As filed via EDGAR with the Securities and Exchange Commission on July 28, 1998
Registration Nos. 33-84842
ICA No. 811-8798
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. ________ |_|
Post-Effective Amendment No. 20 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 20 |X|
(Check appropriate box or boxes)
THE BEAR STEARNS FUNDS
(Exact Name of Registrant as Specified in Charter)
575 Lexington Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 272-2000
copy to:
Stephen A. Bornstein, Esq. Jay G. Baris, Esq.
Bear, Stearns & Co. Inc. Kramer, Levin, Naftalis & Frankel
575 Lexington Avenue 919 Third Avenue
New York, New York 10022 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
|X| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
THE BEAR STEARNS FUNDS
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
- ------------- --------
Part A Prospectus Caption
- ------ ------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial Information Condensed Financial
Information
Item 4. General Description of Description of the
Registrant Fund; General
Information; Appendix
Item 5. Management of the Fund Management of the Fund
Item 5A. Management's Discussion of Performance Information
Fund's Performance
Item 6. Capital Stock and Other Not Applicable
Securities
Item 7. Purchase of Securities Being Alternative Purchase
Offered Methods; How to Buy
Shares
Item 8. Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings Not Applicable
-ii-
<PAGE>
Statement of Additional
Part B Information Caption
- ------ -------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Information About the
Fund
Item 13. Investment Objectives and Investment Objective
Policies and Management
Policies; Appendix
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal Information About the
Holders of Securities Fund
Item 16. Investment Advisory and Other Management
Services Arrangements;
Custodian, Transfer and
Dividend Disbursing
Agent, Counsel and
Independent Auditors
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Not Applicable
Securities
Item 19. Purchase, Redemption and Pricing Management of the Fund;
of Securities Purchase and Redemption
of Shares; Determi-
nation of Net Asset
Value
Item 20. Tax Status Dividends,
Distributions and Taxes
Item 21. Underwriters Cover Page
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
-iii-
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds
CLASS A, B AND C SHARES
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, the Fund offers Class A, B and C shares of
four diversified portfolios, Large Cap Value Portfolio, Small Cap Value
Portfolio, International Equity Portfolio and Balanced Portfolio and three
non-diversified portfolios, S&P STARS Portfolio, The Insiders Select Fund and
Focus List Portfolio (each, a "Portfolio" and together the "Portfolios").
LARGE CAP VALUE PORTFOLIO S&P STARS PORTFOLIO
Seeks investment results that exceed
the total return of publicly traded
Seeks capital appreciation common stocks in the aggregate, as
primarily through investing in a represented by the Standard & Poor's
broadly diversified portfolio of 500 Stock Index.
equity securities of large cap
issuers.
THE INSIDERS SELECT FUND
SMALL CAP VALUE PORTFOLIO
Seeks capital appreciation primarily
Seeks capital appreciation through investing in a broadly
primarily through investing in a diversified portfolio of equity
broadly diversified portfolio of securities of U.S. issuers.
equity securities of small cap
issuers.
FOCUS LIST PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO Seeks capital appreciation primarily
through investing in equity securities
of U.S. issuers that, at the time of
Seeks long-term capital purchase, are included on the Bear
appreciation primarily through Stearns Focus List.
investing in the equity securities
of companies organized outside the
United States or whose securities
are principally traded outside the
United States.
BALANCED PORTFOLIO
Seeks long-term capital growth and
current income primarily through
investing in equity and fixed
income securities.
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 July 28,
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.
JULY 28, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 8
Alternative Purchase Methods............................................... 12
Description of the Portfolios.............................................. 12
Investment Objectives and Policies......................................... 13
Investment Techniques...................................................... 19
Risk Factors............................................................... 26
Management of the Portfolios............................................... 28
How to Buy Shares.......................................................... 35
Net Asset Value............................................................ 37
Shareholder Services....................................................... 40
How to Redeem Shares....................................................... 42
Dividends, Distributions and Taxes......................................... 45
Performance Information.................................................... 46
General Information........................................................ 47
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
THE INSIDERS
S&P STARS PORTFOLIO(1) SELECT FUND
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 offering
price).................. 5.50% -- -- 5.50% -- --
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)................ 0.37%(3) 0.22%(3) 0.37%(3) -- (5)(6) -- (5)(6) -- (5)(6)
12b-1 Fees(4)........... 0.50% 0.75% 1.00% 0.50% 0.75% 1.00%
Other Expenses (after
expense reimbursement).. 0.63%(3) 1.03%(3) 0.63%(3) 1.15%(5) 1.40%(5) 1.15%(5)
---- ---- ---- ------ ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement).. 1.50%(3) 2.00%(3) 2.00%(3) 1.65%(5) 2.15%(5) 2.15%(5)
==== ==== ==== ====== ==== ====
</TABLE>
- ------
See footnotes on page 7.
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>
S&P STARS PORTFOLIO
Class A Shares................. $ 69 $ 69 $100 $100
Class B Shares................. 71 20 95 63
Class C Shares................. 30 20 63 63
THE INSIDERS SELECT FUND
Class A Shares................. 71 71 104 104
Class B Shares................. 73 22 99 67
Class C Shares................. 32 22 67 67
- --------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P STARS PORTFOLIO
Class A Shares................. $132 $132 $224 $224
Class B Shares................. 131 108 220 220
Class C Shares................. 108 108 233 233
THE INSIDERS SELECT FUND
Class A Shares................. 140 140 240 240
Class B Shares................. 138 115 235 235
Class C Shares................. 115 115 248 248
</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>
- ------------------------------------------------------------------------------------------
LARGE CAP VALUE SMALL CAP VALUE
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
offering price)........ 5.50% -- -- 5.50% -- --
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).......... -- (7) -- (7) -- (7) -- (7) -- (7) -- (7)
12b-1 Fees(4).......... 0.50% 0.75% 1.00% 0.50% 0.75% 1.00%
Other Expenses (after
expense reimbursement). 1.00%(7) 1.25%(7) 1.00%(7) 1.00%(7) 1.25%(7) 1.00%(7)
---- ---- ---- ---- ----- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 1.50%(7) 2.00%(7) 2.00%(7) 1.50%(7) 2.00%(7) 2.00%(7)
==== ==== ==== ==== ===== ====
</TABLE>
- ------
See footnotes on page 7.
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>
LARGE CAP VALUE PORTFOLIO
Class A Shares................ $ 69 $ 69 $100 $100
Class B Shares................ 71 20 95 63
Class C Shares................ 30 20 63 63
SMALL CAP VALUE PORTFOLIO
Class A Shares................ 69 69 100 100
Class B Shares................ 71 20 95 63
Class C Shares................ 30 20 63 63
- -------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LARGE CAP VALUE PORTFOLIO
Class A Shares................ $132 $132 $224 $224
Class B Shares................ 131 108 220 220
Class C Shares................ 108 108 233 233
SMALL CAP VALUE PORTFOLIO
Class A Shares................ 132 132 224 224
Class B Shares................ 131 108 220 220
Class C Shares................ 108 108 233 233
</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.
4
<PAGE>
Fee Table (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FOCUS LIST PORTFOLIO BALANCED 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 offering
price).................. 5.50% -- -- 5.50% -- --
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)............... -- (8) -- (8) -- (8) -- (9) -- (9) -- (9)
12b-1 Fees(4)........... 0.25% 0.75% 0.75% 0.25% 0.75% 0.75%
Other Expenses (after
expense reimbursement).. 1.15%(8) 1.15%(8) 1.15%(8) 0.95%(9) 0.95%(9) 0.95%(9)
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement).. 1.40%(8) 1.90%(8) 1.90%(8) 1.20%(9) 1.70%(9) 1.20%(9)
==== ==== ==== ==== ==== ====
</TABLE>
- ------
See footnotes on page 7.
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>
THE FOCUS LIST PORTFOLIO
Class A Shares................. $ 68 $ 68 $ 97 $ 97
Class B Shares................. 70 19 92 60
Class C Shares................. 29 19 60 60
BALANCED PORTFOLIO
Class A Shares................. 67 67 91 91
Class B Shares................. 68 17 86 54
Class C Shares................. 27 17 54 54
- --------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE FOCUS LIST PORTFOLIO
Class A Shares................. $127 $127 $214 $ 214
Class B Shares................. 126 103 209 209
Class C Shares................. 103 103 222 222
BALANCED PORTFOLIO
Class A Shares................. 117 117 192 192
Class B Shares................. 115 92 187 187
Class C Shares................. 92 92 201 201
</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.
5
<PAGE>
Fee Table (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
INTERNATIONAL EQUITY
PORTFOLIO
CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed On Purchases
(as a percentage of offering price)....... 5.50% -- --
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).......... -- (10) -- (10) -- (10)
12b-1 Fees(4)............................. 0.25% 0.75% 0.75%
Other Expenses (after expense
reimbursement).......................... 1.50%(10) 1.50%(10) 1.50%(10)
---- ---- ----
Total Portfolio Operating Expenses (after
fee waiver and expense reimbursement)..... 1.75%(10) 2.25%(10) 2.25%(10)
==== ==== ====
</TABLE>
- ------
See footnotes on page 7.
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>
INTERNATIONAL EQUITY PORTFOLIO
Class A Shares................ $ 72 $ 72 $107 $107
Class B Shares................ 74 23 102 70
Class C Shares................ 33 23 70 70
- -------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO
Class A Shares................ $145 $145 $250 $250
Class B Shares................ 143 120 246 246
Class C Shares................ 120 120 258 258
</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 purpose of the foregoing tables 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." Long-term investors could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. 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 EACH THAN 5%.
6
<PAGE>
- ------
(1) Prior to June 25, 1997, the STARS Portfolio invested all of its assets in
the S&P STARS Master Series (the "Master Series"), a series of S&P STARS
Fund. The Master Series had substantially the same investment objective,
policies and restrictions as the STARS Portfolio.
(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 of Class A shares of each Portfolio within the first year
after purchase. See "How to Buy Shares--Class A Shares."
(3) With respect to Class B shares of the STARS Portfolio, expense ratios are
annualized and Other Expenses include a shareholder servicing fee of 0.25%.
With respect to all classes, the Adviser has undertaken to waive its
advisory fee and assume certain expenses of the STARS Portfolio other than
brokerage commissions, extraordinary items, interest and taxes to the extent
Total STARS Portfolio Operating Expenses exceed 1.50% for Class A, and 2.00%
for Class B and Class C. Without such fee waiver, Advisory Fees stated above
would have been 0.75% for each class. Other Expenses would have been 0.63%
for Class A and 0.63% for Class C and Total STARS Portfolio Operating
Expenses would have been 1.88% for Class A and 2.38% for Class C. With
respect to Class B shares, Other Expenses are estimated to be 1.03%,
and Total Portfolio Operating Expenses are estimated to be 2.53%.
(4) With respect to Class A and Class C shares of the Large Cap Portfolio,
Small Cap Portfolio, STARS Portfolio and Insiders Select Fund, 12B-1 fees
include a shareholder servicing fee of 0.25% and a distribution fee of 0.25%
and 0.75%, respectively. With respect to Class A shares of each Portfolio,
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.
(5) With respect to Class B shares of The Insiders Select Fund, expense ratios
are annualized and Other Expenses include a shareholder servicing fee of
0.25%. With respect to all classes, the Adviser has undertaken to waive its
investment advisory fee and assume certain expenses of the Portfolio other
than brokerage commissions, extraordinary items, interest and taxes to the
extent Total Portfolio Operating Expenses exceed 1.65% for Class A, and 2.15%
for Class B and Class C. Without such fee waiver and expense reimbursement,
Advisory Fees stated above would have been 1.00% for each class, Other
Expenses would have been 1.24% for Class A and 1.25% for Class C, and Total
Portfolio Operating Expenses would have been 2.74% for Class A and 3.25% for
Class C. With respect to Class B shares, Other Expenses are estimated to be
2.22%, and Total Portfolio Operating Expenses are estimated to be 3.97%.
(6) The Advisory Fee is payable at an annual rate equal to 1% of the
Portfolio's average daily net assets, subject to increase or decrease by up
to 0.50% annually depending on the Portfolio's performance. See "Management
of the Portfolio--Investment Adviser."
(7) With respect to Class A, B and C shares of the Large Cap and Small Cap
Portfolios, the Adviser has undertaken to waive its investment advisory fee
and assume certain expenses of each Portfolio other than brokerage
commissions, extraordinary items, interest and taxes to the extent Total
Portfolio Operating Expenses exceed 1.50% for Class A shares and 2.00% for
each of Class B and C shares for each of the Portfolios. With respect to
each Portfolio, without such fee waiver and expense reimbursement, Advisory
Fees stated above would have been 0.75% for each class of Large Cap Value
and Small Cap Value Portfolios. With respect to Class A shares, Other
Expenses would have been 1.98% and 1.01%, for Large Cap Value and Small Cap
Value Portfolios, respectively, and Total Portfolio Operating Expenses would
have been 3.23% and 2.26% for Large Cap Value and Small Cap Value
Portfolios, respectively. With respect to Class B shares, expense ratios are
annualized and Other Expenses are estimated to be 1.55% and 1.81% for Large
Cap Value and Small Cap Value Portfolios, respectively, each of which include
a shareholder servicing fee of 0.25%, and Total Portfolio Operating Expenses
for Class B shares are estimated to be 3.05% and 3.31% for Large Cap Value and
Small Cap Value Portfolios, respectively. With respect to Class C shares,
Other Expenses would have been 1.98% and 1.01% for Large Cap Value and Small
Cap Value Portfolios, respectively, and Total Operating Expenses for Class C
shares would have been 3.73% and 2.76% for Large Cap Value and Small Cap Value
Portfolios, respectively.
(8) With respect to Class A, B and C shares of the Focus List Portfolio,
expense ratios are annualized and Other Expenses include a shareholder
servicing fee of 0.25%. The Adviser has undertaken to waive its advisory fee
and assume certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Operating Expenses
exceed 1.40% for Class A and 1.90% for Class C. Without such fee waiver and
expense reimbursement, (i) Advisory Fees stated above would have been 0.65%
for each class (ii) Other Expenses are estimated to be 5.51% for Class A
shares, 5.77% for Class B shares and 6.02% for Class C shares and (iii) Total
Portfolio Operating Expenses are estimated to be 6.41% for Class A shares,
7.17% for Class B shares and 7.42% for Class C shares.
(9) With respect to Class A, B and C shares of the Balanced Portfolio, expense
ratios are annualized and Other Expenses include a shareholder servicing fee
of 0.25%. The Adviser has undertaken to waive its investment advisory fee and
assume certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes. Without such fee waiver and expense
reimbursement, (i) Advisory Fees stated above would have been 0.65% for the
Portfolio, (ii) Other Expenses are estimated to be 3.55% for Class A, 3.60%
for Class B shares and 3.63% for Class C shares and (iii) Total Portfolio
Operating Expenses are estimated to be 4.45% for Class A shares, 5.00% for
Class B shares and 5.03% for Class C shares.
(10) With respect to Class A, B and C shares of the International Equity
Portfolio, Other Expenses include a shareholder servicing fee of 0.25%. With
respect to all classes, The Adviser has undertaken to waive its investment
advisory fee and assume certain expenses of the Portfolio other than
brokerage commissions, extraordinary items, interest and taxes. Without such
fee waiver and expense reimbursement (i) Advisory Fees would have been 1.00%
for the Portfolio, (ii) Other Expenses are estimated to be 4.56%, 4.54% and
4.54% for Class A, B and C shares, respectively and (iii) Total Portfolio
Operating Expenses are estimated to be 5.81% for Class A shares and 6.29%
for B and C shares.
------------
7
<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 Portfolios' Annual
Report for the fiscal year ended March 31, 1998, which is incorporated by
reference into the Portfolios' Statement of Additional Information, which is
available upon request.
Contained below is 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 each period 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 NET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, INVESTMENT UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INCOME GAIN ON INVESTMENT CAPITAL END OF
OF PERIOD (LOSS)**(1) INVESTMENTS**(2) INCOME GAINS PERIOD
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&P STARS PORTFOLIO
CLASS A
For the fiscal year
ended March 31, 1998... $16.13 $(0.13) $6.69 $ -- $(2.72) $19.97
For the fiscal year
ended March 31, 1997... 14.92 (0.09) 2.63 -- (1.33) 16.13
For the period April 3,
1995* through March 31,
1996................... 12.00 -- 3.31 -- (0.39) 14.92
CLASS B
For the period January
5, 1998* through March
31, 1998............... 17.37 (0.04) 2.53 -- -- 19.86
CLASS C
For the fiscal year
ended March 31, 1998... 16.06 (0.22) 6.65 -- (2.64) 19.85
For the fiscal year
ended March 31, 1997... 14.86 (0.17) 2.62 -- (1.25) 16.06
For the period April 3,
1995* through March 31,
1996................... 12.00 (0.06) 3.28 -- (0.36) 14.86
THE INSIDERS SELECT FUND
CLASS A
For the fiscal year
ended March 31, 1998... 14.58 -- 6.30 -- (3.00) 17.88
For the fiscal year
ended March 31, 1997... 14.00 0.02 2.48 (0.01) (1.91) 14.58
For the period June 16,
1995* through March 31,
1996................... 12.00 0.03 1.98 (0.01) -- 14.00
CLASS B
For the period January
6, 1998* through March
31, 1998............... 15.72 0.01 1.96 -- -- 17.69
CLASS C
For the fiscal year
ended March 31, 1998... 14.48 (0.07) 6.21 -- (2.94) 17.68
For the fiscal year
ended March 31, 1997... 13.96 (0.06) 2.47 -- (1.89) 14.48
For the period June 16,
1995* through March 31,
1996................... 12.00 (0.01) 1.97 -- -- 13.96
LARGE CAP VALUE
PORTFOLIO
CLASS A
For the fiscal year
ended March 31, 1998... 17.17 0.05 7.15 (0.02) (3.52) 20.83
For the fiscal year
ended March 31, 1997... 15.13 0.04 2.28 (0.10) (0.18) 17.17
For the period April 3,
1995* through March 31,
1996................... 12.00 0.06 3.10 (0.02) (0.01) 15.13
CLASS B
For the period January
28, 1998* through March
31, 1998............... 18.17 (0.01) 2.50 -- -- 20.66
CLASS C
For the fiscal year
ended March 31, 1998... 17.11 (0.03) 7.10 -- (3.52) 20.66
For the fiscal year
ended March 31, 1997... 15.08 (0.02) 2.25 (0.02) (0.18) 17.11
For the period April 3,
1995* through March 31,
1996................... 12.00 (0.01) 3.10 -- (0.01) 15.08
</TABLE>
- -----
* Commencement of operations.
** 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) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
8
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
INCREASE/(DECREASE)
NET RATIO OF RATIO OF NET REFLECTED IN AVERAGE
ASSETS, EXPENSES TO INVESTMENT EXPENSE RATIOS AND NET COMMISSION
TOTAL END OF AVERAGE INCOME/(LOSS) INVESTMENT INCOME/(LOSS) PORTFOLIO RATE
INVESTMENT PERIOD NET TO AVERAGE DUE TO WAIVERS AND TURNOVER PER
RETURN(3) (000'S OMITTED) ASSETS(1) NET ASSETS(1) REIMBURSEMENTS RATE SHARE(5)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
43.53% $109,591 1.50%(6) (0.83)%(6) 0.38% 172.78%(7) $0.0541(7)
16.87 67,491 1.50(6) (0.59)(6) 0.70 220.00(7) 0.0595(7)
27.68 45,049 1.50(4)(6) (0.01)(4)(6) 0.89(4) 295.97(7) 0.0603(7)
14.34 5,800 2.00(4) (1.47)(4) 0.53(4) 172.78(7) 0.0541(7)
42.80 63,330 2.00(6) (1.32)(7) 0.38 172.78(7) 0.0541(7)
16.33 37,622 2.00(6) (1.09)(7) 0.70 220.00(7) 0.0595(7)
26.91 28,081 2.00(4)(7) (0.45)(4)(6) 0.92(4) 295.97(7) 0.0603(7)
46.02 21,912 1.65 0.03 1.09 115.64 0.0389
18.31 13,860 1.65 0.11 1.82 128.42 0.0264
16.75 12,132 1.65(4) 0.38(4) 1.87(4) 93.45 0.0294
12.53 2,253 2.15(4) (0.95)(4) 1.82(4) 115.64 0.0389
45.17 12,297 2.15 (0.46) 1.10 115.64 0.0389
17.69 9,519 2.15 (0.38) 1.81 128.42 0.0264
16.33 9,928 2.15(4) (0.12)(4) 1.92(4) 93.45 0.0294
44.59 8,358 1.50 0.32 1.73 61.75 0.0581
15.44 4,987 1.50 0.43 1.58 136.67 0.0593
26.35 3,616 1.50(4) 0.46(4) 4.34(4) 45.28 0.0596
13.70 446 2.00(4) (0.73)(4) 1.05(4) 61.75 0.0581
43.94 4,987 2.00 (0.19) 1.73 61.75 0.0581
14.87 2,986 2.00 (0.08) 1.61 136.67 0.0593
25.71 3,520 2.00(4) (0.06)(4) 4.39(4) 45.28 0.0596
</TABLE>
- -----
(3) 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.
(4) Annualized.
(5) Represents average commission rate per share charged to the Portfolios on
purchase and sales of investments subject to such commissions during each
period.
(6) Includes S&P STARS' share of S&P STARS Master Series' expenses for the
period prior to June 25, 1997.
(7) Portfolio turnover rate and average commission rate per share are related
to S&P STARS Master Series for the period prior to June 25, 1997.
9
<PAGE>
Financial Highlights (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
NET NET DISTRIBUTIONS NET
ASSET NET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, INVESTMENT UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INCOME/ GAIN ON INVESTMENT CAPITAL END OF
OF PERIOD (LOSS)**(1) INVESTMENTS**(2) INCOME GAINS PERIOD
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SMALL CAP VALUE
PORTFOLIO
CLASS A
For the fiscal year
ended March 31, 1998... $17.48 $(0.14) $8.06 $ -- $(1.75) $23.65
For the fiscal year
ended March 31, 1997... 15.87 (0.10) 1.95 -- (0.24) 17.48
For the period April 3,
1995* through March 31,
1996................... 12.00 (0.07) 4.17 -- (0.23) 15.87
CLASS B
For the period January
21, 1998* through March
31, 1998............... 19.95 -- 3.53 -- -- 23.48
CLASS C
For the fiscal year
ended March 31, 1998... 17.38 (0.24) 8.00 -- (1.66) 23.48
For the fiscal year
ended March 31, 1997... 15.79 (0.18) 1.93 -- (0.16) 17.38
For the period April 3,
1995* through March 31,
1996................... 12.00 (0.10) 4.11 -- (0.22) 15.79
FOCUS LIST PORTFOLIO
CLASS A
For the period December
29, 1997* through March
31, 1998............... 12.00 (0.01) 1.41 -- -- 13.40
CLASS B
For the period December
29, 1997* through March
31, 1998............... 12.00 (0.01) 1.39 -- -- 13.38
CLASS C
For the period December
29, 1997* through March
31, 1998............... 12.00 (0.01) 1.39 -- -- 13.38
BALANCED PORTFOLIO
CLASS A
For the period December
29, 1997* through March
31, 1998............... 12.00 0.06 0.91 (0.04) -- 12.93
CLASS B
For the period December
29, 1997* through March
31, 1998............... 12.00 0.05 0.90 (0.03) -- 12.92
CLASS C
For the period December
29, 1997* through March
31, 1998............... 12.00 0.05 0.90 (0.03) -- 12.92
INTERNATIONAL EQUITY
PORTFOLIO
CLASS A
For the period December
29, 1997* through March
31, 1998............... 12.00 0.01 1.76 -- -- 13.77
CLASS B
For the period December
29, 1997* through March
31, 1998............... 12.00 -- 1.75 -- -- 13.75
CLASS C
For the period December
29, 1997* through March
31, 1998............... 12.00 -- 1.75 -- -- 13.75
</TABLE>
- -----
* Commencement of operations.
** 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) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
10
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
INCREASE/(DECREASE)
REFLECTED IN
RATIO OF NET EXPENSE RATIOS AND
RATIO OF INVESTMENT NET INVESTMENT AVERAGE
TOTAL NET ASSETS, END EXPENSES TO INCOME/(LOSS) INCOME/(LOSS) DUE PORTFOLIO COMMISSION
INVESTMENT OF PERIOD AVERAGE NET TO AVERAGE TO WAIVERS AND TURNOVER RATE PER
RETURN(3) (000'S OMITTED) ASSETS(1) NET ASSETS(1) REIMBURSEMENTS RATE SHARE(5)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
46.86% $25,111 1.50% (0.71)% 0.76% 90.39% $0.0557
11.71 13,143 1.50 (0.81) 1.00 56.88 0.0550
34.36 6,474 1.50(4) (0.66)(4) 2.32(4) 40.79 0.0572
17.69 901 2.00(4) (1.49)(4) 1.31(4) 90.39 0.0557
46.10 18,082 2.00 (1.21) 0.76 90.39 0.0557
11.12 11,071 2.00 (1.31) 0.99 56.88 0.0550
33.59 6,753 2.00(4) (1.09)(4) 2.39(4) 40.79 0.0572
11.67 3,201 1.40(4) (0.30)(4) 5.01(4) 28.91 0.0600
11.50 2,399 1.90(4) (0.78)(4) 5.27(4) 28.91 0.0600
11.50 1,687 1.90(4) (0.62)(4) 5.52(4) 28.91 0.0600
8.04 3,852 1.20(4) 2.47(4) 3.25(4) 12.72 0.0543
7.92 1,044 1.70(4) 1.96(4) 3.30(4) 12.72 0.0543
7.92 858 1.70(4) 1.95(4) 3.33(4) 12.72 0.0543
14.75 3,765 1.75(4) 0.53(4) 4.06(4) 3.26 0.0683
14.58 2,137 2.25(4) (0.06)(4) 4.04(4) 3.26 0.0683
14.58 2,173 2.25(4) (0.06)(4) 4.04(4) 3.26 0.0683
</TABLE>
- -----
(3) 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.
(4) Annualized.
(5) Represents average commission rate per share charged to the Portfolios on
purchases and sales of investments subject to such commissions during each
period.
11
<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 5.50%, respectively, 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 Large Cap Value Portfolio, Small Cap Value Portfolio,
Insiders Select Fund and the S&P STARS Portfolio are subject to an annual
distribution and shareholder servicing fee at the rate of 0.50 of 1%, of the
value of the average daily net assets of Class A. Class A shares of the
Balanced, International Equity and Focus List Portfolios are subject to an
annual distribution fee at the rate of 0.25 of 1% of the average daily net
assets of Class A. Class A shares of the Balanced, International Equity and
Focus List Portfolios 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 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
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B Shares." The Class B shares of each Portfolio also are subject
to an annual distribution fee at the rate of 0.75 of 1% of the value of the
average daily net assets of Class B. Class B shares 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 incurred in connection with the
personal service and maintenance of accounts holding Portfolio shares. See
"Management of the Portfolios--Distribution Plan" and "Shareholder Servicing
Plan". Class B shares 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 the Large Cap Value
Portfolio, Small Cap Value Portfolio, Insiders Select Fund and S&P STARS
Portfolio are subject to an annual distribution and shareholder servicing fee
at the rate of 1.00%, of the average daily net assets of Class C. Class C
shares of the Balanced, International Equity and Focus List Portfolios are
subject to an annual distribution fee at the rate of 0.75 of 1% of the average
daily net assets of Class C shares. Also, the Balanced, International Equity
and Focus List Portfolios have 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.
See "Management of the Portfolios--Distribution and Shareholder Servicing
Plan" and "Shareholder Servicing Plan". 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 fee 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
The Fund is 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
12
<PAGE>
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 Fund shareholders vote together as a
group; as to others they vote separately by portfolio. By this Prospectus,
shares of the Large Cap Value Portfolio, Small Cap Value Portfolio,
International Equity Portfolio, Balanced Portfolio, S&P STARS Portfolio, the
Insiders Select Fund and the Focus List 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 S&P STARS Portfolio, The Insiders Select Fund and the Focus List Portfolio
are non-diversified portfolios. A 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, each 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 each 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
each 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 each non-diversified 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 non-diversified
Portfolios' 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.
LARGE CAP VALUE PORTFOLIO (THE "LARGE CAP PORTFOLIO") AND SMALL CAP VALUE
PORTFOLIO (THE "SMALL CAP PORTFOLIO")
The investment objective of the Large Cap and Small Cap Portfolios is capital
appreciation.
The Large Cap Portfolio invests, under normal market conditions, substantially
all of its assets in equity securities of issuers with market capitalizations
of $1 billion or more and identified by the Adviser as value companies.
The Small Cap Portfolio invests, under normal market conditions, substantially
all of its assets in equity securities of issuers with market capitalizations
of up to $1 billion and identified by the Adviser as value companies.
To determine whether a company's stock falls within the value classification,
the Adviser analyzes it based on fundamental factors such as price-to-book
ratios, price-to-earnings ratios, earnings growth, dividend payout ratios,
return on equity, and the company's beta (a measure of stock price volatility
relative to the market generally). In general, the Adviser believes that
companies with relatively low price to book ratios, low price-to-earnings
ratios or higher-than-average dividend payments in relation to price should be
classified as value companies.
For potential investments, the Adviser also, among other matters, may review
new management and upcoming corporate restructuring plans, consider the
general business cycle and the company's position within a specific industry
and consider the responsiveness of the company to identified problems in an
effort to assess the likelihood of future appreciation of the company's
securities.
The Adviser anticipates that at least 85% of the value of each of the Large
Cap and Small Cap Portfolio's total assets (except when maintaining a
temporary defensive position) will be invested in equity securities of
domestic and foreign issuers. Each Portfolio expects, under normal market
conditions, to invest less than 10% of its assets in the equity securities of
foreign issuers. Equity
13
<PAGE>
securities consist of common stocks, convertible securities and preferred
stocks. The convertible securities and preferred stocks in which each
Portfolio may invest will be rated at least investment grade by a nationally
recognized statistical rating organization at the time of purchase. Each
Portfolio may invest, in anticipation of investing cash positions, in money
market instruments consisting of U.S. Government securities, certificates of
deposit, time deposits, bankers' acceptances, short-term investment-grade
corporate bonds and other short-term debt instruments, and repurchase
agreements, as set forth in the Appendix.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is long-term capital
appreciation.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in the equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the
United States, including common stock, preferred stock, depositary receipts
for stock and other securities having the characteristics of stock (such as an
equity or ownership interest in a company) of foreign companies.
Up to 35% of the Portfolio's total assets may be invested in debt obligations.
The debt obligations in which the Portfolio may invest include fixed or
floating-rate bonds, notes, debentures, commercial paper, loan participations,
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.
Under normal market conditions, the Portfolio intends to invest in the
securities of foreign companies located in at least three countries outside of
the United States. The Portfolio expects to invest a substantial portion of
its assets in the securities of issuers located in the developed countries of
Western Europe and Japan. The Portfolio may also invest in the securities of
issuers located in Australia, Canada, New Zealand and emerging market
countries.
"Emerging market countries" are countries that are considered to be emerging
or developing by the World Bank, the International Finance Corporation, or the
United Nations and its authorities. Emerging market countries, include, but
are not limited to, the following: Algeria, Argentina, Bahrain, Bangladesh,
Bolivia, Botswana, Brazil, Chile, China, Colombia, Costa Rica, Cyprus, Czech
Republic, Dominican Republic, Ecuador, Egypt, Estonia, Finland, Ghana, Greece,
Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan,
Kenya, Lebanon, Malaysia, Mauritius, Mexico, Morocco, Namibia, Nicaragua,
Nigeria, Oman, Pakistan, Panama, Peru, Philippines, Poland, Portugal, Russia,
Singapore, Slovakia, South Africa, South Korea, Sri Lanka, Swaziland, Taiwan,
Thailand, Trinidad & Tobago, Tunisia, Turkey, Uruguay, Venezuela, Zambia, and
Zimbabwe. A company is considered to be an emerging market company if (i) its
securities are principally traded in the capital markets of an emerging market
country; (ii) it derives at least 50% of its total revenue from either goods
produced or services rendered in emerging market countries or from sales made
in emerging market countries, regardless of where the securities of such
companies are principally traded; (iii) it maintains 50% or more of its assets
in one or more emerging market countries; or (iv) it is organized under the
laws of, or has a principal office in, an emerging market country.
BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is long-term capital growth and
current income. The Portfolio seeks capital appreciation primarily through the
equity component of its portfolio while investing in fixed-income securities
primarily to provide income for regular quarterly dividends.
This Balanced Portfolio invests, under normal circumstances, between 40% and
60% of its total assets in equity securities. The Portfolio also invests at
least 25% of its total assets in fixed-income senior securities and the
remainder of its assets in other fixed-income securities and cash. The
percentage of the Portfolio invested in equity and fixed-income securities
will vary from time to time as the Adviser evaluates their relative
attractiveness based on market valuations, economic growth and inflation
prospects. This allocation is subject to the Portfolio's intention to pay
regular quarterly dividends. The amount of quarterly dividends can also be
expected to fluctuate in accordance with factors such as prevailing interest
rates and the percentage of the Portfolio's assets invested in fixed-income
securities.
A portion of the Portfolio's portfolio of equity securities may be selected
primarily to provide current income. Equity securities selected to provide
current income may include interests in real estate investment trusts,
convertible securities, preferred stocks, utility stocks and interests in
limited partnerships.
14
<PAGE>
The Balanced Portfolio's fixed income securities primarily include securities
issued by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises, corporations or other entities, mortgage-backed and asset-backed
securities, municipal securities, custodial receipts and U.S. dollar
denominated securities issued by foreign governments.
S&P STARS PORTFOLIO (THE "STARS PORTFOLIO")
The STARS Portfolio's investment objective is to provide investment results
that exceed the total return of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P
500").
In implementing its investment strategy, the Adviser principally uses Standard
& Poor's ("S&P") Stock Appreciation Ranking System (or STARS) to identify a
universe of securities in the highest category (which is five stars) to
evaluate for purchase and in the lowest category (which is one star) to
evaluate for short selling. The Adviser believes that this approach will
provide opportunities to achieve performance that exceeds the S&P 500's total
return.
STARS ranks on a scale from five stars (highest) to one star (lowest) the
stocks of approximately 1,100 issuers analyzed by S&P's research staff of
securities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
*****Buy-Expected to be among the best performers over the next 12 months
and to rise in price.
**** Accumulate-Expected to be an above-average performer.
*** Hold-Expected to be an average performer.
** Avoid-Expected to be a below-average performer.
* Sell-Expected to be a well-below-average performer and to fall in price.
STARS was introduced by S&P in January 1987. Since 1993, on average, the five
star category has consisted of approximately 95 stocks, the four star category
has consisted of approximately 385 stocks, the three star category has
consisted of approximately 530 stocks, the two star category has consisted of
approximately 90 stocks, and the one star category has consisted of between
approximately 10 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P
analysts.
For purposes of evaluating the performance of stocks in the various
categories, and thus of the performance of its analysts, S&P has created a
model which initially gives equal weight by dollar amount to the stocks in the
various categories, does not rebalance the portfolio based on changes in
values or rankings and does not take into account dividends or transaction
costs. STARS is only a model; it does not reflect actual investment
performance. While its performance cannot be used to predict actual results,
S&P believes it is useful in evaluating the capability of its analysts.
INVESTORS SHOULD RECOGNIZE THAT THE POOL OF S&P ANALYSTS CHANGES AND THEIR
PAST PERFORMANCE IS NOT NECESSARILY PREDICTIVE OF FUTURE RESULTS EITHER OF THE
MODEL OR OF THE STARS PORTFOLIO. From January 1, 1987 through March 31, 1998:
. The S&P 500 (measured on a total return basis, without dividend
reinvestment)* increased by 354.95%
. The ranked stocks, measured as described above, changed in value as
follows*:
. Five stars-+721.35%
. Four stars-+427.92%
. Three stars-+261.04%
. Two stars-+209.63%
. One star-(31.28)%
The STARS Portfolio believes that this information should be used by investors
only in their consideration that, historically, the five star stocks, measured
as described above, have significantly outperformed lower ranked stocks and
the one star stocks, similarly measured, have significantly underperformed the
higher-ranked stocks. THIS INFORMATION SHOULD NOT BE USED TO PREDICT WHETHER
- ------
* During this period, the average dividend yields on securities included in
the S&P 500 and the securities ranked five stars were approximately 2.8% and
1.6%, respectively.
15
<PAGE>
THE RESULTS WILL OCCUR IN THE FUTURE OR THE ACTUAL PERFORMANCE OF A PARTICULAR
CATEGORY. STARS performance has been more volatile than that of conventional
indices such as the Dow Jones Industrial Average and the S&P 500. In addition,
at times, lower-ranked STARS categories have outperformed higher ranked STARS
categories and higher-ranked STARS categories have under performed the S&P
500. Specifically, the performance of five star and one star stocks has not
consistently exceeded or fallen below the performance of the S&P 500. In some
years, one star stocks have outperformed the S&P 500 as well as five star
stocks; in other years, both one and five star stocks have outperformed the
S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn
outperformed five star stocks. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one star stocks. In 1996 and 1997 five star
stocks outperformed both the one star stocks and the S&P 500. Investors also
should consider that the STARS Portfolio is managed actively--and, thus, its
performance will depend materially on the Adviser's investment determinations
and will incur transaction and other costs, including management and 12b-1
fees, which are not reflected in the foregoing information. The total returns
for Class A and C shares of the STARS Portfolio for the year ended March 31,
1998, and the average annual total returns for the Portfolio for the period
April 5, 1995 (commencement of investment operators) through March 31, 1998
were as follows:
TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR ENDED AVERAGE
MARCH 31, 1998 ANNUAL(/3/)
-------------- -----------
<S> <C> <C>
S&P STARS Portfolio(/2/)
Class A shares(/4/)................................. 36.75% 26.90%
Class C shares...................................... 42.80 28.31
S&P 500 Index(/1/).................................. 47.95 32.41
Consumer Price Index................................ 1.31 2.31
</TABLE>
- ------
(/1/)The chart assumes a hypothetical $10,000 initial investment in the
Portfolio and reflects all Portfolio expenses. Investors should note that
the Portfolio is a professionally managed mutual fund while the indices
are unmanaged, do not incur sales charges or expenses and are not
available for investment.
(/2/)The Adviser waived its advisory fee and agreed voluntary to reimburse a
portion of the Portfolio's operating expenses, if necessary, to maintain
the expense limitation, as set forth in the notes to the financial
statements. Total returns shown include fee waivers and expense
reimbursements, if any; total returns would have been lower had there
been no assumption of fees and expenses in excess limitations.
(/3/)For the period of April 5, 1995 (commencement of investment operations)
through March 31, 1998 for Class A and C shares.
(/4/)Reflects the initial maximum sales charge in effect at the beginning of
the period (4.75%). Without the applicable sales charge, the total
returns would have been 43.53% and 28,98%, respectively, for each period
shown.
STARS is available to the public through various S&P publications. The Adviser
has access to STARS through S&P's MarketScope, a computer-accessed
subscription service available for an annual fee, currently with more than
74,000 subscriber terminals.
The STARS Portfolio invests primarily in equity securities that, at the time
of purchase, ranked five stars in STARS or at their time of short sale were
ranked as one star in STARS.
As its investment strategy, The Adviser uses STARS to identify a universe of
securities in the five star category to evaluate for purchase and in the one
star category to evaluate for short selling. BSAM anticipates that at least
85% of the value of the Portfolio's total assets (except when maintaining a
temporary defensive position) will be invested in common stocks that, at their
time of purchase, were ranked as five stars in STARS or, at their time of
short sale, were ranked as one star in STARS. The Portfolio may invest up to
15% of its assets in common stocks without regard to STARS ranking, if the
Adviser believes that such securities offer opportunities for capital
appreciation. The Adviser will not seek to replicate STARS performance and
will not necessarily sell a security once it has been downgraded from five
stars or cover a short position once it has been upgraded from one star. From
time to time, certain closed-end investment companies are ranked by STARS and
will be eligible for purchase by the Portfolio. Subsequent market appreciation
of a security or changes in total assets due to subscriptions and redemptions
or dividends or distributions to shareholders will not by themselves cause a
violation of this investment policy. In addition, a subsequent downgrade of a
five star ranked security (or a subsequent upgrade of a one-star security that
has been sold short) will cause the security to be included in the 15%
calculation, but will not by itself cause the Portfolio to violate this
limitation. If at any time, however, the Portfolio exceeds the 15% limitation,
the Portfolio will not purchase additional non-five star ranked securities or
sell short additional non-one star ranked securities. The Portfolio may
invest, in anticipation of investing cash positions and, without limitation,
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<PAGE>
for temporary defensive purposes, in money market instruments consisting of
U.S. Government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment-grade corporate bonds and other short-term
debt instruments, and repurchase agreements, as set forth in the "Investment
Techniques" and the Appendix. The STARS Portfolio may invest in put options
on an index or individual securities to hedge against unanticipated market
decline, and may engage in other options strategies. The STARS Portfolio will
not count put options or premiums paid for options, or the value of money
market instruments for purposes of determining compliance with the 15%
limitation.
STARS PERFORMANCE
STARS rankings are the subjective determination of S&P's analysts. The pool of
these analysts changes. Past performance of securities and issuers included in
STARS cannot be used to predict future results of the Portfolio, which is
managed actively by BSAM and the results of which should be expected to vary
from the performance of STARS. Neither of the STARS Portfolio, Bear Stearns or
BSAM have any ongoing relationship with S&P regarding the STARS Portfolio
other than the right for a fee to use the S&P, Standard & Poor's and STARS
trademarks in connection with the management of mutual funds and access to
STARS through S&P's publicly available subscription service.
THE INSIDERS SELECT FUND
The Insiders Select Fund's investment objective is capital appreciation.
The Adviser selects portfolio securities by analyzing the behavior of (i)
corporate insiders, officers, directors and significant stockholders through
an analysis of their publicly filed reports of their trading activities in the
equity securities of the companies for which they are insiders, (ii) financial
analysts, through an analysis of their published reports about covered
companies, including predicted earnings and revisions to predicted earnings,
and (iii) the company itself, through an analysis of its behavior as to
corporate finance matters, such as stock repurchase programs, dividend
policies and new securities issuance.
Corporate insiders are believed by the Adviser to be in the best position to
understand the near-term prospects of their companies. The Adviser believes
that insider behavior can be observed and analyzed since insiders are required
to disclose transactions in their company's equity securities to the
Securities and Exchange Commission generally no later than the tenth day of
the month following the transaction. Each month many thousands of these
disclosures are received. the Adviser believes that collecting, classifying
and analyzing these transactions provides valuable investment management
information.
These insiders may have many reasons for transacting in company stock and
stock options. Many of these are entirely incidental to the future of the
company. For example, an insider may sell stock to buy a home or finance a
college education for his or her child. Likewise a new management team may
wish to signal confidence in the company by making token purchases of the
company's equity. Many other transactions, however, are related directly to
the insider's beliefs about the near-term price expectations for the company's
stock. An insider who exercises long-term options early for small profits
likely believes the stock soon will decline. Insiders who exercise options,
hold the stock, and buy in the open market probably believe that the stock
soon will rise. Clusters of insiders making substantial buys or sells indicate
broad agreement within a firm as to the direction of the stock.
Financial analysts use a variety of means to learn more about the companies
they follow. Among these are visits to the company and in-depth discussions
with management. Successful analysts learn to interpret the words and actions
of management and the firm itself. Likewise, management uses its discussions
with certain analysts as a means of signaling its views to the marketplace.
The Adviser monitors changes in analysts' predicted earnings and ratings. The
Adviser believes that analysts' revisions can be a valuable indicator of
future returns for the company's stock.
Part of the normal activity of every public company is its financing
decisions. A company must routinely decide whether to maintain or change its
dividend policy, whether to buy its own stock in the open market or whether to
issue new securities. From time to time the company may decide that its stock
is undervalued. Many companies see undervaluation as an opportunity to
purchase the company's stock in the open market. The Adviser believes that by
monitoring changes in shares outstanding (in the hands of the public), a
useful signal can be extracted relating to the company's beliefs about its
prospects. Similarly, the company's decision to sell securities to the public
or another firm can be an indication that the company believes that its stock
has reached a near-term high, a potentially useful sell signal.
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<PAGE>
Insiders, analysts and the company each send signals that can be analyzed by
the Adviser to produce valuable information about the prospects for individual
companies. The Adviser believes that the most powerful analysis, however,
comes from the interaction of all three sources. While no one signal alone
determines whether a security will be purchased or sold, no security will be
considered for purchase or sale unless a positive or negative signal, as the
case may be, is received from insider behavior. In its analysis, the Adviser
uses only data that is available to the public. The Adviser obtains the data
on insider trading activity from CDA/Investnet, which compiles this
information from publicly available Securities and Exchange Commission
filings.
Under normal market conditions, the Adviser invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. The Adviser
selects equity securities believed by it to provide opportunities for capital
appreciation or gains through short selling. Issuers are selected without
regard to market capitalization, although the Adviser anticipates that the
issuers principally will be mid- to-large capitalization companies, that is,
those with market capitalizations exceeding $1 billion. The Adviser selects
from the universe of U.S. equity securities those securities it believes, in
the aggregate, will approximate or exceed the total return performance of the
Standard & Poor's MidCap 400 Index Stock Index* (the "S&P MidCap 400 Index").
The Portfolio will not invest in all or substantially all of the common stocks
included in the S&P MidCap 400 Index and may invest in stocks that are not
included in the S&P MidCap 400 Index.
By investing in this manner--that is, purchasing other equity securities in a
manner intended to approximate or exceed the performance of the S&P MidCap 400
Index--the Adviser seeks to exceed the total return of the S&P MidCap 400
Index.
The S&P MidCap 400 Index consists of 400 domestic stocks chosen for market
size (median market capitalization of about $2.1 billion as of March 31,
1998), liquidity, and industry group representation. It is a market-weighted
index, with each stock affecting the Index in proportion to its market value.
Under normal market conditions, the Portfolio expects to have less than 15% of
its assets invested in money market instruments. However, when the Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest all of its assets in money market
instruments.
FOCUS LIST PORTFOLIO
The Focus List Portfolio's investment objective is capital appreciation.
The Focus List Portfolio will invest at least 65% of its total assets in the
common stocks of U.S. and foreign issuers that, at the time of purchase, are
on the Bear Stearns Equity Focus List (the "Focus List"). The Portfolio is
designed for investors seeking to maximize returns from a fully invested, all-
equity portfolio. The Portfolio is not a market-timing vehicle. Except for
short-term liquidity purposes, cash reserves are not expected to exceed 10% of
Focus List Portfolio assets.
THE BEAR STEARNS FOCUS LIST
The Bear Stearns Equity Research Department has over 80 equity analysts who
cover more than 900 common stocks of U.S. and foreign companies. Using a
rating system of "1" through "5," analysts assign stocks the following
ratings: 1 ("Buy," the highest rating), 2 ("Attractive"), 3 ("Neutral"), 4
("Avoid"), 5 ("Sell"). Approximately 300 stocks are rated as Buy or Attractive
by a Bear Stearns Research analyst.
A Buy rating is assigned to stocks that the Bear Stearns Research analyst and
the Research Stock Selection Committee (comprised of senior Research
personnel) feel will significantly outperform the market over the next three
to six months because of a catalyst or near-term event that is expected to
trigger upward movement in the stock's price. These catalysts may include a
change in management, the introduction of a new product or a change in the
industry outlook. An Attractive rating means that an analyst has determined
that the stock has solid long-term growth prospects either because of, or in
comparison to, its industry and that it is undervalued in comparison to its
industry.
Domestic and international stocks and American Depositary Receipts (ADRs)
rated Buy (1) or Attractive (2) are eligible for inclusion on the Focus List.
Stocks are picked by the Focus List Committee, whose current members are
Kathryn Booth, Director of Global Research for Bear Stearns , and
Elizabeth Mackay, Chief Investment Strategist of Bear Stearns. The Committee
generally
- ------
* "Standard & Poor's," "S&P(R)" and "S&P MidCap 400" are trademarks of The
McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold
or promoted by Standard & Poor's or The McGraw-Hill Companies, Inc.
18
<PAGE>
maintains twenty stocks on the list and any new additions are usually
accompanied by a comparable number of deletions. The Committee monitors the
List daily, and candidates are considered based on any one or more of the
following criteria: market outlook, perception of the stock's sector, and an
analyst's view of the stock's current valuation relative to the market and its
industry.
Stocks that are downgraded below Attractive by an analyst are automatically
deleted from the Focus List. However, the Focus List Committee may delete
stocks for other reasons including, but not limited to, achievement of its
target price range, the failure of a catalyst to materialize or have its
expected effect, and/or the appearance of new, more attractive opportunities.
INVESTMENT STRATEGY
Generally, as soon as practicable after public announcement, the Adviser will
purchase a security that has been added to the Focus List and will sell a
security when the security has been removed from the Focus List. The Adviser
determines what percentage of the Portfolio's total assets are to be allocated
into each Focus List stock and makes changes in allocation percentages as
investment and economic conditions change. The Adviser intends to allocate
portfolio transactions so that the Portfolio qualifies as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code") although there can be no assurance that this goal will be achieved
(see "Dividends, Distributions and Taxes"). Depending upon market conditions
and to the extent the Portfolio needs to hold cash balances to satisfy
shareholder redemption requests, the Adviser may not immediately purchase a
new Focus List stock and/or may continue to hold one or more Focus List stocks
that have been deleted from the Focus List. The Adviser will not have access
to the Focus List prior to its becoming publicly disseminated.
The Focus List Portfolio may invest up to 35% of its total assets in Portfolio
stocks that are not on the Focus List, although it currently intends to limit
its investment in non-Focus List securities to 20% of the Portfolio's total
assets under normal market conditions. The Portfolio will purchase stocks that
are not on the Focus List when the Adviser determines that any stocks on the
Focus List are inappropriate for the Portfolio because they are illiquid,
would cause the Portfolio to be overweighted in a particular sector or overly
concentrated in a particular industry, or for any other reason.
The Investment Strategy described above will be implemented to the extent it
is consistent with maintaining the Portfolio's qualification as a regulated
investment company under the Code. See "Dividends, Distributions and Taxes."
For temporary defensive purposes, the Focus List Portfolio may invest up to
100% of its total assets in cash and cash equivalents, including high quality
short-term money market investments.
POTENTIAL INVESTMENT RESTRICTIONS
It is possible that the Focus List will include stocks of issuers for which
Bear Stearns or one of its affiliates performs banking services for which it
receives fees, as well as stocks of issuers in which Bear Stearns or one of
its affiliates makes a market and may have a long or short position in the
stock. When Bear Stearns or one of its affiliates is engaged in an
underwriting or other distribution of stock of an issuer, the Adviser may be
prohibited from purchasing the stock of the issuer for the Focus List
Portfolio. The activities of Bear Stearns or one of its affiliates may, from
time to time, limit the Focus List Committee's ability to include stocks on
the Focus List or the Focus List Portfolio's flexibility in purchasing and
selling such stocks. In addition, the Focus List is available to other clients
of Bear Stearns and its affiliates, including the Adviser, as well as the
Focus List Portfolio.
Investment Techniques
Each Portfolio may engage in various investment techniques, such as options
and futures transactions, short selling and lending portfolio securities, each
of which involves risk. Options and futures transactions, as well as
investments in certain asset-backed, mortgage-backed and government
securities, involve "derivative securities." For a discussion of these other
investment techniques and their related risks, see "Appendix--Investment
Techniques" and "Risk Factors" below.
EQUITY SECURITIES (ALL PORTFOLIOS)
The Portfolios may invest in equity securities. These securities may include
foreign and domestic common stocks or preferred stocks, rights and warrants
and debt securities which are convertible or exchangeable for common stock or
preferred stock. Under normal conditions, the Balanced Portfolio will not
invest less than 40% or more than 60% of its total assets in equity
securities.
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<PAGE>
SHORT SELLING (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, THE INSIDERS SELECT
FUND AND STARS PORTFOLIO)
A Portfolio may engage in short selling. Short sales are transactions in which
a Portfolio sells a security it does not own in anticipation of a decline in
the market value of that security. To complete such a transaction, a Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
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, the Portfolio is required to pay to the lender amounts
equal to any dividend which accrues during the period of the loan. To borrow
the security, the Portfolio also 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 a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
liquid securities, at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral always equals the
current value of the security sold short; or (b) otherwise cover its short
position in accordance with positions taken by the staff of the Securities and
Exchange Commission.
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. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest a
Portfolio may be required to pay in connection with a short sale. Each
Portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short by a Portfolio. See "Appendix--Investment
Techniques--Options Transactions."
Each Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of a Portfolio's net assets. No Portfolio may sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of its net assets. No
Portfolio may sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 2% of the outstanding
securities of that class.
SHORT SALES "AGAINST THE BOX" (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, IN-
SIDERS SELECT FUND, INTERNATIONAL EQUITY PORTFOLIO, STARS PORTFOLIO AND BAL-
ANCED PORTFOLIO)
A Portfolio may make short sales "against the box," a transaction in which a
Portfolio enters into a short sale of a security which a Portfolio owns. The
proceeds of the short sale will be held by a broker until the settlement date,
at which time a Portfolio delivers the security to close the short position. A
Portfolio receives the net proceeds from the short sale. The Large Cap
Portfolio, Small Cap Portfolio, STARS Portfolio, Balanced Portfolio and
Insiders Select Fund at no time will have more than 15% of the value of its
net assets in deposits on short sales against the box and the International
Equity Portfolio at no time will have more than 25% of its net deposits on
short sales against the box. It currently is anticipated that each Portfolio
will make short sales against the box for purposes of protecting the value of
the Portfolio's net assets. There are certain tax implications associated with
this strategy. See "Dividends, Distributions and Taxes."
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS (LARGE CAP PORTFOLIO, SMALL
CAP PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, THE INSIDERS SELECT FUND AND
FOCUS LIST PORTFOLIO)
A Portfolio may enter into stock index futures contracts, and options with
respect thereto, in U.S. domestic markets. See "Appendix--Investment
Techniques--Options Transactions." These transactions will be entered into as
a substitute for comparable market positions in the underlying securities or
for hedging purposes. Although a Portfolio is not a commodity pool, it is
subject to rules of the Commodity Futures Trading Commission (the "CFTC")
limiting the extent to which it may engage in these transactions.
Each Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
CFTC. In addition, a Portfolio may not engage in such transactions if the sum
of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5%
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<PAGE>
of the liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating
the 5%. To the extent a Portfolio engages in the use of futures and options on
futures for other than bona fide hedging purposes, the Portfolio may be
subject to additional risk.
Engaging in these transactions involves risk of loss to a Portfolio which
could adversely affect the value of a shareholder's investment. Although a
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 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. In addition, engaging in futures
transactions in foreign markets may involve greater risks than trading on
domestic exchanges.
Successful use of futures by a Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
foreign currencies and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. For
example, if a Portfolio has hedged against the possibility of a decline in the
market adversely affecting the value of securities held in its portfolio and
prices increase instead, a Portfolio will lose part or all of the benefit of
the increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if a Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, a Portfolio may be required to segregate cash or liquid
securities in connection with its commodities transactions in an amount
generally equal to the value of the underlying commodity. The segregation of
such assets will have the effect of limiting a Portfolio's ability otherwise
to invest those assets.
A Portfolio may take advantage of opportunities in the area of options and
futures contracts, options on futures contracts and any other derivative
investments which are not presently contemplated for use by the Portfolio or
which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Portfolio's investment
objective and legally permissible for a Portfolio. Before entering into such
transactions or making any such investment, a Portfolio will provide
appropriate disclosure in its prospectus.
FOREIGN SECURITIES
EQUITY SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, INTERNATIONAL
EQUITY PORTFOLIO, FOCUS LIST PORTFOLIO AND BALANCED PORTFOLIO). The
International Equity Portfolio intends to invest, under normal circumstances,
substantially all, and at least 65%, of its total assets in the equity
securities of foreign issuers. All other Portfolios may invest in equity
securities that are issued by foreign issuers and are traded in the United
States. All such securities will be issued by foreign companies that comply
with U.S. accounting standards.
Equity securities include common stock, preferred stock, depositary receipts
for stock and other securities having the characteristics of stock (such as an
equity or ownership interest in a company).
DEPOSITARY RECEIPTS (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, INTERNATIONAL
EQUITY PORTFOLIO, FOCUS LIST PORTFOLIO AND STARS PORTFOLIO). A Portfolio may
invest in foreign securities which take the form of sponsored and unsponsored
American Depository Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (collectively "Depositary
Receipts"). In general, Depository Receipts are receipts for the shares of a
foreign company held in the custody of a depositary institution that entitles
the holder to all dividends and capital gains of the underlying shares. ADRs
represent the shares of foreign companies held in domestic banks. ADRs are
quoted in U.S. dollars and are traded on domestic exchanges. EDRs and GDRs are
receipts evidencing an arrangement with a foreign bank.
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<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (LARGE CAP PORTFOLIO, SMALL CAP
PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO). A Portfolio may purchase or
sell forward foreign currency exchange contracts ("forward contracts") for
hedging and speculative investment purposes.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A Portfolio may
enter into a forward contract, for example, for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge").
When a Portfolio believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward sale contract by
selling an amount of that foreign currency up to 95% of the value of the
Portfolio's securities denominated in such foreign currency. If a Portfolio
believes that the U.S. dollar may suffer a substantial decline against the
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, a Portfolio may, in the alternative, enter into a forward contract
to sell a different foreign currency for a fixed U.S. dollar amount where the
Portfolio believes that the U.S. dollar value of the currency to be sold
pursuant to the forward contract will fall whenever there is a decline in the
U.S. dollar value of the currency in which portfolio securities of the
Portfolio are denominated ("cross-hedge"). Unanticipated changes in currency
prices may result in poorer overall performance for the Portfolio than if it
had not entered into such contracts.
In addition, a Portfolio may enter into forward contracts to seek to increase
total return when the Adviser or the Sub-Adviser, as the case may be,
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held in the portfolio. When
entered into to seek to enhance return, forward contracts are considered
speculative.
FIXED INCOME SECURITIES (BALANCED PORTFOLIO AND INTERNATIONAL EQUITY PORTFO-
LIO)
Under normal conditions, the Balanced Portfolio may invest up to 60% of its
total assets in fixed-income securities, of which at least 25% will be
invested in fixed-income senior securities. Under normal conditions, the
International Equity Portfolio may invest up to 35% of its total assets in
debt securities. The debt securities in which a Portfolio may invest may be
unrated or rated in the lowest rating categories by Standard & Poor's or
Moody's (e.g., securities rated D by Moody's or Standard & Poor's). Fixed
income securities rated BB by Standard & Poor's, Ba by Moody's or below (or
comparable unrated securities) are commonly referred to as "junk bonds" and
are considered predominantly speculative and may be questionable as to
principal and interest payments. In some cases, such bonds may be highly
speculative, have poor prospects for reaching investment grade standing and be
in default. As a result, investment in such bonds will entail greater
speculative risks than those associated with investment in higher-rated debt
securities. Also, to the extent that the rating assigned to a security in a
Portfolio's portfolio is downgraded by a rating organization, the market price
and liquidity of such security may be adversely affected.
U.S. GOVERNMENT SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, S&P
STARS PORTFOLIO AND BALANCED PORTFOLIO)
A Portfolio may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include Treasury receipts and
other stripped U.S. Government securities, where the interest and principal
components of stripped U.S. Government securities are traded independently. A
Portfolio may also invest in zero coupon U.S. Treasury securities and in zero
coupon securities issued by financial institutions, which represent a
proportionate interest in underlying U.S. Treasury securities. A zero coupon
security pays no interest to its holder during its life and its value consists
of the difference between its face value at maturity and its cost. The market
prices of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically. Under normal conditions,
only the Balanced Portfolio will not invest more than 35% of its total assets
in U.S. Government securities.
BANK OBLIGATIONS. (LARGE CAP VALUE PORTFOLIO, SMALL CAP VALUE PORTFOLIO,
BALANCED PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INSIDERS SELECT FUND AND
S&P STARS, PORTFOLIO)
A Portfolio may invest in obligations issued or guaranteed by U.S. or foreign
banks. Bank obligations, including without limitation, time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Banks are subject to
extensive but different governmental regulations, which may limit both the
amount and types of loans which may
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be made and interest rates which may be charged. In addition, the
profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operation of this industry. Under
normal conditions, the Balanced and International Equity Portfolios will not
invest more than 35% of their total assets in bank obligations.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase when-issued securities. When-issued transactions
arise when securities are purchased by the Portfolio with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
transaction. A Portfolio may also purchase securities on a forward commitment
basis, that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary three-day settlement period. A Portfolio is
required to hold and maintain in a segregated account with a Portfolio's
custodian until three days prior to the settlement date, cash or liquid assets
in an amount sufficient to meet the purchase price. Alternatively, a Portfolio
may enter into offsetting contracts for the forward sale of other securities
that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Portfolio would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Portfolio may
dispose of when-issued securities or forward commitments prior to settlement
if the Adviser deems it appropriate to do so. Under normal conditions, the
International Equity and Balanced Portfolios will not invest more than 20% and
33 1/3%, respectively, of its total assets in when-issued securities or
forward commitments.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
Each Portfolio 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),
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. New
financial products and risk management techniques continue to be developed,
and each Portfolio may use these new investments and techniques to the extent
consistent with its investment objective and policies.
A Portfolio will not 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 AND INDICES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered call
options. A Portfolio may purchase call options to gain market exposure in a
particular sector while limiting downside risk. A 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 the Portfolio owns the underlying security
or securities) is to realize, through the receipt of premiums, a greater
return than would be realized on the 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. (See "Risk Factors" and the Statement of
Additional Information for additional risk factors).
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
A Portfolio may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions,
such as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government securities maintained
on a current basis in an amount at least equal to the market value of the
securities loaned.
Cash collateral may be invested in cash equivalents. A Portfolio may
experience a loss or delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction
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breaches its agreement with the Portfolio. Under normal conditions, if a
Portfolio makes securities loans, the value of the securities loaned may not
exceed 33 1/3% of the value of the total assets of the Portfolio. The
Portfolios have appointed Custodial Trust Company (CTC), an affiliate of the
Adviser, as securities lending agent. CTC receives a fee for these services.
See "Portfolio Turnover Rate" and "Portfolio Transactions" in each Portfolio's
"Financial Highlights" and "Statement of Additional Information".
CONVERTIBLE SECURITIES (BALANCED PORTFOLIO, INSIDERS SELECT FUND, INTERNA-
TIONAL EQUITY PORTFOLIO, LARGE CAP PORTFOLIO AND SMALL CAP PORTFOLIO)
A 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. In evaluating a convertible security, the Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which a Portfolio invests will be rated, at the time of
investment, BBB or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or Baa or better by Moody's Investors Service, Inc. ("Moody's"), or
if unrated by such rating organizations, determined to be of comparable
quality by the Adviser. Convertible debt securities are equity investments for
purposes of the Portfolio's investment policies. Under normal conditions, the
Balanced Portfolio will not invest more than 20% of its total assets in
convertible securities.
MORTGAGE-RELATED SECURITIES (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in mortgage-related securities, consistent
with its investment objective, that provide funds for mortgage loans made to
commercial and residential owners. 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 (such as the Portfolio) 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 borrowers on their 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 or commercial 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 Portfolio may buy mortgage-related
securities without insurance or guarantees if through an examination of the
loan experience and practices of the poolers the Adviser determines that the
securities meet the Portfolio's 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 Balanced Portfolio will not invest more than 25% of its total assets in
mortgage-related securities.
The Balanced Portfolio may also invest in Real Estate Investment Trusts
("REITs"). REITs are pooled investment vehicles that invest primarily in
either real estate or real estate-related loans. The value of a REIT may
increase or decrease based on changes in the value of the underlying
properties or mortgage loans. REITs are also subject to risks generally
associated with investments in real estate. Under normal conditions, the
Portfolio will not invest more than 10% of its total assets in REITs.
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ASSET-BACKED SECURITIES (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in asset-backed securities in accordance
with its investment objective and policies. Asset-backed securities represent
an undivided ownership interest in a pool of installment sales contracts and
installment loans collateralized by, among other things, credit card
receivables and automobiles. In general, asset-backed securities and the
collateral supporting them are of shorter maturity than mortgage loans. As a
result, investment in these securities should result in greater price
stability for the Portfolio.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional
Information. The Portfolio will not limit its investments to asset-backed
securities with credit enhancements. Although asset-backed securities are not
generally traded on a national securities exchange, such securities are widely
traded by brokers and dealers, and to such extent will not be considered
illiquid for the purposes of the Portfolio's limitation on investment in
illiquid securities.
Under normal conditions, the Portfolio will not invest more than 10% of its
total assets in asset-backed securities.
CORPORATE DEBT OBLIGATIONS (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in corporate debt obligations rated A
or higher by Standard & Poor's or Moody's or, if unrated, of similar quality.
The Portfolio also may invest up to 5% of its total assets in corporate debt
obligations rated below A but not lower than B by Standard & Poor's or Moody's
or, if unrated, of similar quality. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on the
obligations. Investment in lower-rated debt securities entails greater
speculative risks than those associated with investment in higher-rated debt
securities. Under normal conditions, the Portfolio will not invest more than 60%
of its total assets in corporate debt obligations.
CASH EQUIVALENT (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in short-term securities readily convertible
to cash, including U.S. Treasury bills, certificates of deposit and commercial
paper rated A-1 by Standard & Poor's or P-1 by Moody's. Under normal
conditions, the Portfolio will not invest more than 20% of its total assets in
cash equivalents.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
The Balanced Portfolio may enter into repurchase agreements with dealers in
U.S. Government securities and member banks of the Federal Reserve System
which furnish collateral at least equal in value or market price to the amount
of their repurchase obligation. The Balanced Portfolio may also enter into
repurchase agreements involving certain foreign government securities. Each of
the other Portfolios may enter into repurchase agreements for temporary
defensive purposes only (see the Appendix.) If the other party or "seller"
defaults, a Portfolio might suffer a loss to the extent that 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. In addition, in the event of bankruptcy of the seller or
failure of the seller to repurchase the securities as agreed, the Portfolio
could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. Under normal conditions, the Balanced Portfolio may not invest more
than 20% of its total assets in repurchase agreements.
MORTGAGE DOLLAR ROLLS (BALANCED PORTFOLIO)
The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Portfolio loses the right to receive
principal and interest paid on the securities sold. The Portfolio would
benefit, however, to the extent of any difference between the price received
for the securities sold and the lower forward price for the future purchase or
fee income plus the interest earned on the cash proceeds of the securities
sold until the settlement date for the forward purchase. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of
the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Portfolio. The Portfolio will hold and maintain
in a segregated account until the settlement date cash or liquid assets in an
amount equal to the forward purchase price. Successful use of mortgage dollar
rolls depends upon BSAM's ability to predict correctly interest rates and
mortgage prepayments. There is no assurance that mortgage dollar rolls can be
successfully employed. For financial reporting and tax purposes, the Portfolio
treats mortgage dollar rolls as two separate transactions: one involving the
purchase of a security and a separate transaction involving a sale. The
Portfolio does not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing. Under normal conditions, the Portfolio will
not invest more than 20% of its total assets in mortgage dollar rolls.
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TEMPORARY INVESTMENTS (ALL PORTFOLIOS)
A Portfolio may, for temporary defensive purposes, invest up to 100% of its
total assets in U.S. Government securities, repurchase agreements
collateralized by U.S. Government securities, commercial paper rated at least
A-2 by Standard & Poor's or P-2 by Moody's, certificates of deposit, bankers'
acceptances, repurchase agreements, non-convertible preferred stocks, non-
convertible corporate bonds with a remaining maturity of less than one year
or, subject to certain tax restrictions, foreign currencies. When a
Portfolio's assets are invested in such instruments, the Portfolio may not be
achieving its investment objective.
PORTFOLIO TURNOVER (ALL PORTFOLIOS)
Under normal conditions, the turnover rate for each Portfolio generally will
not exceed, in any one year, 250% for the Focus List Portfolio, 150% for the
STARS Portfolio, the International Equity Portfolio or The Insiders Select
Fund, 100% for the Large Cap and Small Cap Portfolios, and 30% for the
Balanced Portfolio. However, the portfolio turnover rate may exceed this rate
when the Adviser or Sub-Adviser, as the case may be, 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 diversified Portfolio
may also 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 a 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 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 Objective and Management Policies--Investment
Restrictions" in the 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. See
"Investment Objective and Management Policies--Investment Restrictions" in the
Statement of Additional Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject
investors to certain risks which should be considered. The following risks
apply to each Portfolio to the extent that they engage in the investment
practices set forth below.
NET ASSET VALUE FLUCTUATIONS
Each Portfolio's net asset value per share is not 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.
EQUITY SECURITIES
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities and
that fluctuations can be pronounced. The securities of smaller-cap companies
may be subject to more abrupt or erratic market movements than those of
larger-cap companies, both because the securities typically are traded in
lower volume and because the issuers typically are subject to a greater degree
to changes in earnings and prospects. Changes in the value of the equity
securities in a Portfolio's portfolio will result in changes in the value of
the Portfolio's shares and thus the Portfolio's yield and total return to
investors.
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FIXED-INCOME SECURITIES
Investors should be aware that fixed-income securities fluctuate in value
based on changes in prevailing interest rates. As interest rates go up, the
value of a fixed-income security typically goes down, and vice versa.
Generally, fixed-income securities with longer maturities are more sensitive
to changes in interest rates. Many fixed-income securities, including certain
U.S. corporate fixed-income securities in which a Portfolio 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, the Portfolio may have to replace the called security with a lower
yielding security, resulting in a decreased rate of return for the Portfolio.
FUTURES AND OPTIONS
A Portfolio may trade futures contracts, options and options on futures
contracts. Investors should be aware that the use of derivative instruments
such as futures and options requires special skills and knowledge and
investment techniques that are different from what is required in other
Portfolio investments. If the Adviser trades a futures or options contract at
the wrong time or judges market conditions incorrectly, the strategies may
result in significant losses to the Portfolio and reduce the Portfolio's
return. A Portfolio could also experience losses if the prices of its futures
and options positions were not properly correlated with its other investments
or if it could not close out a position because of an illiquid market for the
future or option.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques such as engaging in options and futures
transactions, engaging in foreign currency exchange transactions, short
selling and lending portfolio securities involves greater risk than that
incurred by many other funds with a similar objective. Using these techniques
may produce higher than normal portfolio turnover and may affect the degree to
which a Portfolio's net asset value fluctuates. Higher portfolio turnover
rates are likely to result in comparatively greater brokerage commissions or
transaction costs. See "Appendix--Investment Techniques."
INVESTING IN FOREIGN SECURITIES
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly,
volume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States. The issuers of some of these securities, such as foreign bank
obligations, may be subject to less stringent or different regulations than
are U.S. issuers. In addition, there may be less publicly available
information about a non-U.S. issuer, and non-U.S. issuers generally are not
subject to uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers.
Because stock certificates and other evidences of ownership of such securities
usually are held outside the United States, a Portfolio will be subject to
additional risks which include possible adverse political and economic
developments, possible seizure or nationalization of foreign deposits and
possible adoption of governmental restrictions that might adversely affect the
payment of principal, interest and dividends on the foreign securities or
might restrict the payment of principal, interest and dividends to investors
located outside the country of the issuers, whether from currency blockage or
otherwise. Custodial expenses for a portfolio of non-U.S. securities generally
are higher than for a portfolio of U.S. securities. Since foreign securities
often are purchased with and payable in currencies of foreign countries, the
value of these assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations.
Some currency exchange costs may be incurred when a Portfolio changes
investments from one country to another.
Furthermore, some of these securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by a Portfolio from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries, although applicable tax conventions may reduce or
eliminate such taxes. All such taxes paid by a Portfolio will reduce its net
income available for distribution to investors.
FOREIGN CURRENCY EXCHANGE
Currency exchange rates may fluctuate significantly over short periods of
time. They 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 perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be
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affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or
political developments in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by
an exchange or clearinghouse, a default on the contract would deprive a
Portfolio of unrealized profits or force a Portfolio to cover its commitments
for purchase or resale, if any, at the current market price.
FOREIGN COMMODITY TRANSACTIONS
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic
exchanges. See "Appendix--Investment Techniques." For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. In
addition, unless a Portfolio hedges against fluctuations in the exchange rate
between the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could
incur losses as a result of those changes.
SIMULTANEOUS INVESTMENTS
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by the Adviser. 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.
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, the Adviser's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from, or make other inquiries of, those parties who provide
computer applications or services that are computer system dependent that the
Adviser has determined are critical to the Portfolios.
At the present time, the Adviser 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 the Adviser 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. The Portfolios' Statement of Additional Information
contains the name and general business experience of each Trustee.
INVESTMENT ADVISER
The Portfolios' investment adviser is Bear Stearns Asset Management (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.
The Adviser 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.
The Adviser supervises and assists in the overall management of the
Portfolios' affairs under an Investment Advisory Agreement between the Adviser
and the Portfolios, subject to the overall authority of the Fund's Board of
Trustees in accordance with Massachusetts law.
Marvin & Palmer Associates, Inc. ("Sub-Adviser") is the Sub-Adviser to the
International Equity Portfolio. The Sub-Adviser is subject to the overall
supervision of the Adviser, provides the International Equity Portfolio with
investment advisory services, including portfolio management, pursuant to a
Sub-Investment Management Agreement (the "Management Agreement"). The Sub-
Adviser, which is registered as an investment adviser under the Investment
Advisers Act of 1940, is a privately held corporation founded in 1986 which
specializes in global, non-United States and emerging market equity portfolio
management for institutional accounts. As of March 31, 1998, the Sub-Adviser
managed over $5.6 billion in assets. The Sub-Adviser has offices at 1201 North
Market Street, Suite 2300, Wilmington, Delaware 19801.
28
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
SUB-ADVISER
A portfolio management committee of investment professionals at the Sub-
Adviser manages the International Equity Portfolio's investments. The
committee consists of David F. Marvin, Chairman of the Board; Stanley Palmer,
President, Senior Managing Director; Terry B. Mason, Senior Vice President;
Jay F. Middleton, Vice President, Todd D. Marvin, Vice President and David L.
Schaen, Vice President. Each member of the committee has been employed with
Marvin & Palmer for more than 5 years and the committee members collectively
have over 120 years of international investment experience.
The Management Agreement provides that, as compensation for services, the Sub-
Adviser is entitled to receive a monthly fee from the Adviser (not the
International Equity Portfolio) calculated on an annual basis equal to .20% of
the Portfolio's total average daily net assets to the extent the Portfolio's
average daily net assets are in excess of $25 million and below $50 million at
the relevant month end, .45% of the Portfolio's total average daily net assets
to the extent the Portfolio's average daily net assets are in excess of $50
million and below $65 million at the relevant month end and 0.60% of the
Portfolio's total average daily net assets to the extent the Portfolio's net
assets are in excess of $65 million at the relevant month end.
Under the terms of the Investment Advisory Agreement, the International Equity
Portfolio has agreed to pay the Adviser a monthly fee at an annual rate of 1%
of the Portfolio's average daily net assets. For the fiscal year ended March
31, 1998, investment advisory fees paid by International Equity Portfolio to
the Adviser amounted to $14,726, all of which was waived.
LARGE CAP VALUE PORTFOLIO, SMALL CAP VALUE PORTFOLIO AND S&P STARS PORTFOLIO
Under the terms of an Investment Advisory Agreement, the Large Cap Value
Portfolio, Small Cap Value Portfolio and S&P STARS Portfolio have agreed to
pay the Adviser a monthly fee at the annual rate of 0.75 of 1% of each
Portfolio's average daily net assets. For the fiscal year ended March 31,
1998, investment advisory fees paid by Large Cap Value Portfolio amounted to
$140,641, all of which was waived. For the fiscal year ended March 31, 1998,
investment advisory fees paid by Small Cap Value Portfolio amounted to
$425,409 of which $412,656 was waived. For the fiscal year ended March 31,
1998, investment advisory fees paid by S&P STARS Portfolio amounted to
$1,262,953.
BALANCED PORTFOLIO AND FOCUS LIST PORTFOLIO
Under the terms of an Investment Advisory Agreement, the Balanced Portfolio
and the Focus List Portfolio have agreed to pay the Adviser a monthly fee at
the annual rate of 0.65 of 1% of each Portfolio's average daily net assets.
For the fiscal year ended March 31, 1998, investment advisory fees paid by the
Balanced Portfolio and the Focus List Portfolio amounted to $6,748 and
$12,178, respectively, all of which was waived.
THE INSIDERS SELECT FUND
Under the terms of an Investment Advisory Agreement, The Insiders Select Fund
has agreed to pay the Adviser a monthly fee at the annual rate of 1% of The
Insiders Select Fund 's average daily net assets (the "Basic Fee"), which will
be adjusted monthly (the "Monthly Performance Adjustment") depending on the
extent to which the investment performance of the class of shares (currently,
Class C) expected to bear the highest total operating expenses, after
expenses, exceeded or was exceeded by the percentage change in the investment
record of the S&P MidCap 400 Index. (Prior to February 1, 1998, the adjustment
was based on the S&P 500 Stock Index.) The Monthly Performance Adjustment may
increase or decrease the total advisory fee payable to the Adviser (the "Total
Advisory Fee") by up to 0.50% per year of the value of The Insiders Select
Fund's average daily net assets.
The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of
the 1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average
daily net assets over the most recent calendar month, giving a dollar amount
which is the Basic Fee for that month; (b) one-twelfth of the applicable
performance adjustment rate from the table below is applied to The Insiders
Select Fund's average daily net assets over the most recent calendar month,
giving a dollar amount which is the Monthly Performance Adjustment (for the
first twelve-month period, no performance adjustment will be made); and (c)
the Monthly Performance Adjustment is then added to or subtracted from the
Basic Fee and the result is the amount payable by The Insiders Select Fund to
the Adviser as the Total Advisory Fee for that month.
29
<PAGE>
The full range of Total Advisory Fees on an annualized basis is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS
PERFORMANCE (NET OF
EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE
AND PERCENTAGE CHANGE IN THE ADJUSTMENT
S&P MIDCAP 400 INDEX BASIS FEE (%) RATE (%) TOTAL FEE (%)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more........... 1% 0.50% 1.50%
+2.75 percentage points or more but less
than +3.00 percentage points............. 1% 0.40% 1.40%
+2.50 percentage points or more but less
than +2.75 percentage points............. 1% 0.30% 1.30%
+2.25 percentage points or more but less
than +2.50 percentage points............. 1% 0.20% 1.20%
+2.00 percentage points or more but less
than +2.25 percentage points............. 1% 0.10% 1.10%
Less than +2.00 percentage points but more
than
-2.00 percentage points.................. 1% 1.00%
- -2.00 percentage points or less but more
than
-2.25 percentage points.................. 1% -0.10% 0.90%
- -2.25 percentage points or less but more
than
-2.50 percentage points.................. 1% -0.20% 0.80%
- -2.50 percentage points or less but more
than
-2.75 percentage points.................. 1% -0.30% 0.70%
- -2.75 percentage points or less but more
than
-3.00 percentage points.................. 1% -0.40% 0.60%
- -3.00 percentage points or less........... 1% -0.50% 0.50%
</TABLE>
The period over which performance is measured is a rolling twelve-month
period. Prior to February 1, 1998, the performance was measured against the
monthly return of the S&P 500 Stock Index. Beginning February 1, 1998,
performance is measured against the monthly return of the S&P Midcap 400
Index. The return of each index is calculated as the sum of the change in the
level of the Index during the period, plus the value of any dividends or
distributions made by the companies whose securities comprise the relevant
index. For the fiscal year ended March 31, 1998, the performance fee
adjustment reduced the advisory fee by $132,242 or 0.45% of the value of the
Insiders Select Funds' average daily net assets and advisory fees paid due to
BSAM amounted to $157,031, all of which was waived.
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 pool investment vehicles with assets
at
March 31, 1998 of $3 billion.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law. For providing administrative services to Large Cap Value
Portfolio, Small Cap Value Portfolio, S&P STARS Portfolio and Focus List
Portfolio, 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. Under the terms of an
Administrative Services Agreement with the Fund, 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, not to exceed an annual fee of $150,000 for each Portfolio. Above
$150,000 of average daily net assets, a contractual rate of 0.10 of 1% will be
charged.
For providing administrative services to International Equity Portfolio, The
Insiders Select Fund and Balanced Portfolio, the Fund has agreed to pay PFPC
Inc. a monthly fee equal to an annual rate of 0.10 of 1% of each Portfolio's
average daily net assets up to $200 million, 0.075 of 1% of the next
30
<PAGE>
$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 monthly fee of $12,500 for the
Balanced Portfolio and International Equity Portfolio and $11,000 for The
Insiders Select Fund.
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 the
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. Effective May 1, 1996, and until further notice, PFPC Inc.
will reduce each Portfolio's monthly minimum to $7,500 for net assets of less
than $25 million; $9,167 for net assets of $25 million to $50 million; and
$11,000 for net assets in excess of $50 million. 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 Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment
Advisory Agreement is 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, is each Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to each Portfolio.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A AND C--SHARES S&P STARS
PORTFOLIO, THE INSIDERS SELECT FUND, LARGE CAP VALUE PORTFOLIO AND SMALL CAP
VALUE PORTFOLIO
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Portfolio pays Bear Stearns for
distributing Portfolio shares and for providing personal services to, and/or
maintaining accounts of, Portfolio shareholders.
The Portfolios will pay Bear Stearns an annual fee of 0.50% for Class A shares
and 1.00% for Class C shares, respectively, of each Portfolio's average daily
net assets.
With respect to Class A shares of each 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 and C shares of the Portfolios, up to 0.25% of the average daily
net assets of each class will compensate institutions for personal service and
maintenance of accounts holding Portfolio 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.
31
<PAGE>
DISTRIBUTION PLAN--CLASS B SHARES--ALL PORTFOLIOS
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan") for Class B shares, each
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.
Each 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.
DISTRIBUTION PLAN--CLASS A AND C SHARES--INTERNATIONAL EQUITY PORTFOLIO,
BALANCED PORTFOLIO AND FOCUS LIST PORTFOLIO
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), each Portfolio will pay Bear
Stearns an annual fee of 0.25% and 0.75% of the average daily net assets of
Class A 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.
Each 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 AND C SHARES--INTERNATIONAL EQUITY
PORTFOLIO, BALANCED PORTFOLIO AND FOCUS LIST PORTFOLIO
The Fund has adopted a shareholder servicing plan on behalf of each
Portfolio's Class A and C shares (the "Shareholder Servicing Plan"). In
accordance with the Shareholder Servicing Plan, the Fund may enter into
shareholder service agreements under which each Portfolio pays fees of up to
0.25% of the average daily net assets of Class A 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.
SHAREHOLDER SERVICING PLAN--CLASS B--ALL PORTFOLIOS
The Fund has adopted a shareholder servicing plan on behalf of each
Portfolio's Class B shares (the "Shareholder Servicing Plan"). In accordance
with the Shareholder Servicing Plan, the Fund may enter into shareholder
service agreements under which each Portfolio pays fees of up to 0.25% 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, 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
The Adviser 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, exceed a specific percentage of Class
A's, Class B's and Class C's average daily net assets for the fiscal year, the
Adviser may waive a portion of its investment advisory fee or bear other
expenses to the extent of the excess expense. See "Fee Table" for each
Portfolio's expense limitation.
32
<PAGE>
Prior Performance of the Sub-Adviser of the International Equity Portfolio
The following tables set forth the International Equity Portfolio Sub-
Adviser's composite performance data relating to the historical performance of
institutional private accounts managed by the Sub-Adviser, since the dates
indicated, that have investment objectives, policies, strategies and risks
substantially similar to those of the International Equity Portfolio. The data
is provided to illustrate the past performance of the Sub-Adviser in managing
substantially similar accounts as measured against the specified market index
and does not represent the performance of the International Equity Portfolio.
Investors should not consider this performance data as an indication of future
performance of the Portfolio or of the Sub-Adviser.
The Sub-Adviser's composite performance data shown below is calculated in
accordance with the standards of the Association for Investment Management and
Research ("AIMR"(1)), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends
and interest, accrued income and realized and unrealized gains and losses. All
returns reflect the imposition of foreign withholding taxes on interest,
dividends and capital gains and the deduction of all fees and expenses paid by
the Accounts including, investment advisory fees, brokerage commissions and
execution costs, but not the imposition of federal or state income taxes or
custodial fees, if any. The Sub-Adviser's composite includes all actual, fee-
paying, discretionary institutional private accounts managed by the Sub-
Adviser that have investment objectives, policies, strategies and risks
substantially similar to those of the Portfolio. The composite, however,
excludes certain accounts with similar investment objectives which, in the
opinion of the Sub-Adviser, were not managed in a manner similar to the manner
in which the Portfolio will be managed as a result of asset size, investment
restrictions or other variables. Securities transactions are accounted for on
the trade date and accrual accounting is utilized. Cash and equivalents are
included in performance returns. The monthly returns of the Sub-Adviser's
composites combine the individual accounts' returns (calculated on a time-
weighted rate of return that is revalued whenever cash flows exceed $500) by
asset-weighing each individual account's asset value as of the beginning of
the month. Quarterly and yearly returns are calculated by geometrically
linking the monthly and quarterly returns, respectively. The yearly returns
are computed by geometrically linking the returns of each quarter within the
calendar year. For additional information concerning the composite performance
data, please see the Statement of Additional Information.
The institutional private accounts that are included in the Sub-Adviser's
composite are not subject to the same types of expenses to which the Portfolio
is subject nor to the diversification requirements, specific tax restrictions
and investment limitations imposed on the International Equity Portfolio by
the Investment Company Act or Subchapter M of the Code. Consequently, the
performance results for the Sub-Adviser's composite could have been adversely
affected if the institutional private accounts included in the composites had
been regulated as investment companies under the federal securities laws.
The investment results of the Sub-Adviser's composite presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the International Equity Portfolio or an individual investor
investing in the Portfolio. Investors should also be aware that the use of a
methodology different from that used below to calculate performance could
result in different performance data.
- ------
(1) AIMR is a nonprofit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and
fair presentations by investment advisers of their performance results,
and (ii) ensure uniformity in reporting so that performance results of
investment advisers are directly comparable. Note, however, that the
formula for calculation of performance mandated by the Securities and
Exchange Commission differs from that mandated by AIMR.
33
<PAGE>
THE SUB-ADVISER'S NON-U.S. COMPOSITE PERFORMANCE
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SUB-ADVISER
NON-U.S. MSCI
TIME PERIOD COMPOSITE INDEX EAFE
- --------------------------------------------------------------------------------
<S> <C> <C>
1997.................................................... 19.74% 1.78%
1996.................................................... 9.74 6.05
1995.................................................... 9.78 11.21
1994.................................................... (10.31) 7.78
1993.................................................... 49.03 32.56
1992.................................................... (0.21) (12.17)
1991.................................................... 16.07 12.13
1990.................................................... (13.26) (23.45)
1989.................................................... 19.88 10.53
1988.................................................... 10.18 15.67
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS: Since Inception
Annualized % (Ending 12/31/97) 1 YR 5 YR (12/31/88)
Non-U.S. Composite............................... 19.74 14.03 9.81%
MSCI EAFE Index.................................. 1.78 11.39 4.05%
</TABLE>
- ------
(1) Returns for time periods of less than one year are annualized.
Prior Performance of Related Accounts for
Balanced Portfolio
Set forth in the following table is the performance history of a composite of
institutional private accounts with investment objectives, policies,
strategies and risks substantially similar to those of the Balanced Portfolio.
The accounts constituting the composite were managed during the periods
indicated by a division of Bear Stearns which was then known as Bear Stearns
Asset Management (the "Division"). Bear Stearns recently reorganized its asset
management operations so that the Division was consolidated with the Adviser.
Prior to such consolidation, the Division rendered advisory services to
separate accounts, while the Adviser rendered advisory services to registered
investment companies. During all periods reflected in the table below, both
the Division and the Adviser were commonly managed and shared portfolio
management personnel, including the portfolio managers of the Balanced
Portfolio, who have been and are responsible for managing the accounts
reflected in the composite. Therefore, the Adviser believes that the
performance data reflected below are illustrative of the past performance of
the Adviser in managing a composite set of accounts substantially similar to
the Portfolio. For that reason, this performance history may be relevant to
potential investors in the Balanced Portfolio. Investors should note, however,
that prior to January 1, 1997, the portfolio managers of the Balanced
Portfolio reported to a Director of Equities who is no longer an employee of
the Adviser or any of its affiliates.
The data does not represent the past performance of the Balanced Portfolio and
prospective investors should not consider these performance figures as
indicative of the future performance of the Portfolio or of the Adviser.
The composite performance data shown below were calculated in accordance with
the standards of the Association for Investment Management and Research (See
(1) on pg. 34), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends
and interest, accrued income and realized and unrealized gains and losses. All
returns reflect the deduction of all fees and expenses paid by the accounts
including, investment advisory fees, brokerage commissions and execution
costs, but not the imposition of federal or state income taxes or custodial
fees, if any. The composite includes all actual fee-paying, discretionary
accounts managed by the Division that have investment objectives, policies,
strategies and risks substantially similar to those of the Balanced Portfolio.
The composite, however, excludes certain accounts with similar investment
objectives which, in the opinion of the Adviser, were not managed in a manner
similar to the manner in which the Balanced Portfolio will be managed as a
result of asset size, investment restrictions or other variables. Securities
transactions are accounted for on the trade date and accrual accounting is
utilized. Cash and equivalents are included in performance returns. For
34
<PAGE>
additional information regarding the composite performance data, please see
the Statement of Additional Information.
The institutional private accounts that are included in the composite are not
subject to the same types of expenses to which the Portfolio is subject nor to
the diversification requirements, specific tax restrictions and investment
limitations imposed on the Balanced Portfolio by the Investment Company Act or
Subchapter M of the Code. Consequently, the performance results for the
composites could have been adversely affected if the institutional private
accounts included in the composites had been regulated as investment companies
under the federal securities laws.
The investment results of the composites presented below are unaudited and are
not intended to predict or suggest the returns that might be experienced by
the Balanced Portfolio or an individual investor investing in the Balanced
Portfolio. Investors should also be aware that the use of a methodology
different from that used below to calculate performance could result in
different performance data.
BALANCED COMPOSITE PERFORMANCE SUMMARY
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LIPPER BALANCED INVESTMENT ADVISER'S
TIME PERIOD FUNDS INDEX BALANCED COMPOSITE
- --------------------------------------------------------------------------------
<S> <C> <C>
1997....................................... 20.05% 21.51%
1996....................................... 13.01 12.77
1995....................................... 24.89 31.04
1994....................................... -2.05 -0.39
1993....................................... 11.95 9.84
1992....................................... 7.46 7.81
1991....................................... 25.83 22.97
4/1/90 to 12/31/90......................... 3.07 4.62
</TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LIPPER BALANCED INVESTMENT ADVISER'S
TIME PERIOD(1) FUNDS INDEX BALANCED COMPOSITE
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year..................................... 28.98% 28.18%
5 Years.................................... 13.87 15.22
Since Inception (4/1/90)................... 13.70 14.41
</TABLE>
- ------
(1) Returns for periods of less than one year are annualized.
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 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 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 Fund which class of shares you wish to purchase,
the Fund will assume that your instructions apply to Class A shares.
Purchases are effected at the public offering price 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
35
<PAGE>
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment for payment until the settlement date.
If a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made
before the settlement date.
CHOOSING A CLASS OF SHARES
Once you decide to buy shares of a Portfolio, you must determine which class
of shares to buy. Each Portfolio offers Class A, Class B and Class C shares.
Each class has its own cost structure and features that will affect the
results of your investment over time in different ways. Your financial adviser
or Account Executive can help you choose the class of shares that best suits
your investment needs.
. Class A shares have a front-end sales charge, which is added to the
offering price of your investment.
. Class B shares and C shares do not have a front-end sales charge, which
means that your entire investment is available to work for you right
away. However, Class B shares and C shares have a contingent deferred
sales charge (CDSC) that you must pay if you redeem your shares within a
specified period of time. In addition, the annual expenses of Class B
shares and C shares are higher than the annual expenses of Class A
shares.
In deciding which class is best, you may consider:
. how much you intend to invest
. the length of time you expect to hold your investment
. the features and services available for each class
. how well you expect the market to perform in the coming months.
For example, you may consider Class A shares if you have a long-term
investment horizon or if you plan to invest a large amount of money, because
Class A shares have a lower expense structure and the amount of the initial
sales charge decreases as you invest more money. You may find Class B shares
more attractive, because there is no front-end sales charge and the full
amount of your investment is put to work right away. If you plan to invest for
a shorter time period, you may consider Class C shares, because the CDSC is
lower than that of Class B shares and declines to 0 after one year. In any
event, you should consult your financial adviser or Account Executive before
investing in a Portfolio.
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 Equity Portfolios--5.50% 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.
36
<PAGE>
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]" if purchased directly from the Portfolio and
should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear
Stearns Funds-[Name of 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 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], 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.
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 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 Portfolios' 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 Fund could subject the investor to backup withholding and a $50 penalty
imposed by the Internal Revenue Service (the "IRS").
37
<PAGE>
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............ 5.50% 5.82% 5.25%
$50,000 to less than
$100,000.................... 4.75 4.99 4.25
$100,000 to less than
$250,000.................... 3.75 3.90 3.25
$250,000 to less than
$500,000.................... 2.75 2.83 2.50
$500,000 to less than
$1,000,000.................. 2.00 2.04 1.75
$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 Fund and designated family members of
any of the above individuals; (b) qualified retirement plans of Bear Stearns;
(c) any employee or registered representative of any Authorized Dealer or
their respective spouses and minor children; (d) trustees or directors of
investment companies for which Bear Stearns or an affiliate acts as sponsor;
(e) any state, county or city, or any instrumentality, department, authority
or agency thereof, which is prohibited by applicable investment laws from
paying a sales load or commission in connection with the purchase of Portfolio
shares; (f) any institutional investment clients including corporate sponsored
pension and profit-sharing plans, other benefit plans and insurance companies;
and (g) any pension funds, state and municipal governments or funds, Taft-
Hartley plans and qualified nonprofit 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
38
<PAGE>
providing shareholder services in respect of Fund shares pursuant to
agreements with the Fund 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 Code, and "rabbi trusts," provided, in each case,
the purchase transaction is effected through such broker. The broker may
charge a fee for transactions in Portfolio shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares." The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first
day of that month. In processing redemptions of Class B shares, the Portfolios
will first redeem shares not subject to any CDSC, and then shares held longest
during the eight-year period, resulting in the shareholder paying the lowest
possible CDSC. The amount of the CDSC charged upon redemption is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First............................................ 5%
Second........................................... 4%
Third............................................ 3%
Fourth........................................... 3%
Fifth............................................ 2%
Sixth............................................ 1%
Seventh.......................................... 0%
Eighth*.......................................... 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolios
believe is unlikely. If conversions do not occur as a result of possible
taxability, Class B shares would continue to be subject to higher expenses
than Class A shares for an indeterminate period.
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
Fund's other portfolios and shares of certain other funds sponsored or advised
by Bear Stearns, including the
39
<PAGE>
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, then held by
the investor. The following purchases of Class A shares may be aggregated for
the purposes of determining the amount of purchase and the corresponding sales
load: (a) individual purchases on behalf of a single purchaser, the
purchaser's spouse and their children under the age of 21 years including
shares purchased in connection with a retirement account exclusively for the
benefit of such individual(s), such as an IRA, and purchases made by a company
controlled by such individual(s); (b) individual purchases by a trustee or
other fiduciary account, including an employee benefit plan (such as employer-
sponsored pension, profit-sharing and stock bonus plans, including plans under
section 401(k) of the Code, and medical, life and disability insurance
trusts); or (c) individual purchases by a trustee or other fiduciary
purchasing shares concurrently for two or more employee benefit plans of a
single employer or of employers affiliated with each other. Subsequent
purchases made under the conditions set forth above will be subject to the
minimum subsequent investment of $50 and will be entitled to the Right of
Accumulation.
LETTER OF INTENT-CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of each Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, 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 portfolios, 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 $100 per transaction) at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Portfolio shares may be purchased by transferring funds
from the account designated by the investor. At the investor's option, the
account designated will be debited in the specified amount, and Portfolio
shares will be purchased once a month, on 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 is
currently 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 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
40
<PAGE>
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 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 Fund on 60 business days' notice to
the affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Fund will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of personal
retirement plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have a value of at least the minimum initial
investment required for the portfolio or fund into which the exchange is being
made; if making an exchange to an existing account, the dollar value must
equal or exceed the applicable minimum for subsequent investments. If any
amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
portfolio or fund.
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
41
<PAGE>
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 shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
recognize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid by a
Portfolio in shares of the same class of another portfolio of the 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. 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 Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee is currently 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 Fund imposes 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 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. 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 Fund 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
42
<PAGE>
of at least $1,000,000. A CDSC of 1% is also imposed on any redemption of
Class A shares within one year of the date of purchase by any investor that
purchased the shares with the proceeds from the redemption of shares of an
investment company sold with a sales charge or commission and not distributed
by Bear Stearns. No CDSC will be imposed to the extent that the net asset
value of the Class A shares redeemed does not exceed (i) the current net asset
value of Class A shares acquired through reinvestment of dividends or capital
gain distributions, plus (ii) increases in the net asset value of an
investor's Class A shares above the dollar amount of all such investor's
payments for the purchase of Class A shares held by the investor at the time
of redemption. See the Statement of Additional Information for more
information.
CONTINGENT DEFERRED SALES CHARGE-CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of
Class B shares within six years of the date of purchase. No CDSC will be
imposed to the extent that the net asset value of the Class B shares redeemed
does not exceed (i) the current net asset value of Class B shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class B shares above the
dollar amount of all such investor's payments for the purchase of Class B
shares held by the investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above
the total amount of payments for the purchase of Class B shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 5% for a total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases
in the net asset value of an investor's Class C shares above the dollar amount
of all such investor's payments for the purchase of Class C shares held by the
investor at the time of redemption.
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.
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Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 1% for a total CDSC of $2.40.
WAIVER OF CDSC-CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection
with (a) redemptions made within one year after the death or disability, as
defined in section 72(m)(7) of the Code, of the shareholder, (b) redemptions
by employees participating in eligible benefit plans, (c) redemptions as a
result of a combination of any investment company with a Portfolio by merger,
acquisition of assets or otherwise, (d) a distribution following retirement
under a tax-deferred retirement plan or upon attaining age 70 1/2 in the case
of an IRA or Keogh plan or custodial account pursuant to section 403(b) of the
Code, and (e) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the
automatic withdrawal is established. If the Fund's 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 Fund's 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 Fund 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 Fund may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Fund 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], 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
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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 Portfolios 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 that which participants in a medallion program by the Securities
Transfer Association. The three recognized medallion programs are Securities
Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program
(SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP).
Signature guarantees which are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature-guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, each Portfolio's net asset value
may fluctuate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund 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, Distributions and Taxes
Dividends will be automatically reinvested in additional Portfolio shares at
net asset value, unless payment in cash is requested or dividends are
redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income at
least once a year. Each 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 1940 Act. No Portfolio will 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 Portfolio shares at net asset value,
unless payment in cash is requested or dividends are redirected into another
fund pursuant to the Redirected Distribution Option. All expenses are accrued
daily and deducted before declaration of dividends to investors. Dividends
paid by each class of each 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 of a Portfolio 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 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 the same or
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's 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.
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The Large Cap Portfolio, Small Cap Portfolio, The Insiders Select Fund, STARS
Portfolio, International Equity Portfolio and Balanced Portfolio may make short
sales "against the box." See "Description of the Portfolios--Investment
Techniques." Any gains realized by a Portfolio as such sales will be recognized
at the time the Portfolio enters into the short sale.
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 certain 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 the Adviser 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.
Generally, the Fund must 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 that the TIN furnished in connection with opening an account is
correct and 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 direct the Fund to institute backup withholding if
the IRS determines that 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 and local taxes in respect of
their investment in Portfolio shares. Management of the Fund believes that
each Portfolio has qualified for the fiscal year ended March 31, 1998 as a
"regulated investment company" under the Code. Each Portfolio intends 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. A Portfolio may be subject to a non-
deductible 4% excise tax, measured with respect to certain undistributed
amounts of taxable investment income and capital gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in a Portfolio.
Performance Information
For purposes of advertising, performance for each class 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
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also take into account any applicable distribution and shareholder servicing
fees. As a result, at any given time, the performance of Class B and Class C
should be expected to be lower than that of Class A. 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 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 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 such 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 such Portfolio's actual total return for the applicable
period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value (or maximum
public offering price in the case of Class A shares) per share at the
beginning of the period. Class B total return will reflect the deduction of
the CDSC. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return. Total
return for each Portfolio also may be calculated by using the net asset value
per share at the beginning of the period instead of the maximum offering price
per share at the beginning of the period for Class A shares or without giving
effect to any applicable CDSC at the end of the period for Class B or C
shares. Calculations based on the net asset value per share do not reflect the
deduction of the sales load on the Portfolios' 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 each Portfolio's shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index,
Standard & Poor's Midcap 400 Index, Wilshire 4500 Stock Index, Russell Small
Cap Index, the Dow Jones Industrial Average and other industry benchmarks.
General Information
The Fund 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 Fund is 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 Fund 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 Fund" in the Portfolios' Statement of Additional
Information,
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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 Fund 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 Fund) 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 Fund has 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 Fund, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by such matter. Rule 18f-2
further provides that a portfolio shall be deemed to be affected by a matter
unless it is clear that the interests of such portfolio in the matter are
identical or that the matter does not affect any interest of such portfolio.
However, Rule 18f-2 exempts the selection of independent accountants and the
election of Trustees from the separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account. Shareholder inquiries may be made by
writing to the Fund 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
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, each Portfolio may
employ, among others, certain of the following investment techniques which may
involve certain risks. Options and futures transactions involve "derivative
securities."
LENDING PORTFOLIO SECURITIES (ALL PORTFOLIOS)
From time to time, each Portfolio may lend securities from its portfolio of
investments to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the value of a Portfolio's total assets. In connection with such
loans, a Portfolio will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Each Portfolio can increase its income through the
investment of such collateral. A Portfolio continues to be entitled to
payments in amounts equal to the interest, dividends and other distributions
payable on the loaned security and receives interest on the amount of the
loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio. The Portfolios have appointed Custodial Trust Company (CTC), an
affiliate of the Adviser. CTC receives a fee for these services.
BORROWING MONEY (ALL PORTFOLIOS)
As a fundamental policy, each Portfolio is permitted to borrow 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.
However, each Portfolio currently intends to borrow money only for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of a Portfolio's total
assets, such Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS (LARGE CAP PORTFOLIO,
STARS PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, SMALL CAP VALUE PORTFOLIO AND
FOCUS LIST PORTFOLIO)
Each Portfolio's assets may be invested in the securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depositary Receipts
("CDRs"), are receipts issued in Europe typically by non-United States banks
and trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and CDRs
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without
participation by the issuer of the deposited security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
FOREIGN SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, FOCUS LIST
PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND STARS PORTFOLIO)
Each Portfolio may purchase securities of foreign issuers, which may involve
more risks than investment in securities issued by domestic companies.
Securities of foreign issuers may be traded in the United States in the form
of American Depository Receipts (ADRs) and other similar instruments, but most
are traded primarily in foreign markets. The risks of investing in foreign
securities include, among other things:
. POLITICAL AND ECONOMIC RISK. Foreign investments are subject to increased
political and economic risks, especially in developing countries. In some
countries, there is the risk that assets may be confiscated or taxed by
foreign governments.
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. REGULATORY RISK. Foreign securities markets may be subject to less
government regulation and foreign issuers may not be subject to uniform
accounting, auditing and financial reporting standards.
. CURRENCY RISK. Foreign securities denominated in foreign currencies may be
subject to the additional risk of fluctuations in the value of the currency
as compared to the U.S. dollar.
. MARKET RISK. Foreign securities markets may be subject to greater
volatility and may be less liquid than domestic markets.
. TRANSACTION COSTS. Transaction costs involving foreign securities tend to
be higher than similar costs applicable to transactions in U.S. securities.
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which at the time 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 (ALL PORTFOLIOS)
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 (ALL PORTFOLIOS)
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 (ALL PORTFOLIOS)
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.
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Bankers' 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.
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.
WARRANTS (ALL PORTFOLIOS)
Each Portfolio may invest up to 5% of its net assets in warrants, except that
this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time.
INVESTMENT COMPANY SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, a Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of such Portfolio's total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies will involve duplication of advisory fees and certain other
expenses.
ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Portfolio's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, options traded in the over-the-counter market and securities
used to cover such options, and certain asset-backed and mortgage-backed
securities, such as certain collateralized mortgage obligations and stripped
mortgage-backed securities. As to these securities, each Portfolio is subject
to a risk that should such Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value,
the value of such Portfolio's net assets could be adversely affected.
RATINGS (ALL PORTFOLIOS)
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the
quality of the obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Therefore, although these ratings may be an initial criterion for selection of
portfolio investments, BSAM also will evaluate such obligations and the
ability of their issuers to pay interest and principal. Each Portfolio will
rely on BSAM's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, BSAM will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the quality of the issuer's
management and regulatory matters. It also is possible that a rating agency
might not timely change the rating on a particular issue to reflect subsequent
events. Once the rating of a security held by a Portfolio has been changed,
BSAM will consider all circumstances deemed relevant in determining whether
such Portfolio should continue to hold the security.
A-3
<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
Sub Adviser
International Equity Portfolio
Marvin & Palmer Associates, Inc.
1201 N. Market Street
Suite 2300
Wilmington, DE 19801
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
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
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 PORTFOLIOSO PROSPECTUS AND IN
THE PORTFOLIOSO OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOSO SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOSO 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-015-01
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS 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 Total Return Bond Portfolio
(the "Bond Porfolio") and the High Yield Total Return Portfolio (the "High
Yield Portfolio") (each a "Portfolio" and together the "Portfolios").
TOTAL RETURN BOND PORTFOLIO
Seeks maximization of total return, 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 July 28,
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.
JULY 28, 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............................................... 31
How to Buy Shares.......................................................... 36
Net Asset Value............................................................ 38
Shareholder Services....................................................... 41
How to Redeem Shares....................................................... 42
Dividends and Distributions................................................ 45
Taxes...................................................................... 46
Performance Information.................................................... 48
General Information........................................................ 49
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TOTAL RETURN BOND HIGH YIELD TOTAL RETURN
PORTFOLIO PORTFOLIO
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases
(as a percentage of
maximum offering
price)................. 4.50%(1) -- -- 4.50%(1) -- --
Maximum Deferred Sales
Charge Imposed on
Redemptions (as a
percentage of the
amount subject to
charge)................ -- (2) 5.00% 1.00% -- (2) 5.00% 1.00%
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Advisory Fees (after
fee waiver)............ 0.00%(3) 0.00%(3) 0.00%(3) 0.00%(4) 0.00%(4) 0.00%(4)
12b-1 Fees............. 0.35%(5) 0.75% 0.75% 0.10% 0.75% 0.75%
Other Expenses (after
expense reimbursement). 0.45%(3) 0.70%(3) 0.70%(3) 0.90%(4) 0.90%(4) 0.90%(4)
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 0.80%(3) 1.45%(3) 1.45%(3) 1.00%(4) 1.65%(4) 1.65%(4)
==== ==== ==== ==== ==== ====
</TABLE>
- ------
See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL RETURN BOND 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>
TOTAL RETURN BOND 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)(1) (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(7)....................................... 0.35% 0.75% 0.75%
Other Expenses (after expense reimbursement)(6)(7).. 1.12% 1.64% 1.37%
---- ---- ----
Total Portfolio Operating Expenses (after fee waiver
and expense reimbursement)(6)....................... 1.75% 2.40% 2.40%
==== ==== ====
</TABLE>
- ------
See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $ 62 $ -- $ 98 $ --
Class B Shares.......... 75 24 107 75
Class C Shares.......... 34 24 75 75
- -------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $136 $ -- $242 $ --
Class B Shares.......... 150 128 257 257
Class C Shares.......... 128 128 274 274
</TABLE>
- ------
* Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight in the case of Class B shares.
The amounts listed in the example should not be considered as representative
of past or future expenses and actual expenses may be greater or less than
those indicated. Moreover, while the example assumes a 5% annual return, the
Portfolios actual performance will vary and may result in an actual return
greater or less than 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolios and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares."
For a description of the expense reimbursement or waiver arrangements in
effect, see "Management of the Portfolio."
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 Bond 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 Bond 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 stated above would have been .45% for the Bond
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 stated above 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 Bond Portfolio, 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 Portfolio".
(7) With respect to the Class B and Class C shares of the Debt Portfolio,
Other Expenses include 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. The 6.25% limitation is imposed on the
Debt Portfolio rather than on a per shareholder basis. Therefore, a long-
term shareholder of the Debt 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.
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 is 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
TOTAL RETURN BOND
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
<PAGE>
HIGH YIELD TOTAL RETURN
PORTFOLIO(3)
CLASS A
For the period January
2, 1998 through
March 31, 1998......... 12.00 0.26 0.73 (0.26) -- 12.73
CLASS B
For the period January
2, 1998 through March
31, 1998............... 12.00 0.24 0.73 (0.24) -- 12.73
CLASS C
For the period January
2, 1998 through
March 31, 1998......... 12.00 0.24 0.73 (0.24) -- 12.73
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
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(7)(8) 8.72(7)(8) 3.42(7)(8) 266.46
9.43 2,926 0.80 6.13 1.86 244.78
4.40 3,367 0.80 5.99 1.73 262.95
8.54 4,467 0.85(8) 5.76(8) 2.87(8) 107.35
(0.04)(7) 18 1.45(8) 5.22(7)(8) 0.48(7)(8) 244.78
8.92 1,403 1.28 5.60 1.80 244.78
3.99 1,018 1.20 5.57 1.74 262.95
8.13 1,775 1.25(8) 5.38(8) 2.95(8) 107.35
8.30 18,301 1.00(8) 9.14(8) 1.67(8) 139.61
8.13 6,013 1.65(8) 8.46(8) 1.68(8) 139.61
8.13 11,298 1.65(8) 8.46(8) 1.67(8) 139.61
</TABLE>
- -----
(5) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses on investments during the respective periods because of the timing
of sales and repurchases of Portfolio shares in relation to fluctuating
net asset values during the respective periods. For the Debt Portfolio net
realized and unrealized gain/(loss) on investments include forward foreign
currency exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
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 Bond 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 Bond
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."
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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.
TOTAL RETURN BOND PORTFOLIO ("BOND PORTFOLIO")
The Bond Portfolio's investment objective is to maximize total return,
consistent with preservation of capital.
The Bond 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 ranging from four to 13 years and a
duration of not less than 65% of the Salomon Brothers BIG Bond Index and not
more than 135% of the Salomon Brothers BIG Bond Index.
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 70% of the value of the Portfolio's net assets must consist of
securities which, in the case of bonds and other debt instruments, are rated
no lower than A 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") or, if unrated, deemed to be of comparable quality by BSAM. Up to 30%
of the value of the Bond Portfolio's net assets may consist of securities
which, in the case of bonds and other debt instruments, are rated no lower
than Baa by Moody's or BBB by S&P, Fitch and Duff or, if unrated, deemed to be
of comparable quality by BSAM. The Bond 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"
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 65% 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 its 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 (ALL PORTFOLIOS)
Each Portfolio 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 Bond Portfolio and 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 High Yield Portfolio may borrow money to the extent
permitted under the 1940 Act. A Portfolio may not purchase securities when
borrowings exceed 5% of its total assets. If market fluctuations in the value
of the Debt Portfolio's portfolio holdings or other factors cause the ratio of
the Portfolio's total assets to outstanding borrowings to fall below 300%,
within three days of any such event the Debt Portfolio may be required to sell
portfolio securities to restore the 300% asset coverage, even though from an
investment standpoint such sales might be disadvantageous. Borrowings may be
utilized to meet share redemptions of the Debt Portfolio or to pay dividends
and distributions to Shareholders of the Portfolio, in instances where the
Debt Portfolio does not desire to liquidate its portfolio holdings. The Debt
Portfolio expects that some of its borrowings may be made on a secured basis.
In such situations, either the custodian will segregate the pledged assets for
the benefit of the lender or arrangements will be made with a suitable
subcustodian, which may include the lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that a Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income
from the assets obtained with borrowed funds is not sufficient to cover the
cost of borrowing,
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the net income of the Portfolio will be less than if borrowing were not used,
and therefore the amount available for distribution to Shareholders as
dividends will be reduced.
RESTRICTED AND ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase securities that are not registered or are offered
in an exempt non-public offering ("restricted securities") under the
Securities Act of 1933, as amended (the "Securities Act"), including
securities offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act. Each Portfolio will not invest more than 15% of
its net assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable
and restricted securities that are not eligible for sale under Rule 144A.
Restricted securities eligible for sale under Rule 144A are also subject to
this 15% limitation, unless the Board of Trustees (or BSAM pursuant to a
delegated authority) determines, based upon a continuing review of the trading
markets for the specific restricted securities sold under Rule 144A, that such
restricted securities are liquid. The Board of Trustees has adopted guidelines
and delegated to BSAM the function of determining and monitoring the liquidity
of Rule 144A securities, although the Board of Trustees retains ultimate
responsibility for any determination regarding whether a liquid market exists
for Rule 144A securities. The liquidity of Rule 144A securities will be
monitored by BSAM and, if as a result of changed conditions, it is determined
that a Rule 144A security is no longer liquid, the respective Portfolio's
holdings of illiquid securities will be reviewed to determine what, if any,
action is required to assure that the Portfolio does not exceed its applicable
percentage limitation for investments in illiquid securities. In reaching
liquidity decisions, BSAM may consider, inter alia, the following factors: (1)
the unregistered nature of the security; (2) the frequency of trades and
quotes for the security; (3) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (4) dealer
undertakings to make a market in the security; and (5) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). Investing in Rule 144A securities could have the effect of
increasing the level of portfolio illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and
related options (including interest rate futures contracts and options
thereon), options on securities, financial indices and currencies, and forward
currency exchange contracts. The Portfolios' ability to use these strategies
may be limited by market conditions, regulatory limits and tax considerations
and there can be no assurance that any of these strategies will succeed. See
"Portfolio Securities" in the Statement of Additional Information for The Bear
Stearns Funds and "Investment Practices" in the Statement of Additional
Information for the Bear Stearns Investment Trust. New financial products and
risk management techniques continue to be developed and the Portfolios may use
these new investments and techniques to the extent consistent with their
investment objective and policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options
made for "bona fide hedging purposes."
OPTIONS ON SECURITIES AND INDICES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered call
options. 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. (See "Risk Factors" and the Statement of
Additional Information for additional risk factors).
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FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS)
Each Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance
its income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments
in futures and options on futures involve certain risks. (See "Risk Factors"
and the Statement of Additional Information.)
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each Portfolio may, in seeking to increase its income, lend securities in its
portfolio to securities firms and financial institutions deemed creditworthy by
BSAM. Securities loans are made to broker-dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short term Government securities, bank
letters of credit or such other collateral as may be permitted under a
Portfolio's investment program and by regulatory agencies and approved by the
Board of Trustees. While the securities loan is outstanding, a Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Each Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The risks in
lending securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. The creditworthiness of firms to which a Portfolio lends its
portfolio securities will be monitored on an ongoing basis by BSAM pursuant to
procedures adopted and reviewed on an ongoing basis by the Board of Trustees.
The Bond 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 Bond and High Yield Portfolios have appointed Custodial Trust Company (CTC),
an affiliate of BSAM, as securities lending agent. CTC receives a fee for these
services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each Portfolio may enter into repurchase agreements, which may be viewed as a
type of secured lending by the Portfolio, and which typically involves the
acquisition by the Portfolio of debt securities from a selling financial
institution, such as a bank, savings and loan association or broker-dealer. In
a repurchase agreement, the Portfolio purchases a debt security from a seller
which undertakes to repurchase the security at a specified resale price on an
agreed future date (ordinarily a week or less). The resale price generally
exceeds the purchase price by an amount which reflects an agreed-upon market
interest rate for the term of the repurchase agreement. The principal risk is
that, if the seller defaults, the Portfolio might suffer a loss to the extent
the proceeds from the sale of the underlying securities and other collateral
held by the Portfolio in connection with the related repurchase agreement are
less than the repurchase price. Repurchase agreements maturing in more than
seven days are considered by the Portfolios to be illiquid.
SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a
decline in the market value of that security (short sales). To complete the
transaction, a Portfolio will borrow the security to make delivery to the
buyer. A Portfolio is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was sold by
the Portfolio. Until the security is replaced, a Portfolio is required to pay
to the lender any dividends or interest which accrue during the period of the
loan. To borrow the security, a Portfolio may be required to pay a premium,
which would increase the cost of the security sold. The proceeds of the short
sale will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out. Until a Portfolio
replaces the borrowed security, it will (a) maintain in a segregated account
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, at such a level that the amount
deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and will
not be less than the market value of the security at the time it was sold
short or (b) otherwise cover its short position through a short sale
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"against-the-box," which is a short sale in which the Portfolio owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. There
are certain tax implications associated with this strategy. See "Dividends,
Distributions and Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss will be increased, by the
amount of any premium, dividends or interest paid in connection with the short
sale. Under normal conditions, a Portfolio will not engage in short sales to
the extent that the Portfolio would be required to segregate with its
Custodian, or deposit as collateral to replace borrowed securities, more than
25% of its net assets. The Debt Portfolio may not make short sales of
securities, except short sales against the box.
BRADY BONDS (DEBT PORTFOLIO)
"Brady bonds" are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging Countries in
connection with sovereign debt restructurings, under a plan, introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady, known as the Brady
Plan. Agreements implemented under the Brady Plan are designed to reduce the
debt service burden of heavily indebted nations, in exchange for various forms
of credit enhancement coupled with economic policy reforms designed to improve
the debtor country's ability to service its external obligations. The Brady
Plan only sets forth the guiding principles for debt reduction and economic
reform, emphasizing that solutions must be negotiated on a case by case basis
between debtor nations and their creditors. As a result, the financial
packages offered by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money
by existing lenders. Credit enhancement may take the form of collateralizing
the principal with U.S. Treasury zero coupon bonds with a maturity equal to
the final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain
types of Brady bonds may be collateralized by cash or securities agreed upon
by creditors.
As a pre-condition to issuing Brady bonds, debtor nations are generally
required to agree to the implementation of certain domestic monetary and
fiscal reform measures with the World Bank or the IMF. Such measures have
included the liberalization of trade and foreign investments, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to improve the
debtor's ability to service its external obligations and promote its growth
and development.
Brady bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring
that will result in the issuance of Brady bonds. For purposes of applicable
tax and 1940 Act rules and regulations, Brady bonds are not considered U.S.
Government securities.
The Debt Portfolio may invest in either collateralized or uncollateralized
Brady bonds. Brady bonds are issued in various currencies (primarily U.S.
dollars) and are actively traded in the over-the-counter ("OTC") secondary
market for debt of Emerging Country issuers. Because of the large size of most
Brady bond issues, Brady bonds are generally highly liquid instruments. Brady
bonds may be collateralized or uncollateralized, may carry floating or fixed
rates of interest, and may have maturities of up to 30 years. The most common
are 30-year collateralized fixed-rate "par bonds" and floating-rate "discount
bonds," which are collateralized as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the Brady bonds, and carry at least one
year's rolling interest-rate guarantee in the form of cash or marketable
securities.
Investors should recognize that Brady bonds have been issued only recently,
and accordingly they do not have a long payment history. There can be no
assurance that the Brady bonds in which the Portfolio may invest will not be
subject to restructuring arrangements or to requests for new credit
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which may cause the Portfolio to suffer a loss of interest or principal on any
of its holdings. For a discussion of the risks involved in investing in Brady
bonds, see "Risk Factors and Special Considerations--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 (BOND AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Bond 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 Portfolio's operations. In addition, special tax considerations may apply.
The Portfolio does not intend to invest in such vehicles or funds unless, in the
judgment of 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, the 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 BOND PORTFOLIOS)
The High Yield and Bond 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 (BOND PORTFOLIO)
The Bond Portfolio 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.
MUNICIPAL OBLIGATIONS (BOND PORTFOLIO)
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 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 it from municipal obligations generally will be
subject to federal income tax. Municipal obligations bear fixed, floating or
variable rates of interest, which are determined in some instances by formulas
under which the municipal obligation's interest rate will change directly or
inversely to changes in interest rates or an index, or multiples thereof, in
many cases subject to a maximum and minimum. The Bond Portfolio currently
intends to invest no more than 25% of its assets in municipal obligations.
However, this percentage may be varied from time to time without shareholder
approval.
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.
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 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 Bond 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 Portfolios 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 Statement
of Additional Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject
investors to certain risks which should be considered. The following risks
apply to each Portfolio to the extent that they engage 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.
22
<PAGE>
FIXED-INCOME SECURITIES
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities that may be purchased by
the Portfolios, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating
of a security purchased by a Portfolio has been adversely changed, the
Portfolio will consider all circumstances deemed relevant in determining
whether to continue to hold the security. Holding such securities that have
been downgraded below investment grade can subject a Portfolio to additional
risk. Certain securities purchased by a Portfolio, such as those rated Baa by
Moody's or BBB by S&P, Fitch or Duff, may be subject to such risk with respect
to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated fixed-income securities. Debt securities which are
rated Baa by Moody's are considered medium grade obligations; they are neither
highly protected nor poorly secured, and are considered by Moody's to have
speculative characteristics. Debt securities rated BBB by S&P are regarded as
having adequate capacity to pay interest and repay principal, and while such
debt securities ordinarily exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt securities in
this category than in higher rated categories. Fitch considers the obligor's
ability to pay interest and repay principal on debt securities rated BBB to be
adequate; adverse changes in economic conditions and circumstances, however,
are more likely to have an adverse impact on these debt securities and,
therefore, impair timely payment. Debt securities rated BBB by Duff are
considered to have below average protection factors but still considered
sufficient for prudent investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by
the U.S. Government or its agencies and instrumentalities will be made in
accordance with guidelines established by the Funds' Board of Trustees. In
accordance with such guidelines, BSAM will monitor investments in such
securities with particular regard to trading activity, availability of
reliable price information and other relevant information.
FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered carefully
by an investor in the Portfolios. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange
controls and the risk of currency fluctuations. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations
or issued or guaranteed by the U.S. Government, its instrumentalities or
agencies. In addition, there may be less publicly available information about
a foreign company or government than about a domestic company or the U.S.
Government. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the United
States and there is a possibility of expropriation, confiscatory taxation or
diplomatic developments which could affect investment. In many instances,
foreign debt securities may provide higher yields than securities of domestic
issuers which have similar maturities and quality. These investments, however,
may be less liquid than the securities of U.S. corporations. In the event of
default of any such foreign debt obligations, it may be more difficult for a
Portfolio to obtain or enforce a judgement against the issuers of such
securities.
Investing in the securities markets of developing countries involves exposure
to economies that are generally less diverse and mature and to political
systems which can be expected to have less stability than those of developed
countries. Historical experience indicates that the markets of developing
countries have been more volatile than the markets of developed countries. The
risks associated with
23
<PAGE>
investments in foreign securities may be greater with respect to investments
in developing countries and are certainly greater with respect to investments
in the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with a Portfolio's
international investment activities. Foreign brokerage commissions are
generally higher than United States brokerage commissions. Increased custodian
costs as well as administrative difficulties (such as the applicability of
foreign laws to foreign custodians in various circumstances) may be associated
with the maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversion between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of a Portfolio's securities
denominated in that currency. Such changes also will affect the Portfolio's
income and distributions to shareholders. In addition, although the Portfolio
will receive income in such currencies, the Portfolio will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines after the Portfolio's income has been
accrued and translated into U.S. dollars, the Portfolio could be required to
liquidate portfolio securities to make such distributions, particularly in
instances in which the amount of income the Portfolio is required to
distribute is not immediately reduced by the decline in such currency.
Similarly, if an exchange rate declines between the time the Portfolio incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any
such currency of such expenses at the time they were incurred.
Each Portfolio may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in
the U.S. dollar price of the purchase or sale of securities denominated in a
foreign currency; locking-in 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
Portfolio 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 Statement of Additional Information.
The Portfolios will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Portfolios will generally purchase OTC options only if BSAM believes that
the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Portfolio's ability to effectively hedge its portfolio. There is
also the risk of loss by the 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.
24
<PAGE>
HIGH YIELD SECURITIES
GENERAL. The High Yield and Debt Portfolios may invest all or substantially
all of their assets in high yield, high risk debt securities, commonly
referred to as "junk bonds." Securities rated below investment grade and
comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks
than higher-rated securities. Under rating agency guidelines, medium- and
lower-rated securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Certain of the
debt securities in which a Portfolio may invest may have, or be considered
comparable to securities having, the lowest ratings for non-subordinated debt
instruments assigned by Moody's, S&P or D&P (i.e., rated C by Moody's or CCC
or lower by S&P or D&P). Under rating agency guidelines, these securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default,
to be unlikely to have the capacity to pay interest and repay principal when
due in the event of adverse business, financial or economic conditions, and/or
to be in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and lowest-
rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by a Portfolio with a commensurate effect on the
value of its respective shares. Therefore, an investment in a Portfolio should
not be considered as a complete investment program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities
are characterized by relatively few market makers, and participants in the
market are mostly institutional investors, including insurance companies,
banks, other financial institutions and mutual funds. In addition, the trading
volume for high yield, high risk debt securities is generally lower than that
for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on a Portfolio's ability to dispose of particular portfolio
investments and may limit its ability to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If a Portfolio
is not able to obtain precise or accurate market quotations for a particular
security, it will become more difficult for the Funds' Board of Trustees to
value the Portfolio's securities and the Funds' Trustees may have to use a
greater degree of judgment in making such valuations. Furthermore, adverse
publicity and investor perceptions about lower-rated securities, whether or
not based on fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities. Less liquid secondary markets may
also affect a Portfolio's ability to sell securities at their fair value. In
addition, each Portfolio may invest up to 15% of its net assets, measured at
the time of investment, in illiquid securities, which may be more difficult to
value and to sell at fair value. If the secondary markets for high yield, high
risk debt securities contract due to adverse economic conditions or for other
reasons, certain previously liquid securities in a Portfolio may become
illiquid and the proportion of the Portfolio's assets invested in illiquid
securities may increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned
and the time it is updated. In addition, there may be varying degrees of
difference in credit risk of securities within each rating category. See
Appendix A to this Prospectus for a description of such ratings.
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their Debt
Obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default in payment of
interest or principal by such issuers is significantly greater than with
investment grade
25
<PAGE>
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back
features which permit the issuer of the security to call or repurchase it.
Such securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have
to replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
a Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing
and emerging countries or the governmental authorities that control repayment
of their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant
country. Countries such as those in which a Portfolio may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, trade difficulties
and extreme poverty and unemployment. Many of these countries are also
characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but
are not limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
its debt service burden to the economy as a whole, and its government's policy
towards the International Monetary Fund, the World Bank and other
international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of
the defaulting party itself, and the ability of the holder of foreign
sovereign debt securities to obtain recourse may be subject to the political
climate in the relevant country. In addition, no assurance can be given that
the holders of commercial bank debt will not contest payments to the holders
of other foreign sovereign Debt Obligations in the event of default under
their commercial bank loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may
be subject to greater price volatility than other securities in which the
Portfolio invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of
financially troubled issuers are more likely to go into default than
securities of other issuers. In addition, it may be difficult to obtain
information about financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The
market prices of such securities are subject to erratic and abrupt market
movements and the spread between bid and asked prices may be greater than
normally expected. In addition, it is anticipated that many of such portfolio
investments may not be widely traded and that the Portfolio's position in such
securities may be substantially relative to the market for such securities. As
a result, the Portfolio may experience delays and incur losses and other costs
in connection with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include
securities of companies involved in bankruptcy proceedings, reorganizations
and financial restructurings. To the extent the Portfolio invests in such
securities, it may have a more active participation in the affairs of issuers
than is generally assumed by an investor. This may subject the Portfolio to
litigation risks or prevent the Portfolio from disposing of securities. In a
bankruptcy or other proceeding, the Portfolio as a creditor may be unable to
enforce its rights in any collateral or may have its security interest in any
collateral challenged, disallowed or subordinated to the claims of the
creditors. See "Portfolio Securities-- Bankruptcy and Other Proceedings--
Litigation Risks" in the Statement of Additional Information.
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<PAGE>
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85%
consisted of portfolio investments and 5.15% consisted of other assets in
excess of liabilities. The percentage of the Portfolio's investments invested
in securities rated by S&P and Moody's as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the Debt
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt Portfolio's total investments in securities rated by
S&P or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa, A, Ba
or B by Moody's) by monthly dollar-weighted average is set forth below. It
should be noted that this information reflects the average composition of the
Debt Portfolio's assets during the most recent period and is not necessarily
representative of the Debt Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's investments
invested in securities rated by S&P and Moody's as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
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 effect a given country's international
foreign currency reserves. Fluctuations in the level of these reserves affect
the amount of foreign exchange readily available for external debt payments
and thus could have a bearing on the capacity of Emerging Country issuers to
make payments on their Debt Obligations regardless of their financial
condition. In addition, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, or other similar developments which could affect investments in
those countries.
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 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.
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INVESTING IN SECURITIES MARKETS OF EMERGING COUNTRIES
Most securities markets in Emerging Countries may have substantially less
volume and are subject to less government supervision than U.S. securities
markets, and securities of many issuers in Emerging Countries may be less
liquid and more volatile than securities of comparable domestic issuers. In
addition, there is generally less government regulation of securities
exchanges, securities dealers, and listed and unlisted companies in Emerging
Countries than in the United States.
Markets in Emerging Countries also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of a Portfolio is uninvested
and no return is earned thereon. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to
miss attractive investment opportunities. Inability to dispose of securities
due to settlement problems could result either in losses to the Portfolio due
to subsequent declines in value of the security or, if the Portfolio has
entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in
U.S. securities. Such transactions also involve additional costs for the
purchase or sale of foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is restricted
or controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in certain Emerging Country Debt
Obligations and increase the costs and expenses of a Portfolio. Certain
Emerging Countries require prior governmental approval of investments by
foreign persons, limit the amount of investment by foreign persons in a
particular company, limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than
the classes available for purchase by domiciliaries of the countries and/or
impose additional taxes on foreign investors. Certain Emerging Countries may
also restrict investment opportunities in issuers in industries deemed
important to national interests.
Certain Emerging Countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
Emerging Country's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Portfolio of any restrictions on investments.
Throughout the last decade many Emerging Countries have experienced and
continue to experience high rates of inflation. In certain countries inflation
has at times accelerated rapidly to hyperinflationary levels, creating a
negative interest rate environment and sharply eroding the value of
outstanding financial assets in those countries. Increases in inflation could
have an adverse affect on a Portfolio's non-dollar denominated securities and
on the issuers of debt obligations generally.
In addition, with respect to certain Emerging Countries, there is a
possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets of a Portfolio, and political or social instability
or diplomatic developments which could affect investments in those countries.
Individual foreign economies may differ favorably or unfavorably from the
United States economy in such respects as growth of gross domestic product,
rate of inflation, capital reinvestment, resources, self-sufficiency and
balance of payments position. The securities markets, values of securities,
yields and risks associated with securities markets in different countries may
change independently of each other. The risk also exists that an emergency
situation may arise in one or more emerging countries as a result of which
trading of securities may cease or may be substantially curtailed and prices
for the Portfolio's securities in such markets may not be readily available.
The Funds may suspend redemption of Portfolio shares for any period during
which an emergency exists, as determined by the Securities and Exchange
Commission. Accordingly, if a Portfolio believes that appropriate
circumstances exist, it will promptly apply to the Securities and Exchange
Commission for a determination that an emergency is present. During the period
commencing from a Portfolio's identification of such condition until the date
of the Securities and Exchange Commission action, the Portfolio's securities
in the affected markets will be valued at fair value determined in good faith
by or under the direction of the Board of Trustees.
REPORTING STANDARDS
The Debt Obligations of emerging markets countries will not be registered with
the Securities and Exchange Commission or subject to U.S. regulatory or
reporting requirements. Disclosure
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requirements in Emerging Countries are generally not as stringent as in the
U.S. and there may be less publicly available information about issuers in
Emerging Countries than about domestic issuers. Emerging Country issuers are
not generally subject to accounting, auditing and financial reporting
standards comparable to those applicable to domestic issuers.
INVESTMENT PRACTICES
Certain of the investment practices in which the Portfolios may engage have
risks associated with them, including possible default by the other party to
the transaction, illiquidity and, to the extent BSAM's views as to certain
market movements are incorrect, the risk that the use of such strategies could
result in losses greater than if they had not been used. The risks associated
with illiquidity are particularly acute in situations in which a Portfolio's
operations require cash, such as when the Portfolio redeems for its shares of
beneficial interests or pays distributions, and may result in the Portfolio
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of such investments. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specified currency at a future
date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at the price set at the time of the contract. The
use of forward foreign currency exchange contracts entails certain risks. The
cost to a Portfolio of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are
involved. When a Portfolio enters into a forward currency contract, it relies
on the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Portfolio will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Portfolio might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Portfolio would continue to be subject to market risk with respect to the
position and would continue to be required to maintain a position in
securities denominated in the foreign currency or to maintain cash or
securities in a segregated account.
Use of put and call options could result in losses to the Portfolios, force
the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a
Portfolio could realize on its investments or cause the Portfolio to hold a
security it might otherwise sell. The use of currency transactions could
result in the Portfolio's incurring losses as a result of the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. A Portfolio depends upon the reliability and
creditworthiness of the counterparty when it enters into OTC currency or
securities options or other agreements. Investments in indexed securities
offer the potential for an attractive rate of return, but also entail the risk
of loss of principal. The use of options and futures transactions entails
certain special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the
related portfolio position of a Portfolio could create the possibility that
losses on the hedging instrument will be greater than gains in the value of
the Portfolio's position, thereby reducing the Portfolio's net asset value.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated. With regards to the Portfolio's use of proxy hedges, there can be
no assurance that historical correlations between the movement of certain
foreign currencies relating to the U.S. dollar will continue. Thus, at any
time poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying the Portfolio's proxy hedges and the movements
in the exchange rates of the foreign currencies in which the Portfolio assets
that are the subject of such proxy-hedges are denominated.
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YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from or make other inquiries of those parties who provide
computer applications or services that are computer system dependent that BSAM
has determined are critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information
contains the name and general business experience of each Trustee.
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INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575
Lexington Avenue, New York, New York 10022. The Bear Stearns Companies Inc. is
a holding company which, through its subsidiaries including its principal
subsidiary, Bear Stearns, is a leading United States investment banking,
securities trading and brokerage firm serving United States and foreign
corporations, governments and institutional and individual investors. BSAM is
a registered investment adviser and offers, either directly or through
affiliates, investment advisory services to open-end and closed-end investment
funds and other managed pooled investment vehicles with net assets at June 30,
1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios'
affairs under an Investment Advisory Agreement between BSAM and the
Portfolios, subject to the overall authority of the Fund's Board of Trustees
in accordance with Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio
managers, assistant portfolio managers and analysts performing as a dynamic
unit to manage the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to
receive from the Bond Portfolio and High Yield Portfolio a monthly fee equal
to an annual rate of 0.45% and 0.60%, respectively, of each Portfolio's
average daily net assets. For the fiscal year ended March 31, 1998, investment
advisory fees accrued by the Bond Portfolio and High Yield Bond Portfolio
amounted to $91,715 and $28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which
would have the effect of lowering the Debt Portfolio's expense ratio and
increasing yield to investors at the time such amounts are waived or assumed,
as the case may be. The Debt Portfolio will not pay BSAM at a later time for
any amounts it may waive, nor will the Debt Portfolio reimburse BSAM for any
amounts it may assume until such time as the average net assets of the Debt
Portfolio exceed $50 million or the total operating expenses of the Debt
Portfolio are less than 1.75%, 2.40% and 2.40% of the Class A shares, Class B
and Class C shares, respectively, of the Debt Portfolio. The investment
management fees paid by the Debt Portfolio are greater than those paid by most
funds, but are believed by BSAM to be appropriate for fees paid by funds with
a global investment strategy.
ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New
York 10167. BSFM offers administrative services to open-end and closed-end
investment funds and other managed pooled investment vehicles with assets at
June 30, 1998 of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed
to pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1%
of each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
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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.
BOND 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 Bond Portfolio
pays Bear Stearns for distributing Portfolio shares and for providing personal
services to, and/or maintaining accounts of, Portfolio shareholders.
The Bond 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 Bond 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 Bond Portfolio rather than on a per-shareholder basis. Therefore, a
long-term shareholder of the Bond Portfolio may pay more in distribution fees
than the economic equivalent of 6.25% of such shareholder's investment in such
shares.
Under the Plan, Bear Stearns may pay third parties in respect of these
services such amount as it may determine. The fees paid to Bear Stearns under
the Plan are payable without regard to actual expenses incurred. With respect
to Class A shares of the Bond Portfolio, up to 0.25% of the average daily net
assets of the class will compensate institutions for personal service and
maintenance of
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accounts holding the Bond 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 Bond 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 Bond 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 Fund may enter into
shareholder service agreements under which the Bond Portfolio pays a fee of up
to 0.25% of the average daily net assets of Class B and C shares of the Bond
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 Bond Portfolio, 1.45% of the average daily net assets of the
Class B shares of the Bond Portfolio and 1.45% of the average daily net assets
of the Class C shares of the Bond Portfolio for the fiscal year, BSAM may
waive a portion of its investment advisory fee or bear other expenses to the
extent of the excess expenses.
HIGH YIELD PORTFOLIO
DISTRIBUTION PLAN-CLASS A, B AND C SHARES
Under a plan adopted by the Board of Trustees of The Bear Stearns Funds
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the High
Yield Portfolio will pay Bear Stearns an annual fee of 0.10%, 0.75% and 0.75%
of the average daily net assets of Class A, B and C shares, respectively.
Amounts paid under the Distribution Plan compensate Bear Stearns for
distributing Portfolio shares. Bear Stearns may pay third parties that sell
Portfolio shares such amount as it may determine.
The High Yield Portfolio understands that these third parties may also charge
fees for their clients who are beneficial owners of Portfolio shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from Bear Stearns under the Distribution
Plan.
SHAREHOLDER SERVICING PLAN-CLASS A, B AND C SHARES
The Bear Stearns Funds has adopted a shareholder servicing plan on behalf of
the High Yield Portfolio's Class A, B and C shares (the "Shareholder Servicing
Plan"). In accordance with the Shareholder Servicing Plan, the Fund may enter
into shareholder service agreements under which the Portfolio pays fees of up
to 0.25% of the average daily net assets of Class A, B or C shares for fees
incurred in connection with the personal service and maintenance of accounts
holding Portfolio shares for responding to inquiries of, and furnishing
assistance to, shareholders regarding ownership of the shares or their
accounts or similar services not otherwise provided on behalf of the
Portfolio.
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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 compensates Bear Stearns for distributing Portfolio shares.
Bear Stearns may pay third parties that sell Portfolio shares such amount as
it may determine.
The Portfolio understands that these third parties may also charge fees for
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN-CLASS B AND C SHARES
Bear Stearns Investment Trust has adopted a shareholder servicing plan on behalf
of the Debt Portfolio's Class B and Class C shares. In accordance with the
shareholder servicing plan, the Portfolio may enter into shareholder service
agreements under which the Debt Portfolio pays fees of up to 0.25% of the
average daily net assets of Class B shares and Class C shares for fees incurred
in connection with the personal service and maintenance of accounts holding
Portfolio shares for responding to inquires of, and furnishing assistance to
shareholders regarding ownership of the shares or their accounts or similar
services not otherwise provided on behalf of the Portfolio. Fees paid under the
shareholder servicing plans may also include a service fee paid to
broker-dealers or others who provide services in connection with "no transaction
fee" or similar programs for the purchase of shares.
EXPENSE LIMITATION
All expenses incurred in the operation of the Debt Portfolio will be borne by
the Portfolio, except to the extent specifically assumed by BSAM. See
"Management of the Portfolio--Expenses" in the Statement of Additional
Information.
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BSAM has undertaken that, if in any fiscal year, certain expenses, including
the investment management fee and fees under the distribution plan, exceed
1.75% of Class A's average daily net assets, 2.40% of Class B's average daily
net assets and 2.40% of Class C's average daily net assets for the fiscal
year, BSAM may waive a portion of its investment management fee or bear other
expenses to the extent of the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at least $50, or $25 for retirement
plans. Share certificates are issued only upon written request. No
certificates are issued for fractional shares. The Funds reserve the right to
reject any purchase order. The Funds reserve the right to vary the initial and
subsequent investment minimum requirements at any time. Investments by
employees of Bear Stearns and its affiliates are not subject to minimum
investment requirements.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an
"Authorized Dealer"). Purchases of a Portfolio's shares also may be made
directly through the Transfer Agent. When purchasing Portfolio shares,
investors must specify which class is being purchased. If you do not specify
in your instructions to the Funds which class of shares you wish to purchase,
the Funds will assume that your instructions apply to Class A shares.
Purchases are effected at the net asset value next determined after a purchase
order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent
(the "trade date"). Payment for Portfolio shares generally is due to Bear
Stearns or the Authorized Dealer on the third business day (the "settlement
date") after the trade date. Investors who make payment before the settlement
date may permit the payment to be held in their brokerage accounts or may
designate a temporary investment for payment until the settlement date. If a
temporary investment is not designated, Bear Stearns or the Authorized Dealer
will benefit from the temporary use of the funds if payment is made before the
settlement date.
CHOOSING A CLASS OF SHARES
Once you decide to buy shares of a Portfolio, you must determine which class
of shares to buy. Each Portfolio offers Class A, Class B and Class C shares.
Each class has its own cost structure and features that will affect the
results of your investment over time in different ways. Your financial adviser
or Account Executive can help you choose the class of shares that best suits
your investment needs.
. Class A shares have a front-end sales charge, which is added to the
offering price of your investment.
. Class B shares and C shares do not have a front-end sales charge, which
means that your entire investment is available to work for you right
away. However, Class B shares and C shares have a contingent deferred
sales charge (CDSC) that you must pay if you redeem your shares within a
specified period of time. In addition, the annual expenses of Class B
shares and C shares are higher than the annual expenses of Class A
shares.
In deciding which class is best, you may consider:
. how much you intend to invest
. the length of time you expect to hold your investment
. the features and services available for each class
. how well you expect the market to perform in the coming months.
For example, you may consider Class A shares if you have a long-term
investment horizon or if you plan to invest a large amount of money, because
Class A shares have a lower expense structure and the amount of the initial
sales charge decreases as you invest more money. You may find Class B shares
more attractive, because there is no front-end sales charge and the full
amount of your investment is put to work right away. If you plan to invest for
a shorter time period, you may consider Class C shares, because the CDSC is
lower than that of Class B shares and declines to 0 after one year. In any
event, you should consult your financial adviser or Account Executive before
investing in a Portfolio.
36
<PAGE>
The following table summarizes the differences in the expense structures of
the three classes of shares:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Front-End Sales Charge Debt Portfolios--4.50% None None
- -------------------------------------------------------------------------------------------------------------------
Contingent Deferred None* 5% to 0%, declining the longer 1% if you sell shares
Sales Charge you hold your shares within one year of purchase
- -------------------------------------------------------------------------------------------------------------------
Annual Expenses Lower than Class B Higher than Class A shares Higher than Class A shares;
and C shares (Note: Class B shares convert to same as Class B shares
Class A shares 8 years after purchase)**
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* For purchases of $1 million or more, you will be charged a CDSC of 1% if you
sell shares within one year of purchase.
** The Conversion of Class B shares to Class A shares will not occur at any
time the Portfolios are advised that such conversion may constitute a
taxable event for Federal tax purposes. If Class B shares are not converted
to Class A shares, they will continue to be subject to higher expenses than
Class A shares for an indefinite period of time.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling
shares of one class of shares than for selling another class. The purpose of
both the CDSC and the asset-based sales charge is to compensate Bear Stearns
and the brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-[Name of
Portfolio]" or "Bear Stearns Investment Trust--Emerging Markets Debt
Portfolio" if purchased directly from the Portfolio, and should be directed to
the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-[Name of
Portfolio] or Bear Stearns Investment Trust--Emerging Markets Debt Portfolio,
P.O. Box 8960, Wilmington, Delaware 19899-8960. Direct overnight deliveries to
PFPC, Inc., 400 Bellevue Parkway, Suite 108, Wilmington, Delaware 19809.
Payment by check or Federal Reserve draft must be received within three
business days of receipt of the purchase order by Bear Stearns or an
Authorized Dealer. Shareholders may not purchase shares of the Portfolio with
a check issued by a third party and endorsed over to the Portfolio. Orders
placed directly with the Transfer Agent must be accompanied by payment. Bear
Stearns (or an investor's Authorized Dealer) is responsible for forwarding
payment promptly to the Funds. The Funds will charge $7.50 for each wire
redemption. The payment proceeds of a redemption of shares recently purchased
by check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in a Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Funds. An account with a Portfolio may be established by
completing and signing the Account Information Form indicating which class of
shares is being purchased, a copy of which is attached to this Prospectus, and
mailing it, together with a check to cover the purchase, to PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio] or Bear Stearns
Investment Trust--Emerging Markets Debt Portfolio, P.O. Box 8960, Wilmington,
Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to The Bear
Stearns Funds or Bear Stearns Investment Trust and directed to the address set
forth in the preceding paragraph. The Portfolio account number should appear
on the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the relevant Portfolio
calculates its net asset value are priced according to the net asset value
determined on that date. Purchase orders received after the close of trading
on the New York Stock Exchange are priced as of the time the net asset value
is next determined.
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<PAGE>
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Funds' Board of Trustees. For further information
regarding the methods employed in valuing each Portfolio's investments, see
"Determination of Net Asset Value" in the Bear Stearns Funds' Statement of
Additional Information and "Net Asset Value" in Bear Stearns Investment
Trust's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to
the Funds could subject the investor to backup withholding and a $50 penalty
imposed by the Internal Revenue Service.
CLASS A SHARES
The sales charge may vary depending on the dollar amount invested in each
Portfolio. The public offering price for Class A shares of each Portfolio is
the net asset value per share of that class plus a sales load, which is
imposed in accordance with the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.50% 4.71% 4.25%
At least $50,000 but less
than $100,000............... 4.25 4.44 4.00
At least $100,000 but less
than $250,000............... 3.25 3.36 3.00
At least $250,000 but less
than $500,000............... 2.50 2.56 2.25
At least $500,000 but less
than $1,000,000............. 2.00 2.04 1.75
At least $1,000,000 and
above....................... 0.00* 0.00 1.25
</TABLE>
- ------
* There is no initial sales charge on purchases of $1,000,000 or more of Class
A shares. However, if an investor purchases Class A shares without an
initial sales charge as part of an investment of at least $1,000,000 and
redeems those shares within one year after purchase, a CDSC of 1.00% will be
imposed at the time of redemption. Letter of Intent and Right of
Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow
additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares.
Dealers may receive a larger percentage of the sales load from Bear Stearns
than they receive for selling most other funds.
Class A shares may be sold at net asset value to (a) Bear Stearns, its
affiliates or their respective officers, directors or employees (including
retired employees), any partnership of which Bear Stearns is a general
partner, any Trustee or officer of the Funds and designated family members of
any of the above individuals; (b) qualified retirement plans of Bear Stearns;
(c) any employee or registered representative of any Authorized Dealer or
their respective spouses and minor children; (d) trustees or directors of
investment companies for which Bear Stearns or an affiliate acts as sponsor;
(e) any state, county or city, or any instrumentality, department, authority
or agency thereof, which is prohibited by applicable investment laws from
paying a sales load or commission in connection with the purchase of Portfolio
shares; (f) any institutional investment clients including corporate sponsored
pension and profit-sharing plans, other benefit plans and insurance companies;
and (g) any pension funds, state and municipal governments or funds, Taft-
Hartley plans and qualified non-profit organizations, foundations and
endowments; (h) trust institutions (including bank trust departments)
investing on their own behalf or on behalf of their clients; and (i) accounts
as to which an Authorized Dealer charges an asset management fee. To take
advantage of these exemptions, a purchaser must indicate its eligibility for
an exemption to Bear Stearns along with its Account Information Form. Such
purchaser agrees to notify Bear Stearns if, at any time of any additional
purchases, it is no longer eligible for an exemption. Bear Stearns reserves
the right to request certification or additional information from a purchaser
in order to verify that such purchaser is eligible for an exemption.
38
<PAGE>
Bear Stearns reserves the right to limit the participation of its employees in
Class A shares of each Portfolio. Dividends and distributions reinvested in
Class A shares of a Portfolio will be made at the net asset value per share on
the reinvestment date.
Class A shares of each Portfolio also may be purchased at net asset value with
the proceeds from the redemption of shares of an investment company sold with
a sales charge or commission and not distributed by Bear Stearns. This
includes shares of a mutual fund which were subject to a contingent deferred
sales charge upon redemption. The purchase must be made within 60 days of the
redemption, and Bear Stearns must be notified by the investor in writing, or
by the investor's investment professional, at the time the purchase is made.
However, if such investor redeems those shares within one year after purchase,
a CDSC of 1.00% will be imposed at the time of redemption. Bear Stearns will
offer to pay Authorized Dealers an amount up to 1.25% of the net asset value
of shares purchased by the dealers' clients or customers in this manner.
In addition, Class A Shares of each Portfolio may be purchased at net asset
value by the following customers of a broker that operates a master account
for purchasing and redeeming, and otherwise providing shareholder services in
respect of Fund shares pursuant to agreements with the Funds or Bear Stearns:
(i) investment advisers and financial planners who place trades for their own
accounts or for the accounts of their clients and who charge a management,
consulting or other fee, (ii) clients of such investment advisers and
financial planners if such clients place trades through accounts linked to
master accounts of such investment advisers or financial planners on the books
and records of such broker and (iii) retirement and deferred compensation
plans, and trusts used to fund such plans, including, but not limited to,
plans or trusts defined in sections 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended (the "Code"), and "rabbi trusts," provided,
in each case, the purchase transaction is effected through such broker. The
broker may charge a fee for transactions in Portfolio shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares." The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first
day of that month. In processing redemptions of Class B shares, the Portfolios
will first redeem shares not subject to any CDSC, and then shares held longest
during the eight-year period, resulting in the shareholder paying the lowest
possible CDSC. The amount of the CDSC charged upon redemption is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR SINCE CDSC AS A PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First............................................ 5%
Second........................................... 4%
Third............................................ 3%
Fourth........................................... 3%
Fifth............................................ 2%
Sixth............................................ 1%
Seventh.......................................... 0%
Eighth*.......................................... 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolios
believe is unlikely. If conversions do not occur as a result of possible
taxability, Class B shares would continue to be subject to higher expenses
than Class A shares for an indeterminate period.
39
<PAGE>
The purpose of the conversion feature is to allow the holders of Class B
shares the ability to not bear the burden of distribution-related expenses
when the shares have been outstanding for a duration sufficient for Bear
Stearns to have obtained compensation for distribution-related expenses
incurred in connection with Class B shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to
purchase Class A shares of any Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) the current public
offering price of all Class A shares of the Portfolios, shares of the Funds'
other portfolios and shares of certain other funds sponsored or advised by Bear
Stearns, including the Debt Portfolio of Bear Stearns Investment Trust, then
held by the investor. The following purchases of Class A shares may be
aggregated for the purposes of determining the amount of purchase and the
corresponding sales load: (a) individual purchases on behalf of a single
purchaser, the purchaser's spouse and their children under the age of 21 years
including shares purchased in connection with a retirement account exclusively
for the benefit of such individual(s), such as an IRA, and purchases made by a
company controlled by such individual(s); (b) individual purchases by a trustee
or other fiduciary account, including an employee benefit plan (such as
employer-sponsored pension, profit-sharing and stock bonus plans, including
plans under section 401(k) of the Code, and medical, life and disability
insurance trusts); or (c) individual purchases by a trustee or other fiduciary
purchasing shares concurrently for two or more employee benefit plans of a
single employer or of employers affiliated with each other. Subsequent purchases
made under the conditions set forth above will be subject to the minimum
subsequent investment of $50 and will be entitled to the Right of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of each Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including The Bear Stearns Funds or the
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, as
applicable, purchased in a 13-month period pursuant to the terms and under the
conditions set forth herein. A minimum initial purchase of $1,000 is required.
The Transfer Agent will hold in escrow 5% of the amount indicated in the
Account Information Form for payment of a higher sales load if the investor
does not purchase the full amount indicated in the Account Information Form.
The escrow will be released when the investor fulfills the terms of the Letter
of Intent by purchasing the specified amount. If an investor's purchases
qualify for a further sales load reduction, the sales load will be adjusted to
reflect the total purchase at the end of 13 months. If total purchases are
less than the amount specified, the investor will be requested to remit an
amount equal to the difference between the sales load actually paid and the
sales load applicable to the aggregate purchases actually made. If such
remittance is not received within 20 business days, the Transfer Agent, as
attorney-in-fact, will redeem an appropriate number of shares held in escrow
to realize the difference. Checking a box in the Letter of Intent section of
the Account Information Form does not bind an investor to purchase, or a
Portfolio to sell, the full amount indicated at the sales load in effect at
the time of signing, but the investor must complete the intended purchase to
obtain the reduced sales load. At the time an investor purchases shares of any
of the above-listed funds, the investor must indicate its intention to do so
under the Letter of Intent section of the Account Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of a
Portfolio (minimum initial investment of $250 and minimum subsequent
investments of $50 per transaction) at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Portfolio shares may be purchased by transferring funds
from the account designated by the investor. At the investor's option, the
account designated will be debited in the specified amount, and Portfolio
shares will be purchased once a month, on or about the twentieth day. Only an
account maintained at a domestic financial institution which is an Automated
Clearing House member may be
40
<PAGE>
so designated. Investors desiring to participate in the Systematic Investment
Plan should call the Transfer Agent at 1-800-447-1139 to obtain the
appropriate forms. The Systematic Investment Plan does not assure a profit and
does not protect against loss in declining markets. Since the Systematic
Investment Plan involves the continuous investment in a Portfolio regardless
of fluctuating price levels of the Portfolio's shares, investors should
consider their financial ability to continue to purchase through periods of
low price levels. The Fund may modify or terminate the Systematic Investment
Plan at any time or charge a service fee. No such fee currently is
contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of a Portfolio, shares of the same class of the Funds' other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including The Bear Stearns Funds, or the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, as applicable, and the Money
Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered
for sale in the investor's state of residence. These funds have different
investment objectives which may be of interest to investors. To use this
privilege, investors should consult their account executive at Bear Stearns,
their account executive at an Authorized Dealer or the Transfer Agent to
determine if it is available and whether any conditions are imposed on its
use.
To use this privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares-General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to
exchange shares of a Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account
that previously did not provide for this option, a Telephone Exchange
Authorization Form must be filed with the Transfer Agent. This form is
available from the Transfer Agent. Once this election has been made, the
shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to
request the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to
submit exchange requests to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for
losses or expenses arising out of telephone instructions reasonably believed
to be genuine.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless
otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. To
participate in the Systematic Investment Plan or establish automatic
withdrawal for the new account, however, an exchanging shareholder must file a
specific written request. The Exchange Privilege may be modified or terminated
at any time, or from time to time, by the Funds on 60 business days' notice to
the affected portfolio or fund shareholders. The Funds, BSAM and Bear Stearns
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Funds will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have
41
<PAGE>
a value of at least the minimum initial investment required for the portfolio
or fund into which the exchange is being made; if making an exchange to an
existing account, the dollar value must equal or exceed the applicable minimum
for subsequent investments. If any amount remains in the investment portfolio
from which the exchange is being made, such amount must not be below the
minimum account value required by the portfolio or fund.
Shares will be exchanged at the next determined net asset value. No CDSC will
be imposed on Class B or C shares at the time of an exchange. The CDSC
applicable on redemption of Class B or C shares will be calculated from the
date of the initial purchase of the Class B or C shares exchanged. If an
investor is exchanging Class A shares into a portfolio or fund that charges a
sales load, the investor may qualify for share prices which do not include the
sales load or which reflect a reduced sales load, if the shares of the
portfolio or fund from which the investor is exchanging were: (a) purchased
with a sales load; (b) acquired by a previous exchange from shares purchased
with a sales load; or (c) acquired through reinvestment of dividends or
distributions paid with respect to the foregoing categories of shares. To
qualify, at the time of the exchange the investor must notify Bear Stearns,
the Authorized Dealer or the Transfer Agent. Any such qualification is subject
to confirmation of the investor's holdings through a check of appropriate
records. No fees currently are charged shareholders directly in connection
with exchanges, although the Funds reserve the right, upon not less than 60
business days' written notice, to charge shareholders a $5.00 fee in
accordance with rules promulgated by the Securities and Exchange Commission.
The Funds reserve the right to reject any exchange request in whole or in
part. The Exchange Privilege may be modified or terminated at any time upon
notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
recognize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid by a
Portfolio in shares of the same class of another portfolio of the Funds or a
fund advised or sponsored by Bear Stearns of which the shareholder is an
investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the current net asset value. If
an investor is investing in a class that charges a CDSC, the shares purchased
will be subject upon redemption to the CDSC, if applicable, to the purchased
shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Funds may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request; in certain instances a CDSC will be charged.
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any
request for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the
investor owns fewer shares of the class than specified to be redeemed, the
redemption request may be delayed until the Transfer Agent receives further
instructions from the investor, the investor's Bear Stearns account executive
or the investor's Authorized Dealer. The Funds impose no charges (other than
any applicable CDSC) when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be transmitted until the check used for investment has cleared, which
may take up to 15 business days.
42
<PAGE>
The Funds will reject requests to redeem shares by telephone or wire for a
period of 15 business days after receipt by the Transfer Agent of the purchase
check against which such redemption is requested. This procedure does not
apply to shares purchased by wire payment.
The Funds reserve the right to redeem investor accounts at its option upon not
less than 60 business days written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period. Shareholders who have redeemed Class A shares may reinstate
their Portfolio account without a sales charge up to the dollar amount
redeemed by purchasing Class A shares of the same Portfolio or of any other
Bear Stearns Funds within 60 business days of the redemption. Shareholders
should obtain and read the applicable prospectuses of such other funds and
consider their objectives, policies and applicable fees before investing in
any of such funds. To take advantage of this reinstatement privilege,
shareholders must notify their Bear Stearns account executive, Authorized
Dealer or the Transfer Agent at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE-CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1%
is also imposed on any redemption of Class A shares within one year of the
date of purchase by any investor that purchased the shares with the proceeds
from the redemption of shares of an investment company sold with a sales
charge or commission and not distributed by Bear Stearns. No CDSC will be
imposed to the extent that the net asset value of the Class A shares redeemed
does not exceed (i) the current net asset value of Class A shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class A shares above the
dollar amount of all such investor's payments for the purchase of Class A
shares held by the investor at the time of redemption. See the Statement of
Additional Information for more information.
CONTINGENT DEFERRED SALES CHARGE-CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of
Class B shares within six years of the date of purchase. No CDSC will be
imposed to the extent that the net asset value of the Class B shares redeemed
does not exceed (i) the current net asset value of Class B shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class B shares above the
dollar amount of all such investor's payments for the purchase of Class B
shares held by the investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above
the total amount of payments for the purchase of Class B shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 5% for a total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases
in the net asset value of an investor's Class C shares above the dollar amount
of all such investor's payments for the purchase of Class C shares held by the
investor at the time of redemption.
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If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 1% for a total CDSC of $2.40.
WAIVER OF CDSC-CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection
with (a) redemptions made within one year after the death or disability, as
defined in section 72(m)(7) of the Code, of the shareholder, (b) redemptions
by employees participating in eligible benefit plans, (c) redemptions as a
result of a combination of any investment company with a Portfolio by merger,
acquisition of assets or otherwise, (d) a distribution following retirement
under a tax-deferred retirement plan or upon attaining age 70 1/2 in the case
of an IRA or Keogh plan or custodial account pursuant to section 403(b) of the
Code, and (e) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the
automatic withdrawal is established. If the Funds' Trustees determine to
discontinue the waiver of the CDSC, the disclosure in the Portfolios'
prospectus will be revised appropriately. Any Portfolio shares subject to a
CDSC which were purchased prior to the termination of such waiver will have
the CDSC waived as provided in the Portfolio's prospectus at the time of the
purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account
executive or the investor's Authorized Dealer must notify Bear Stearns. Any
such qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Funds' agent, Bear Stearns or Authorized Dealers may honor a
redemption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder. Bear
Stearns account executives or Authorized Dealers are responsible for promptly
forwarding redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably
believed by the Transfer Agent to be genuine. The Funds will require the
Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Transfer Agent or the Funds may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Funds nor the Transfer Agent will be liable for following telephone
instructions reasonably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares
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through the Transfer Agent. Mail redemption requests should be sent to the
Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-[Name of
Portfolio] or Bear Stearns Investment Trust--Emerging Markets Debt Portfolio,
P.O. Box 8960, Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any
Authorized Dealer, or to the Transfer Agent if the shares are not held in a
brokerage account.
If share certificates have been issued, written redemption instructions,
indicating the Portfolio from which shares are to be redeemed, and duly
endorsed share certificates, must be received by the Transfer Agent in proper
form and signed exactly as the shares are registered. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any
eligible guarantor institution. A signature guarantee is designed to protect
the shareholders and the Portfolio against fraudulent transactions by
unauthorized persons. A signature guarantee may be obtained from a domestic
bank or trust company, recognized broker, dealer, clearing agency or savings
association who are participants in a medallion program by the Securities
Transfer Association. The three recognized medallion programs are Securities
Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program
(SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP).
Signature guarantees which are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, each Portfolio's net asset value
may fluctuate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Funds or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrent with
withdrawals generally are undesirable.
Dividends and Distributions
BOND PORTFOLIO AND HIGH YIELD PORTFOLIO
All expenses are accrued daily and deducted before declaration of dividends to
investors. Dividends paid by each class of a Portfolio will be calculated at
the same time and in the same manner and will be of the same amount, except
that the expenses attributable solely to a particular class will be borne
exclusively by such class. Class B and C shares will receive lower per share
dividends than Class A shares because of the higher expenses borne by Class B
and C shares. See "Fee Table."
Dividends will be automatically reinvested in additional shares of each
Portfolio at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution
Option. Each Portfolio ordinarily pays dividends from its net investment
income monthly and distributes net realized securities gains, if any, once a
year, but it may make distributions on a more frequent basis to comply with
the distribution requirements of the Code, in all events in a manner
consistent with the provisions of the 1940 Act. Neither Portfolio will make
distributions from net realized securities gains unless capital loss
carryovers, if any, have been utilized or have expired.
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DEBT PORTFOLIO
The Portfolio declares and pays as dividends quarterly to shareholders
substantially all of its net investment income (i.e., its income, including
both original issue discount and market discount accretions, other than its
net realized long and short-term capital gains and net realized foreign
exchange gains). Substantially all of the Portfolio's net realized capital
gains (net realized long-term capital gains in excess of net realized short-
term capital losses, including any capital loss carryovers), net realized
short-term capital gains and net realized foreign exchange gains, if any, are
expected to be distributed each year by the Portfolio.
Each dividend and distribution, if any, declared by the Portfolio on its
outstanding shares will, at the election of each shareholder, be paid in cash
or in additional shares of the Portfolio or redirected into another fund
pursuant to the Redirected Distribution Option. This election should initially
be made on a Shareholder's Account Information Form and may be changed upon
written notice to either Bear Stearns, an Authorized Dealer or the Transfer
Agent at any time prior to the record date for a particular dividend or
distribution. If no election is made, all dividends and distributions will be
reinvested in the Portfolio. The Portfolio distributes net realized securities
gains, if any, once a year, but it may make distributions on a more frequent
basis to comply with the distribution requirements of the Code, in all events
in a manner consistent with the provisions of the Investment Company Act. The
Portfolio will not make distributions from net realized securities gains
unless capital loss carryovers, if any, have been utilized or have expired.
Dividends are automatically reinvested in additional shares of the Portfolio
at net asset value. All expenses are accrued daily and deducted before
declaration of dividends to investors.
All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made
upon the condition that the Transfer Agent is thereby automatically appointed
as agent of the investor to receive all dividends and capital gains
distributions on shares owned by the investor. Such dividends and
distributions will be paid, at the net asset value per share, in shares of the
Portfolio (or in cash if the shareholder so requests) as of the close of
business on the record date. At any time an investor may request the Transfer
Agent, in writing, to have subsequent dividends and/or capital gains
distributions paid to him or her in cash rather than shares. In order to
provide sufficient time to process the change, such request should be received
by the Transfer Agent at least five (5) business days prior to the record date
of the dividend or distribution. In the case of recently purchased shares for
which registration instructions have not been received on the record date,
cash payments will be made to Bear Stearns or the Authorized Dealer which will
be forwarded to the shareholder, upon the receipt of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the
Portfolio or unrealized appreciation of the Portfolio's securities. Therefore,
subsequent distributions (or portions thereof) attributable to such items, may
be taxable to the investor even if the distributions (or portions thereof) in
reality represent a return of a portion of the purchase price.
Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid
by a Portfolio will be taxable to U.S. shareholders as ordinary income,
whether received in cash or reinvested in additional shares of such Portfolio
or redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and
certain capital gains of individuals may be subject to a lower tax rate.
Dividends and distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description
of the Portfolio-Investment Instruments and Strategies." Any gains realized by
a Portfolio on such sales will be recognized at the time the Portfolio enters
into the short sales.
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Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term
securities gains paid by a Portfolio to a foreign investor as well as the
proceeds of any redemptions from a foreign investor's account, regardless of
the extent to which gain or loss may be realized, generally will not be
subject to U.S. nonresident withholding tax. However, such distributions may
be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSAM or its
affiliates within 91 days of purchase and such other fund reduces or
eliminates its otherwise applicable sales load for the purpose of the
exchange. In this case, the amount of the sales load charged the investor for
such shares, up to the amount of the reduction of the sales load charge on the
exchange, is not included in the basis of such shares for purposes of
computing gain or loss on the exchange, and instead is added to the basis of
the fund shares received on the exchange.
Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on
a federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend
and interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's federal
income tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of
their investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to
so qualify if such qualification is in the best interests of its shareholders.
Such qualification relieves a Portfolio of any liability for federal income
tax to the extent its earnings are distributed in accordance with applicable
provisions of the Code. In addition, a Portfolio is subject to a non-
deductible 4% excise tax, measured with respect to certain undistributed
amounts of taxable investment income and capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net
income at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
For a detailed discussion of certain federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
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Performance Information
For purposes of advertising, performance for Class A, B and C shares of each
Portfolio may be calculated on the basis of average annual total return and/or
total return. These total return figures reflect changes in the price of the
shares and assume that any income dividends and/or capital gains distributions
made by a Portfolio during the measuring period were reinvested in shares of
the same class. These figures also take into account any applicable
distribution and shareholder servicing fees. As a result, at any given time,
the performance of Class B and C shares should be expected to be lower than
that of Class A shares. Performance for each class will be calculated
separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in each Portfolio was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions, if any, during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result
in the redeemable value of the investment at the end of the period.
Advertisements of the Portfolio's performance will include the Portfolio's
average annual total return for one, five and ten year periods, or for shorter
periods depending upon the length of time during which the Portfolio has
operated. Computations of average annual total return for periods of less than
one year represent an annualization of each Portfolio's actual total return
for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions, if any. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value (or maximum
public offering price in the case of Class A shares) per share at the
beginning of the period. Class B total return will reflect the deduction of
the CDSC. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return. Total
return for each Portfolio also may be calculated by using the net asset value
per share at the beginning of the period instead of the maximum offering price
per share at the beginning of the period for Class A shares or without giving
effect to any applicable CDSC at the end of the period for Class B or C.
Calculations based on the net asset value per share do not reflect the
deduction of the sales load on each Portfolio's Class A shares, which, if
reflected, would reduce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the High Yield Total Return Portfolio's shares,
including data from Lipper Analytical Services, Inc., Lehman Brothers High
Yield Bond Index, Credit Suisse First Boston High Yield Bond Index and other
industry sources. Performance information that may be used in advertising or
marketing the Total Return Bond Portfolio's shares may include data from
Lipper Analytical Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond
Index, Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index,
Salomon Brothers Broad Investment-Grade Index and components thereof, Mutual
Fund Values, Mutual Fund Forecaster, Mutual Fund Investing and other industry
publications. Comparative performance information may be used from time to
time in advertising or marketing the Emerging Markets Debt Portfolio's shares,
including data from Lipper Analytical Services, Inc., Morningstar, Inc.,
Moody's Bond Survey Index and components thereof, Mutual Fund Values, Mutual
Fund Forecaster, Mutual Fund Investing and other industry publications.
DEBT PORTFOLIO
Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the average net asset value during
the period for which the distribution rates are being calculated.
The Debt Portfolio may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
the Portfolio may from time to time advertise its performance relative to
certain performance rankings and indices.
The investment results of the Debt Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be
considered a representation of what an investment in the Debt Portfolio may earn
or what the Debt Portfolio's performance may be in any future period.
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In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
Portfolio's performance will be included in the Portfolio's annual report to
shareholders which will be made available to shareholders upon request and
without charge.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust (the "Trust Agreement") dated September 29, 1994, and commenced
operations on or about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992, as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and
shareholders will vote in the aggregate and not by class, except as otherwise
required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove
Trustees. To date, the Fund's Board has authorized the creation of 10
portfolios of shares. All consideration received by the Funds for shares of
one of the portfolios and all assets in which such consideration is invested
will belong to that portfolio (subject only to the rights of creditors of the
Funds) and will be subject to the liabilities related thereto. The assets
attributable to, and the expenses of, one portfolio (and as to classes within
a portfolio) are treated separately from those of the other portfolios (and
classes). The Funds have the ability to create, from time to time, new
portfolios of shares without shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the holders of the outstanding voting securities of an investment
company, such as the Funds, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall not be deemed to be affected by a matter unless it is clear
that the interests of such portfolio in the matter are identical or that the
matter does not affect any interest of such portfolio. However, Rule 18f-2
exempts the selection of independent accountants and the election of Trustees
from the separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account. Shareholder inquiries may be made by
writing to the Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each Portfolio means the vote
of the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
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As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's
Day, President's Day, Good Friday, Martin Luther King Day, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in each
Portfolio's official sales literature in connection with the offer of a
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any state in which,
or to any person to whom, such offering may not lawfully be made.
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Appendix A
RATINGS
The following is a description of certain ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff &
Phelps Credit Rating Co. ("D&P") that are applicable to certain obligations in
which certain of each Fund's Portfolios may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or
A-1
<PAGE>
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 PORTFOLIOSO PROSPECTUS AND IN
THE PORTFOLIOSO OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOSO SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOSO PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-016-01
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds
CLASS Y SHARES
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, the Fund offers Class Y shares of four
diversified portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio,
International Equity Portfolio and Balanced Portfolio and three non-diversified
portfolios, S&P STARS Portfolio, The Insiders Select Fund and Focus List
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.
LARGE CAP VALUE PORTFOLIO S&P STARS PORTFOLIO
Seeks capital appreciation primarily Seeks investment results that exceed
through investing in a broadly the total return of publicly traded
diversified portfolio of equity common stocks in the aggregate, as
securities of large cap issuers. represented by the Standard & Poor's
500 Stock Index.
SMALL CAP VALUE PORTFOLIO THE INSIDERS SELECT FUND
Seeks capital appreciation primarily Seeks capital appreciation primarily
through investing in a broadly through investing in a broadly
diversified portfolio of equity diversified portfolio of equity
securities of small cap issuers. securities of U.S. issuers.
INTERNATIONAL EQUITY PORTFOLIO FOCUS LIST PORTFOLIO
Seeks long-term capital appreciation Seeks capital appreciation primarily
primarily through investing in the through investing in equity
equity securities of companies securities of U.S. issuers that, at
organized outside the United States the time of purchase, are included on
or whose securities are principally the Bear Stearns Research Focus List.
traded outside the United States
BALANCED PORTFOLIO
Seeks long-term capital growth and
current income primarily through
investing in investments in equity
and fixed income securities.
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 July 28,
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.
JULY 28, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table................................................................. 3
Financial Highlights...................................................... 6
Description of the Portfolios............................................. 8
Investment Objectives and Policies........................................ 8
Investment Techniques..................................................... 14
Risk Factors.............................................................. 21
Management of the Portfolios.............................................. 23
Prior Performance of the Sub-Advisor of the International Equity
Portfolio............................................................... 26
Prior Performance of Related Accounts for Balanced Portfolio.............. 28
How to Buy Shares......................................................... 29
Net Asset Value........................................................... 30
Shareholder Services...................................................... 30
How to Redeem Shares...................................................... 31
Dividends, Distributions and Taxes........................................ 33
Performance Information................................................... 34
General Information....................................................... 35
Appendix.................................................................. A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
THE INSIDERS LARGE CAP SMALL CAP
S&P STARS SELECT VALUE VALUE
PORTFOLIO FUND PORTFOLIO PORTFOLIO
CLASS Y* CLASS Y CLASS Y CLASS Y
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed On
Purchases (as a Percentage of
offering price).............. None None None None
Maximum Deferred Sales charge
Imposed on Redemptions (as a
percentage of the amount
subject to charge)........... None None None None
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee
waiver)...................... 0.37%(1) 0.00%(2)(3) 0.00%(4) 0.00%(4)
12b-1 Fees................... None None None None
Other Expenses (after expense
reimbursement)............... 0.63%(1) 1.15%(2) 1.00%(4) 1.00%(4)
---- ---- ---- ----
Total Portfolio Operating
Expenses (after fee waiver
and expense reimbursement)... 1.00%(1) 1.15%(2) 1.00%(4) 1.00%(4)
==== ==== ==== ====
</TABLE>
- ------
See footnotes on page .
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>
S&P STARS PORTFOLIO
Class Y Shares................ $10 $10 $ 32 $ 32
THE INSIDERS SELECT FUND
Class Y Shares................ 12 12 37 37
LARGE CAP VALUE PORTFOLIO
Class Y Shares................ 10 10 32 32
SMALL CAP VALUE PORTFOLIO
Class Y Shares................ 10 10 32 32
- -------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P STARS PORTFOLIO
Class Y Shares................ $55 $55 $122 $122
THE INSIDERS SELECT FUND
Class Y Shares................ 63 63 140 140
LARGE CAP VALUE PORTFOLIO
Class Y Shares................ 55 55 122 122
SMALL CAP VALUE PORTFOLIO
Class Y Shares................ 55 55 122 122
</TABLE>
3
<PAGE>
Fee Table (continued)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL
FOCUS LIST BALANCED EQUITY
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%(5) 0.00%(6) 0.00%(7)
12b-1 Fees............................... None None None
Other Expenses (after expense
reimbursement)........................... 0.90%(5) 0.70%(6) 1.25%(7)
---- ---- ----
Total Portfolio Operating Expenses (after
fee waiver and expense reimbursement).... 0.90%(5) 0.70%(6) 1.25%(7)
==== ==== ====
</TABLE>
- ------
See footnotes on page .
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>
THE FOCUS LIST PORTFOLIO
Class Y Shares................ $ 9 $ 9 $29 $29
BALANCED PORTFOLIO
Class Y Shares................ 7 7 22 22
INTERNATIONAL EQUITY PORTFOLIO
Class Y Shares................ 13 13 40 40
- -------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE FOCUS LIST PORTFOLIO
Class Y Shares................ $50 $50 $111 $111
BALANCED PORTFOLIO
Class Y Shares................ 39 39 87 87
INTERNATIONAL EQUITY PORTFOLIO
Class Y Shares................ 69 69 151 151
</TABLE>
The purpose of the foregoing tables 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%.
4
<PAGE>
- ------
* Prior to June 25, 1997, the STARS Portfolio invested all of its assets in
the S&P STARS Master Series (the "Master Series"), a series of S&P STARS
Fund. The Master Series had substantially the same investment objective,
policies and restrictions as the Portfolio.
(1) The Adviser has undertaken to waive its advisory fee and assume certain
expenses of the STARS Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total STARS Portfolio
Operating Expenses exceed 1.00% for Class Y shares. Without such waiver,
Advisory Fees stated above would have been 0.75%, Other Expenses would have
been 0.63% and Total STARS Portfolio Operating Expenses would have been
1.38% for Class Y shares.
(2) The Adviser has undertaken to waive its investment advisory fee and assume
certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Portfolio
Operating Expenses exceed 1.15% for Class Y shares. Without such waiver and
expense reimbursement, Advisory Fees stated above would have been 1.00%,
Other Expenses would have been 1.22% and Total Portfolio Operating Expenses
would have been 2.22% for Class Y Shares.
(3) The Advisory Fee is payable at an annual rate equal to 1% of the
Portfolio's average daily net assets, subject to increase or decrease by up
to 0.50% annually depending on the Portfolio's performance. See "Management
of the Portfolios--Investment Adviser".
(4) The Adviser has undertaken to waive its investment advisory fee and assume
certain expenses of the Large Cap Value and Small Cap Value Portfolios
other than brokerage commissions, extraordinary items, interest and taxes
to the extent Total Portfolio Operating Expenses exceed 1.00% for each
Portfolio for Class Y shares. Without such fee waiver and expense
reimbursement, Advisory Fees stated above would have been 0.75% for each
Portfolio, Other Expense would have been 2.01% and 1.02% for Large Cap
Value and Small Cap Value Portfolios, respectively, and Total Portfolio
Operating Expenses would have been 2.76% and 1.77% for Large Cap Value and
Small Cap Value Portfolios, respectively.
(5) "Other Expenses" are based on estimated amounts for the current fiscal
year. The Adviser has undertaken to waive its investment advisory fee and
assume certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Portfolio
Operating Expenses exceed 0.90% for Class Y shares. Without such waiver and
expense reimbursement, (which may be discontinued at any time upon notice
to shareholders), Advisory Fees would be 0.65%, Other Expenses are
estimated to be 1.19% and Total Portfolio Operating Expenses are estimated
to be 1.84%.
(6) Other Expenses are based on estimated amounts for the current fiscal year.
The Adviser has undertaken to waive its investment advisory fee and assume
certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Portfolio
Operating Expenses exceed 0.70% for Class Y shares. Without such waiver and
expense reimbursement, (which may be discontinued at any time upon notice
to shareholders), Advisory Fees would be 0.65%, Other Expenses are
estimated to be 3.17% and Total Portfolio Operating Expenses are estimated
to be 3.82%.
(7) Other Expenses are based on estimated amounts for the current fiscal year.
The Adviser has undertaken to waive its investment advisory fee and assume
certain expenses of the Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Portfolio
Operating Expenses exceed 1.25% for Class Y shares. Without such waiver and
expense reimbursement, (which may be discontinued at any time upon notice
to shareholders), Advisory Fees would be 1.00%, Other Expenses are
estimated to be 2.13% and Total Portfolio Operating Expenses are estimated
to be 3.13%.
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment
results for the periods indicated has been audited by Deloitte & Touche LLP.
Further financial data and related notes appear in the Portfolio's Annual
Report for the fiscal year ended March 31, 1998 which is incorporated by
reference into the Portfolio's Statement of Additional Information which is
available upon request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class Y
shares of S&P STARS Portfolio, The Insiders Select Fund, Large Cap Value
Portfolio, Small Cap Value Portfolio and Balanced Portfolio for each period
indicated. The Focus List Portfolio and International Equity 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>
DISTRI-
NET NET BUTIONS NET
ASSET NET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, INVESTMENT UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INCOME GAIN ON INVESTMENT CAPITAL END OF
OF PERIOD (LOSS)**(1) INVESTMENTS**(2) INCOME GAINS PERIOD
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&P STARS PORTFOLIO
CLASS Y
For the fiscal year
ended March 31, 1998... $16.23 $(0.05) $6.74 $ -- $(2.81) $20.11
For the fiscal year
ended March 31, 1997... 14.97 (0.02) 2.66 -- (1.38) 16.23
For the period April 3,
1995* through March 31,
1996................... 14.13 0.07 1.20 (0.03) (0.40) 14.97
THE INSIDERS SELECT FUND
CLASS Y
For the fiscal year
ended March 31, 1998... 14.66 0.07 6.36 -- (3.00) 18.09
For the fiscal year
ended March 31, 1997... 14.02 0.08 2.49 (0.02) (1.91) 14.66
For the period June 20,
1995* through March 31,
1996................... 12.12 0.07 1.87 (0.04) -- 14.02
LARGE CAP VALUE
PORTFOLIO
CLASS Y
For the fiscal year
ended March 31, 1998... 17.18 0.26 7.05 (0.13) (3.52) 20.84
For the fiscal year
ended March 31, 1997... 15.12 0.23 2.17 (0.16) (0.18) 17.18
For the period April 3,
1995* through March 31,
1996................... 13.98 0.07 1.16 (0.08) (0.01) 15.12
</TABLE>
- -----
* Commencement of operations.
** 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) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
6
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
INCREASE/(DECREASE)
NET RATIO OF RATIO OF NET REFLECTED IN AVERAGE
ASSETS, EXPENSES TO INVESTMENT EXPENSE RATIOS AND NET COMMISSION
TOTAL END OF AVERAGE INCOME/(LOSS) INVESTMENT INCOME/(LOSS) PORTFOLIO RATE
INVESTMENT PERIOD NET TO AVERAGE DUE TO WAIVERS AND TURNOVER PER
RETURN(3) (000'S OMITTED) ASSETS(1) NET ASSETS(1) REIMBURSEMENTS RATE SHARE(5)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
44.22% $35,652 1.00%(6) (0.32)%(6) 0.38% 172.78%(7) $0.0541
17.48 14,763 1.00(6) (0.10)(6) 0.70 220.00(7) 0.059(7)
9.09 8,779 1.00(4)(6) 0.82(4)(6) 0.99(4) 295.97(7) 0.0603(7)
46.68 1,265 1.15 0.55 1.07 115.64 0.0389
18.81 1,557 1.15 0.60 1.81 128.42 0.0264
15.98 1,293 1.15(4) 0.97(4) 2.04(4) 93.45 0.0294
45.27 7,263 1.00 0.83 1.76 61.75 0.0581
16.04 6,109 1.00 1.00 1.50 136.67 0.0593
8.75 3,413 1.00(4) 0.76(4) 4.41(4) 45.28 0.0596
</TABLE>
- -----
(3) 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.
(4) Annualized.
(5) Represents average commission rate per share charged to the Portfolios on
purchase and sales of investments subject to such commissions during each
period.
(6) Includes S&P STARS' share of S&P STARS Master Series' expenses for the
period prior to June 25, 1997.
(7) Portfolio turnover rate and average commission rate per share are related
to S&P STARS Master Series for the period prior to June 25, 1997.
7
<PAGE>
Description of the Portfolios
GENERAL
The Fund is 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 Fund shareholders vote together as a group; as to others they vote
separately by portfolio. By this Prospectus, shares of the Large Cap Value
Portfolio, Small Cap Value Portfolio, International Equity Portfolio, Balanced
Portfolio, S&P STARS Portfolio, The Insiders Select Fund and the Focus List
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 S&P STARS Portfolio, The Insiders Select Fund and the Focus List Portfolio
are non-diversified portfolios. A 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, each 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 each 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
each 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 each non-diversified 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 non-diversified
Portfolios' 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.
LARGE CAP VALUE PORTFOLIO (THE "LARGE CAP PORTFOLIO") AND SMALL CAP VALUE
PORTFOLIO (THE "SMALL CAP PORTFOLIO")
The investment objective of the Large Cap and Small Cap Portfolios is capital
appreciation.
The Large Cap Portfolio invests, under normal market conditions, substantially
all of its assets in equity securities of issuers with market capitalizations
of $1 billion or more and identified by the Adviser as value companies.
The Small Cap Portfolio invests, under normal market conditions, substantially
all of its assets in equity securities of issuers with market capitalizations
of up to $1 billion and identified by the Adviser as value companies.
To determine whether a company's stock falls within the value classification,
the Adviser analyzes it based on fundamental factors such as price-to-book
ratios, price-to-earnings ratios, earnings growth, dividend payout ratios,
return on equity, and the company's beta (a measure of stock price volatility
relative to the market generally). In general, the Adviser believes that
companies with relatively low price to book ratios, low price-to-earnings
ratios or higher-than-average dividend payments in relation to price should be
classified as value companies.
For potential investments, the Adviser also, among other matters, may review
new management and upcoming corporate restructuring plans, consider the
general business cycle and the company's position within a specific industry
and consider the responsiveness of the company to identified problems in an
effort to assess the likelihood of future appreciation of the company's
securities.
8
<PAGE>
The Adviser anticipates that at least 85% of the value of each of the Large
Cap and Small Cap Portfolio's total assets (except when maintaining a
temporary defensive position) will be invested in equity securities of
domestic and foreign issuers. Each Portfolio expects, under normal market
conditions, to invest less than 10% of its assets in the equity securities of
foreign issuers. Equity securities consist of common stocks, convertible
securities and preferred stocks. The convertible securities and preferred
stocks in which each Portfolio may invest will be rated at least investment
grade by a nationally recognized statistical rating organization at the time
of purchase. Each Portfolio may invest, in anticipation of investing cash
positions, in money market instruments consisting of U.S. Government
securities, certificates of deposit, time deposits, bankers' acceptances,
short-term investment-grade corporate bonds and other short-term debt
instruments, and repurchase agreements, as set forth in the Appendix.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is long-term capital
appreciation.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in the equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the
United States, including common stock, preferred stock, depositary receipts
for stock and other securities having the characteristics of stock (such as an
equity or ownership interest in a company) of foreign companies.
Up to 35% of the Portfolio's total assets may be invested in debt obligations.
The debt obligations in which the Portfolio may invest include fixed or
floating-rate bonds, notes, debentures, commercial paper, loan participations,
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.
Under normal market conditions, the Portfolio intends to invest in the
securities of foreign companies located in at least three countries outside of
the United States. The Portfolio expects to invest a substantial portion of
its assets in the securities of issuers located in the developed countries of
Western Europe and Japan. The Portfolio may also invest in the securities of
issuers located in Australia, Canada, New Zealand and emerging market
countries.
"Emerging market countries" are countries that are considered to be emerging
or developing by the World Bank, the International Finance Corporation, or the
United Nations and its authorities. Emerging market countries, include, but
are not limited to, the following: Algeria, Argentina, Bahrain, Bangladesh,
Bolivia, Botswana, Brazil, Chile, China, Colombia, Costa Rica, Cyprus, Czech
Republic, Dominican Republic, Ecuador, Egypt, Estonia, Finland, Ghana, Greece,
Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan,
Kenya, Lebanon, Malaysia, Mauritius, Mexico, Morocco, Namibia, Nicaragua,
Nigeria, Oman, Pakistan, Panama, Peru, Philippines, Poland, Portugal, Russia,
Singapore, Slovakia, South Africa, South Korea, Sri Lanka, Swaziland, Taiwan,
Thailand, Trinidad & Tobago, Tunisia, Turkey, Uruguay, Venezuela, Zambia, and
Zimbabwe. A company is considered to be an emerging market company if (i) its
securities are principally traded in the capital markets of an emerging market
country; (ii) it derives at least 50% of its total revenue from either goods
produced or services rendered in emerging market countries or from sales made
in emerging market countries, regardless of where the securities of such
companies are principally traded; (iii) it maintains 50% or more of its assets
in one or more emerging market countries; or (iv) it is organized under the
laws of, or has a principal office in, an emerging market country.
BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is long-term capital growth and
current income. The Portfolio seeks capital appreciation primarily through the
equity component of its portfolio while investing in fixed-income securities
primarily to provide income for regular quarterly dividends.
This Balanced Portfolio invests, under normal circumstances, between 40% and
60% of its total assets in equity securities. The Portfolio also invests at
least 25% of its total assets in fixed-income senior securities and the
remainder of its assets in other fixed-income securities and cash. The
percentage of the Portfolio invested in equity and fixed-income securities
will vary from time to time as the Adviser evaluates their relative
attractiveness based on market valuations, economic growth and inflation
prospects. This allocation is subject to the Portfolio's intention to pay
regular quarterly dividends. The amount of quarterly dividends can also be
expected to fluctuate in accordance with factors such as prevailing interest
rates and the percentage of the Portfolio's assets invested in fixed-income
securities.
9
<PAGE>
A portion of the Portfolio's portfolio of equity securities may be selected
primarily to provide current income. Equity securities selected to provide
current income may include interests in real estate investment trusts,
convertible securities, preferred stocks, utility stocks and interests in
limited partnerships.
The Balanced Portfolio's fixed income securities primarily include securities
issued by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises, corporations or other entities, mortgage-backed and asset-backed
securities, municipal securities, custodial receipts and U.S. dollar
denominated securities issued by foreign governments.
S&P STARS PORTFOLIO (THE "STARS PORTFOLIO")
The STARS Portfolio's investment objective is to provide investment results
that exceed the total return of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P
500").
In implementing its investment strategy, the Adviser principally uses Standard
& Poor's ("S&P") Stock Appreciation Ranking System (or STARS) to identify a
universe of securities in the highest category (which is five stars) to
evaluate for purchase and in the lowest category (which is one star) to
evaluate for short selling. The Adviser believes that this approach will
provide opportunities to achieve performance that exceeds the S&P 500's total
return.
STARS ranks on a scale from five stars (highest) to one star (lowest) the
stocks of approximately 1,100 issuers analyzed by S&P's research staff of
securities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
***** Buy-Expected to be among the best performers over the next 12 months and
to rise in price.
**** Accumulate-Expected to be an above-average performer.
*** Hold-Expected to be an average performer.
** Avoid-Expected to be a below-average performer.
* Sell-Expected to be a well-below-average performer and to fall in price.
STARS was introduced by S&P in January 1987. Since 1993, on average, the five
star category has consisted of approximately 95 stocks, the four star category
has consisted of approximately 385 stocks, the three star category has
consisted of approximately 530 stocks, the two star category has consisted of
approximately 90 stocks, and the one star category has consisted of between
approximately 10 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P
analysts.
For purposes of evaluating the performance of stocks in the various
categories, and thus of the performance of its analysts, S&P has created a
model which initially gives equal weight by dollar amount to the stocks in the
various categories, does not rebalance the portfolio based on changes in
values or rankings and does not take into account dividends or transaction
costs. STARS is only a model; it does not reflect actual investment
performance. While its performance cannot be used to predict actual results,
S&P believes it is useful in evaluating the capability of its analysts.
INVESTORS SHOULD RECOGNIZE THAT THE POOL OF S&P ANALYSTS CHANGES AND THEIR
PAST PERFORMANCE IS NOT NECESSARILY PREDICTIVE OF FUTURE RESULTS EITHER OF THE
MODEL OR OF THE STARS PORTFOLIO. From January 1, 1987 through March 31, 1998:
. The S&P 500 (measured on a total return basis, without dividend
reinvestment)* increased by 354.95%
. The ranked stocks, measured as described above, changed in value as
follows*:
. Five stars-+721.35%
. Four stars-+427.92%
. Three stars-+261.04%
. Two stars-+209.63%
. One star-(31.28)%
- ------
* During this period, the average dividend yields on securities included in
the S&P 500 and the securities ranked five stars were approximately 2.8% and
1.6%, respectively.
10
<PAGE>
The STARS Portfolio believes that this information should be used by investors
only in their consideration that, historically, the five star stocks, measured
as described above, have significantly outperformed lower ranked stocks and
the one star stocks, similarly measured, have significantly underperformed the
higher-ranked stocks. THIS INFORMATION SHOULD NOT BE USED TO PREDICT WHETHER
THE RESULTS WILL OCCUR IN THE FUTURE OR THE ACTUAL PERFORMANCE OF A PARTICULAR
CATEGORY. STARS performance has been more volatile than that of conventional
indices such as the Dow Jones Industrial Average and the S&P 500. In addition,
at times, lower-ranked STARS categories have outperformed higher ranked STARS
categories and higher-ranked STARS categories have under performed the S&P
500. Specifically, the performance of five star and one star stocks has not
consistently exceeded or fallen below the performance of the S&P 500. In some
years, one star stocks have outperformed the S&P 500 as well as five star
stocks; in other years, both one and five star stocks have outperformed the
S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn
outperformed five star stocks. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one star stocks. In 1996 and 1997 five star
stocks outperformed both the one star stocks and the S&P 500. Investors also
should consider that the STARS Portfolio is managed actively--and, thus, its
performance will depend materially on the Adviser's investment determinations
and will incur transaction and other costs, including management and 12b-1
fees, which are not reflected in the foregoing information. The total returns
for Class A and C shares of the STARS Portfolio for the year ended March 31,
1998, and the average annual total returns for the Portfolio for the period
August 7, 1995 (commencement of Class Y shares initial public offering) through
March 31, 1998 were as follows:
TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR ENDED AVERAGE
MARCH 31, 1998 ANNUAL/(3)/
-------------- -----------
<S> <C> <C>
S&P STARS Portfolio/(1)/
Class A shares...................................... 44.22% 26.06%
S&P 500 Index/(2)/.................................. 47.95 32.41
Consumer Price Index................................ 1.31 2.31
</TABLE>
- ------
/(1)/The Adviser waived its advisory fee and agreed voluntary to reimburse a
portion of the Portfolio's operating expenses, if necessary, to maintain
the expense limitation, as set forth in the notes to the financial
statements. Total returns shown include fee waivers and expense
reimbursements, if any; total returns would have been lower had there
been no assumption of fees and expenses in excess limitations.
/(2)/The chart assumes a hypothetical $10,000 initial investment in the
Portfolio and reflects all Portfolio expenses. Investors should note that
the Portfolio is a professionally managed mutual fund while the indices
are unmanaged, do not incur sales charges or expenses and are not
available for investment.
STARS is available to the public through various S&P publications. The Adviser
has access to STARS through S&P's MarketScope, a computer-accessed
subscription service available for an annual fee, currently with more than
74,000 subscriber terminals.
The STARS Portfolio invests primarily in equity securities that, at the time
of purchase, ranked five stars in STARS or at their time of short sale were
ranked as one star in STARS.
As its investment strategy, The Adviser uses STARS to identify a universe of
securities in the five star category to evaluate for purchase and in the one
star category to evaluate for short selling. BSAM anticipates that at least
85% of the value of the Portfolio's total assets (except when maintaining a
temporary defensive position) will be invested in common stocks that, at their
time of purchase, were ranked as five stars in STARS or, at their time of
short sale, were ranked as one star in STARS. The Portfolio may invest up to
15% of its assets in common stocks without regard to STARS ranking, if the
Adviser believes that such securities offer opportunities for capital
appreciation. The Adviser will not seek to replicate STARS performance and
will not necessarily sell a security once it has been downgraded from five
stars or cover a short position once it has been upgraded from one star. From
time to time, certain closed-end investment companies are ranked by STARS and
will be eligible for purchase by the Portfolio. Subsequent market appreciation
of a security or changes in total assets due to subscriptions and redemptions
or dividends or distributions to shareholders will not by themselves cause a
violation of this investment policy. In addition, a subsequent downgrade of a
five star ranked security (or a subsequent upgrade of a one-star security that
has been sold short) will cause the security to be included in the 15%
calculation, but will not by itself cause the Portfolio to violate this
11
<PAGE>
limitation. If at any time, however, the Portfolio exceeds the 15% limitation,
the Portfolio will not purchase additional non-five star ranked securities or
sell short additional non-one star ranked securities. The Portfolio may
invest, in anticipation of investing cash positions and, without limitation,
for temporary defensive purposes, in money market instruments consisting of
U.S. Government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment-grade corporate bonds and other short-term
debt instruments, and repurchase agreements, as set forth in the "Investment
Techniques" and the Appendix. The STARS Portfolio may invest in put options
on an index or individual securities to hedge against unanticipated market
decline, and may engage in other options strategies. The STARS Portfolio will
not count put options or premiums paid for options, or the value of money
market instruments for purposes of determining compliance with the 15%
limitation.
STARS PERFORMANCE
STARS rankings are the subjective determination of S&P's analysts. The pool of
these analysts changes. Past performance of securities and issuers included in
STARS cannot be used to predict future results of the Portfolio, which is
managed actively by BSAM and the results of which should be expected to vary
from the performance of STARS. Neither of the STARS Portfolio, Bear Stearns or
BSAM have any ongoing relationship with S&P regarding the STARS Portfolio
other than the right for a fee to use the S&P, Standard & Poor's and STARS
trademarks in connection with the management of mutual funds and access to
STARS through S&P's publicly available subscription service.
THE INSIDERS SELECT FUND
The Insiders Select Fund's investment objective is capital appreciation.
The Adviser selects portfolio securities by analyzing the behavior of (i)
corporate insiders, officers, directors and significant stockholders through
an analysis of their publicly filed reports of their trading activities in the
equity securities of the companies for which they are insiders, (ii) financial
analysts, through an analysis of their published reports about covered
companies, including predicted earnings and revisions to predicted earnings,
and (iii) the company itself, through an analysis of its behavior as to
corporate finance matters, such as stock repurchase programs, dividend
policies and new securities issuance.
Corporate insiders are believed by the Adviser to be in the best position to
understand the near-term prospects of their companies. The Adviser believes
that insider behavior can be observed and analyzed since insiders are required
to disclose transactions in their company's equity securities to the
Securities and Exchange Commission generally no later than the tenth day of
the month following the transaction. Each month many thousands of these
disclosures are received. the Adviser believes that collecting, classifying
and analyzing these transactions provides valuable investment management
information.
These insiders may have many reasons for transacting in company stock and
stock options. Many of these are entirely incidental to the future of the
company. For example, an insider may sell stock to buy a home or finance a
college education for his or her child. Likewise a new management team may
wish to signal confidence in the company by making token purchases of the
company's equity. Many other transactions, however, are related directly to
the insider's beliefs about the near-term price expectations for the company's
stock. An insider who exercises long-term options early for small profits
likely believes the stock soon will decline. Insiders who exercise options,
hold the stock, and buy in the open market probably believe that the stock
soon will rise. Clusters of insiders making substantial buys or sells indicate
broad agreement within a firm as to the direction of the stock.
Financial analysts use a variety of means to learn more about the companies
they follow. Among these are visits to the company and in-depth discussions
with management. Successful analysts learn to interpret the words and actions
of management and the firm itself. Likewise, management uses its discussions
with certain analysts as a means of signaling its views to the marketplace.
The Adviser monitors changes in analysts' predicted earnings and ratings. The
Adviser believes that analysts' revisions can be a valuable indicator of
future returns for the company's stock.
Part of the normal activity of every public company is its financing
decisions. A company must routinely decide whether to maintain or change its
dividend policy, whether to buy its own stock in the open market or whether to
issue new securities. From time to time the company may decide that its stock
is undervalued. Many companies see undervaluation as an opportunity to
purchase the company's stock in the open market. The Adviser believes that by
monitoring changes in shares outstanding (in the hands of the public), a
useful signal can be extracted relating to the company's beliefs about its
prospects. Similarly, the company's decision to sell securities to the public
or another
12
<PAGE>
firm can be an indication that the company believes that its stock has reached
a near-term high, a potentially useful sell signal.
Insiders, analysts and the company each send signals that can be analyzed by
the Adviser to produce valuable information about the prospects for individual
companies. The Adviser believes that the most powerful analysis, however,
comes from the interaction of all three sources. While no one signal alone
determines whether a security will be purchased or sold, no security will be
considered for purchase or sale unless a positive or negative signal, as the
case may be, is received from insider behavior. In its analysis, the Adviser
uses only data that is available to the public. The Adviser obtains the data
on insider trading activity from CDA/Investnet, which compiles this
information from publicly available Securities and Exchange Commission
filings.
Under normal market conditions, the Adviser invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. The Adviser
selects equity securities believed by it to provide opportunities for capital
appreciation or gains through short selling. Issuers are selected without
regard to market capitalization, although the Adviser anticipates that the
issuers principally will be mid- to-large capitalization companies, that is,
those with market capitalizations exceeding $1 billion. The Adviser selects
from the universe of U.S. equity securities those securities it believes, in
the aggregate, will approximate or exceed the total return performance of the
Standard & Poor's MidCap 400 Index Stock Index* (the "S&P MidCap 400 Index").
The Portfolio will not invest in all or substantially all of the common stocks
included in the S&P MidCap 400 Index and may invest in stocks that are not
included in the S&P MidCap 400 Index.
By investing in this manner--that is, purchasing other equity securities in a
manner intended to approximate or exceed the performance of the S&P MidCap 400
Index--the Adviser seeks to exceed the total return of the S&P MidCap 400
Index.
The S&P MidCap 400 Index consists of 400 domestic stocks chosen for market
size (median market capitalization of about $2.1 billion as of March 31,
1998), liquidity, and industry group representation. It is a market-weighted
index, with each stock affecting the Index in proportion to its market value.
Under normal market conditions, the Portfolio expects to have less than 15% of
its assets invested in money market instruments. However, when the Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest all of its assets in money market
instruments.
FOCUS LIST PORTFOLIO
The Focus List Portfolio's investment objective is capital appreciation.
The Focus List Portfolio will invest at least 65% of its total assets in the
common stocks of U.S. and foreign issuers that, at the time of purchase, are
on the Bear Stearns Equity Focus List (the "Focus List"). The Portfolio is
designed for investors seeking to maximize returns from a fully invested, all-
equity portfolio. The Portfolio is not a market-timing vehicle. Except for
short-term liquidity purposes, cash reserves are not expected to exceed 10% of
Focus List Portfolio assets.
THE BEAR STEARNS FOCUS LIST
The Bear Stearns Equity Research Department has over 80 equity analysts who
cover more than 900 common stocks of U.S. and foreign companies. Using a
rating system of "1" through "5," analysts assign stocks the following
ratings: 1 ("Buy," the highest rating), 2 ("Attractive"), 3 ("Neutral"), 4
("Avoid"), 5 ("Sell"). Approximately 300 stocks are rated as Buy or Attractive
by a Bear Stearns Research analyst.
A Buy rating is assigned to stocks that the Bear Stearns Research analyst and
the Research Stock Selection Committee (comprised of senior Research
personnel) feel will significantly outperform the market over the next three
to six months because of a catalyst or near-term event that is expected to
trigger upward movement in the stock's price. These catalysts may include a
change in management, the introduction of a new product or a change in the
industry outlook. An Attractive rating means that an analyst has determined
that the stock has solid long-term growth prospects either because of, or in
comparison to, its industry and that it is undervalued in comparison to its
industry.
Domestic and international stocks and American Depositary Receipts (ADRs)
rated Buy (1) or Attractive (2) are eligible for inclusion on the Focus List.
Stocks are picked by the Focus List Committee, whose current members are
Kathryn Booth, Director of Global Research for Bear Stearns , and
Elizabeth Mackay, Chief Investment Strategist of Bear Stearns. The Committee
generally
- ------
* "Standard & Poor's," "S&P(R)" and "S&P MidCap 400" are trademarks of The
McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold
or promoted by Standard & Poor's or The McGraw-Hill Companies, Inc.
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maintains twenty stocks on the list and any new additions are usually
accompanied by a comparable number of deletions. The Committee monitors the
List daily, and candidates are considered based on any one or more of the
following criteria: market outlook, perception of the stock's sector, and an
analyst's view of the stock's current valuation relative to the market and its
industry.
Stocks that are downgraded below Attractive by an analyst are automatically
deleted from the Focus List. However, the Focus List Committee may delete
stocks for other reasons including, but not limited to, achievement of its
target price range, the failure of a catalyst to materialize or have its
expected effect, and/or the appearance of new, more attractive opportunities.
INVESTMENT STRATEGY
Generally, as soon as practicable after public announcement, the Adviser will
purchase a security that has been added to the Focus List and will sell a
security when the security has been removed from the Focus List. The Adviser
determines what percentage of the Portfolio's total assets are to be allocated
into each Focus List stock and makes changes in allocation percentages as
investment and economic conditions change. The Adviser intends to allocate
portfolio transactions so that the Portfolio qualifies as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code") although there can be no assurance that this goal will be achieved
(see "Dividends, Distributions and Taxes"). Depending upon market conditions
and to the extent the Portfolio needs to hold cash balances to satisfy
shareholder redemption requests, the Adviser may not immediately purchase a
new Focus List stock and/or may continue to hold one or more Focus List stocks
that have been deleted from the Focus List. The Adviser will not have access
to the Focus List prior to its becoming publicly disseminated.
The Focus List Portfolio may invest up to 35% of its total assets in Portfolio
stocks that are not on the Focus List, although it currently intends to limit
its investment in non-Focus List securities to 20% of the Portfolio's total
assets under normal market conditions. The Portfolio will purchase stocks that
are not on the Focus List when the Adviser determines that any stocks on the
Focus List are inappropriate for the Portfolio because they are illiquid,
would cause the Portfolio to be overweighted in a particular sector or overly
concentrated in a particular industry, or for any other reason.
The Investment Strategy described above will be implemented to the extent it
is consistent with maintaining the Portfolio's qualification as a regulated
investment company under the Code. See "Dividends, Distributions and Taxes."
For temporary defensive purposes, the Focus List Portfolio may invest up to
100% of its total assets in cash and cash equivalents, including high quality
short-term money market investments.
POTENTIAL INVESTMENT RESTRICTIONS
It is possible that the Focus List will include stocks of issuers for which
Bear Stearns or one of its affiliates performs banking services for which it
receives fees, as well as stocks of issuers in which Bear Stearns or one of
its affiliates makes a market and may have a long or short position in the
stock. When Bear Stearns or one of its affiliates is engaged in an
underwriting or other distribution of stock of an issuer, the Adviser may be
prohibited from purchasing the stock of the issuer for the Focus List
Portfolio. The activities of Bear Stearns or one of its affiliates may, from
time to time, limit the Focus List Committee's ability to include stocks on
the Focus List or the Focus List Portfolio's flexibility in purchasing and
selling such stocks. In addition, the Focus List is available to other clients
of Bear Stearns and its affiliates, including the Adviser, as well as the
Focus List Portfolio.
Investment Techniques
Each Portfolio may engage in various investment techniques, such as options
and futures transactions, short selling and lending portfolio securities, each
of which involves risk. Options and futures transactions, as well as
investments in certain asset-backed, mortgage-backed and government
securities, involve "derivative securities." For a discussion of these other
investment techniques and their related risks, see "Appendix--Investment
Techniques" and "Risk Factors" below.
EQUITY SECURITIES (ALL PORTFOLIOS)
The Portfolios may invest in equity securities. These securities may include
foreign and domestic common stocks or preferred stocks, rights and warrants
and debt securities which are convertible or exchangeable for common stock or
preferred stock. Under normal conditions, the Balanced Portfolio will not
invest less than 40% or more than 60% of its total assets in equity
securities.
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SHORT SELLING (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, THE INSIDERS SELECT
FUND AND STARS PORTFOLIO)
A Portfolio may engage in short selling. Short sales are transactions in which
a Portfolio sells a security it does not own in anticipation of a decline in
the market value of that security. To complete such a transaction, a Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
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, the Portfolio is required to pay to the lender amounts
equal to any dividend which accrues during the period of the loan. To borrow
the security, the Portfolio also 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 a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
liquid securities, at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral always equals the
current value of the security sold short; or (b) otherwise cover its short
position in accordance with positions taken by the staff of the Securities and
Exchange Commission.
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. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest a
Portfolio may be required to pay in connection with a short sale. Each
Portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short by a Portfolio. See "Appendix--Investment
Techniques--Options Transactions."
Each Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of a Portfolio's net assets. No Portfolio may sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of its net assets. No
Portfolio may sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 2% of the outstanding
securities of that class.
SHORT SALES "AGAINST THE BOX" (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO,
INSIDERS SELECT FUND, INTERNATIONAL EQUITY PORTFOLIO, STARS PORTFOLIO AND
BALANCED PORTFOLIO)
A Portfolio may make short sales "against the box," a transaction in which a
Portfolio enters into a short sale of a security which a Portfolio owns. The
proceeds of the short sale will be held by a broker until the settlement date,
at which time a Portfolio delivers the security to close the short position. A
Portfolio receives the net proceeds from the short sale. The Large Cap
Portfolio, Small Cap Portfolio, STARS Portfolio, Balanced Portfolio and
The Insiders Select Fund at no time will have more than 15% of the value of its
net assets in deposits on short sales against the box and the International
Equity Portfolio at no time will have more than 25% of its net deposits on
short sales against the box. It currently is anticipated that each Portfolio
will make short sales against the box for purposes of protecting the value of
the Portfolio's net assets. There are certain tax implications associated with
this strategy. See "Dividends, Distributions and Taxes."
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS (LARGE CAP PORTFOLIO, SMALL
CAP PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, THE INSIDERS SELECT FUND AND
FOCUS LIST PORTFOLIO)
A Portfolio may enter into stock index futures contracts, and options with
respect thereto, in U.S. domestic markets. See "Appendix--Investment
Techniques--Options Transactions." These transactions will be entered into as
a substitute for comparable market positions in the underlying securities or
for hedging purposes. Although a Portfolio is not a commodity pool, it is
subject to rules of the Commodity Futures Trading Commission (the "CFTC")
limiting the extent to which it may engage in these transactions.
Each Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
CFTC. In addition, a Portfolio may not engage in such transactions if the sum
of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5%
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of the liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating
the 5%. To the extent a Portfolio engages in the use of futures and options on
futures for other than bona fide hedging purposes, the Portfolio may be
subject to additional risk.
Engaging in these transactions involves risk of loss to a Portfolio which
could adversely affect the value of a shareholder's investment. Although a
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 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. In addition, engaging in futures
transactions in foreign markets may involve greater risks than trading on
domestic exchanges.
Successful use of futures by a Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
foreign currencies and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. For
example, if a Portfolio has hedged against the possibility of a decline in the
market adversely affecting the value of securities held in its portfolio and
prices increase instead, a Portfolio will lose part or all of the benefit of
the increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if a Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, a Portfolio may be required to segregate cash or liquid
securities in connection with its commodities transactions in an amount
generally equal to the value of the underlying commodity. The segregation of
such assets will have the effect of limiting a Portfolio's ability otherwise
to invest those assets.
A Portfolio may take advantage of opportunities in the area of options and
futures contracts, options on futures contracts and any other derivative
investments which are not presently contemplated for use by the Portfolio or
which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Portfolio's investment
objective and legally permissible for a Portfolio. Before entering into such
transactions or making any such investment, a Portfolio will provide
appropriate disclosure in its prospectus.
FOREIGN SECURITIES
EQUITY SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, INTERNATIONAL
EQUITY PORTFOLIO, FOCUS LIST PORTFOLIO AND BALANCED PORTFOLIO). The
International Equity Portfolio intends to invest, under normal circumstances,
substantially all, and at least 65%, of its total assets in the equity
securities of foreign issuers. All other Portfolios may invest in equity
securities that are issued by foreign issuers and are traded in the United
States. All such securities will be issued by foreign companies that comply
with U.S. accounting standards.
Equity securities include common stock, preferred stock, depositary receipts
for stock and other securities having the characteristics of stock (such as an
equity or ownership interest in a company).
DEPOSITARY RECEIPTS (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, INTERNATIONAL
EQUITY PORTFOLIO, FOCUS LIST PORTFOLIO AND STARS PORTFOLIO). A Portfolio may
invest in foreign securities which take the form of sponsored and unsponsored
American Depository Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (collectively "Depositary
Receipts"). In general, Depository Receipts are receipts for the shares of a
foreign company held in the custody of a depositary institution that entitles
the holder to all dividends and capital gains of the underlying shares. ADRs
represent the shares of foreign companies held in domestic banks. ADRs are
quoted in U.S. dollars and are traded on domestic exchanges. EDRs and GDRs are
receipts evidencing an arrangement with a foreign bank.
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (LARGE CAP PORTFOLIO, SMALL CAP
PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO). A Portfolio may purchase or
sell forward foreign currency exchange contracts ("forward contracts") for
hedging and speculative investment purposes.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A Portfolio may
enter into a forward contract, for example, for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge").
When a Portfolio believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward sale contract by
selling an amount of that foreign currency up to 95% of the value of the
Portfolio's securities denominated in such foreign currency. If a Portfolio
believes that the U.S. dollar may suffer a substantial decline against the
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, a Portfolio may, in the alternative, enter into a forward contract
to sell a different foreign currency for a fixed U.S. dollar amount where the
Portfolio believes that the U.S. dollar value of the currency to be sold
pursuant to the forward contract will fall whenever there is a decline in the
U.S. dollar value of the currency in which portfolio securities of the
Portfolio are denominated ("cross-hedge"). Unanticipated changes in currency
prices may result in poorer overall performance for the Portfolio than if it
had not entered into such contracts.
In addition, a Portfolio may enter into forward contracts to seek to increase
total return when the Adviser or the Sub-Adviser, as the case may be,
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held in the portfolio. When
entered into to seek to enhance return, forward contracts are considered
speculative.
FIXED INCOME SECURITIES (BALANCED PORTFOLIO AND INTERNATIONAL EQUITY
PORTFOLIO)
Under normal conditions, the Balanced Portfolio may invest up to 60% of its
total assets in fixed-income securities, of which at least 25% will be
invested in fixed-income senior securities. Under normal conditions, the
International Equity Portfolio may invest up to 35% of its total assets in
debt securities. The debt securities in which a Portfolio may invest may be
unrated or rated in the lowest rating categories by Standard & Poor's or
Moody's (e.g., securities rated D by Moody's or Standard & Poor's). Fixed
income securities rated BB by Standard & Poor's, Ba by Moody's or below (or
comparable unrated securities) are commonly referred to as "junk bonds" and
are considered predominantly speculative and may be questionable as to
principal and interest payments. In some cases, such bonds may be highly
speculative, have poor prospects for reaching investment grade standing and be
in default. As a result, investment in such bonds will entail greater
speculative risks than those associated with investment in higher-rated debt
securities. Also, to the extent that the rating assigned to a security in a
Portfolio's portfolio is downgraded by a rating organization, the market price
and liquidity of such security may be adversely affected.
U.S. GOVERNMENT SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, S&P
STARS PORTFOLIO AND BALANCED PORTFOLIO)
A Portfolio may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include Treasury receipts and
other stripped U.S. Government securities, where the interest and principal
components of stripped U.S. Government securities are traded independently. A
Portfolio may also invest in zero coupon U.S. Treasury securities and in zero
coupon securities issued by financial institutions, which represent a
proportionate interest in underlying U.S. Treasury securities. A zero coupon
security pays no interest to its holder during its life and its value consists
of the difference between its face value at maturity and its cost. The market
prices of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically. Under normal conditions,
only the Balanced Portfolio will not invest more than 35% of its total assets
in U.S. Government securities.
BANK OBLIGATIONS. (LARGE CAP VALUE PORTFOLIO, SMALL CAP VALUE PORTFOLIO,
BALANCED PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INSIDERS SELECT FUND AND
S&P STARS, PORTFOLIO)
A Portfolio may invest in obligations issued or guaranteed by U.S. or foreign
banks. Bank obligations, including without limitation, time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Banks are subject to
extensive but different
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governmental regulations, which may limit both the amount and types of loans
which may be made and interest rates which may be charged. In addition, the
profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operation of this industry. Under
normal conditions, the Balanced and International Equity Portfolios will not
invest more than 35% of their total assets in bank obligations.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase when-issued securities. When-issued transactions
arise when securities are purchased by the Portfolio with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
transaction. A Portfolio may also purchase securities on a forward commitment
basis, that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary three-day settlement period. A Portfolio is
required to hold and maintain in a segregated account with a Portfolio's
custodian until three days prior to the settlement date, cash or liquid assets
in an amount sufficient to meet the purchase price. Alternatively, a Portfolio
may enter into offsetting contracts for the forward sale of other securities
that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Portfolio would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Portfolio may
dispose of when-issued securities or forward commitments prior to settlement
if the Adviser deems it appropriate to do so. Under normal conditions, the
International Equity and Balanced Portfolios will not invest more than 20% and
33 1/3%, respectively, of its total assets in when-issued securities or
forward commitments.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
Each Portfolio 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),
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. New
financial products and risk management techniques continue to be developed,
and each Portfolio may use these new investments and techniques to the extent
consistent with its investment objective and policies.
A Portfolio will not 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 AND INDICES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered call
options. A Portfolio may purchase call options to gain market exposure in a
particular sector while limiting downside risk. A 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 the Portfolio owns the underlying security
or securities) is to realize, through the receipt of premiums, a greater
return than would be realized on the 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. (See "Risk Factors" and the Statement of
Additional Information for additional risk factors).
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
A Portfolio may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions,
such as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government securities maintained
on a current basis in an amount at least equal to the market value of the
securities loaned.
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Cash collateral may be invested in cash equivalents. A Portfolio may
experience a loss or delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Portfolio. Under normal conditions, if a Portfolio
makes securities loans, the value of the securities loaned may not exceed 33
1/3% of the value of the total assets of the Portfolio. The Portfolios have
appointed Custodial Trust Company (CTC), an affiliate of the Adviser, as
securities lending agent. CTC receives a fee for these services.
See "Portfolio Turnover Rate" and "Portfolio Transactions" in each Portfolio's
"Financial Highlights" and "Statement of Additional Information".
CONVERTIBLE SECURITIES (BALANCED PORTFOLIO, INSIDERS SELECT FUND, INTERNA-
TIONAL EQUITY PORTFOLIO, LARGE CAP PORTFOLIO AND SMALL CAP PORTFOLIO)
A 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. In evaluating a convertible security, the Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which a Portfolio invests will be rated, at the time of
investment, BBB or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or Baa or better by Moody's Investors Service, Inc. ("Moody's"), or
if unrated by such rating organizations, determined to be of comparable
quality by the Adviser. Convertible debt securities are equity investments for
purposes of the Portfolio's investment policies. Under normal conditions, the
Balanced Portfolio will not invest more than 20% of its total assets in
convertible securities.
MORTGAGE-RELATED SECURITIES (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in mortgage-related securities, consistent
with its investment objective, that provide funds for mortgage loans made to
commercial and residential owners. 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 (such as the Portfolio) 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 borrowers on their 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 or commercial 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 Portfolio may buy mortgage-related
securities without insurance or guarantees if through an examination of the
loan experience and practices of the poolers the Adviser determines that the
securities meet the Portfolio's 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 Balanced Portfolio will not invest more than 25% of its total assets in
mortgage-related securities.
The Balanced Portfolio may also invest in Real Estate Investment Trusts
("REITs"). REITs are pooled investment vehicles that invest primarily in
either real estate or real estate-related loans. The value of a REIT may
increase or decrease based on changes in the value of the underlying
properties or
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mortgage loans. REITs are also subject to risks generally associated with
investments in real estate. Under normal conditions, the Portfolio will not
invest more than 10% of its total assets in REITs.
ASSET-BACKED SECURITIES (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in asset-backed securities in accordance
with its investment objective and policies. Asset-backed securities represent
an undivided ownership interest in a pool of installment sales contracts and
installment loans collateralized by, among other things, credit card
receivables and automobiles. In general, asset-backed securities and the
collateral supporting them are of shorter maturity than mortgage loans. As a
result, investment in these securities should result in greater price
stability for the Portfolio.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional
Information. The Portfolio will not limit its investments to asset-backed
securities with credit enhancements. Although asset-backed securities are not
generally traded on a national securities exchange, such securities are widely
traded by brokers and dealers, and to such extent will not be considered
illiquid for the purposes of the Portfolio's limitation on investment in
illiquid securities.
Under normal conditions, the Portfolio will not invest more than 10% of its
total assets in asset-backed securities.
CORPORATE DEBT OBLIGATIONS (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in corporate debt obligations rated BBB or
higher by Standard & Poor's or Moody's or, if unrated, of similar quality. The
Portfolio may also invest up to 5% of its total assets in corporate debt
obligations rated below A but not lower than B by Standard & Poor's or Moody's
or, if unrated, of similar quality. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on the
obligations. Investment in lower-rated debt securities entails greater
speculative risks than those associated with investment in higher-rated debt
securities. Under normal conditions, the Portfolio will not invest more than 60%
of its total assets in corporate debt obligations.
CASH EQUIVALENT (BALANCED PORTFOLIO)
The Balanced Portfolio may invest in short-term securities readily convertible
to cash, including U.S. Treasury bills, certificates of deposit and commercial
paper rated A-1 by Standard & Poor's or P-1 by Moody's. Under normal
conditions, the Portfolio will not invest more than 20% of its total assets in
cash equivalents.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
The Balanced Portfolio may enter into repurchase agreements with dealers in
U.S. Government securities and member banks of the Federal Reserve System
which furnish collateral at least equal in value or market price to the amount
of their repurchase obligation. The Balanced Portfolio may also enter into
repurchase agreements involving certain foreign government securities. Each of
the other Portfolios may enter into repurchase agreements for temporary
defensive purposes only (see the Appendix.) If the other party or "seller"
defaults, a Portfolio might suffer a loss to the extent that 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. In addition, in the event of bankruptcy of the seller or
failure of the seller to repurchase the securities as agreed, the Portfolio
could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. Under normal conditions, the Balanced Portfolio may not invest more
than 20% of its total assets in repurchase agreements.
MORTGAGE DOLLAR ROLLS (BALANCED PORTFOLIO)
The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Portfolio loses the right to receive
principal and interest paid on the securities sold. The Portfolio would
benefit, however, to the extent of any difference between the price received
for the securities sold and the lower forward price for the future purchase or
fee income plus the interest earned on the cash proceeds of the securities
sold until the settlement date for the forward purchase. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of
the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Portfolio. The Portfolio will hold and maintain
in a segregated account until the settlement date cash or liquid assets in an
amount equal to the forward purchase price. Successful use of mortgage dollar
rolls depends upon BSAM's ability to predict correctly interest rates and
mortgage prepayments. There is no assurance that mortgage dollar rolls can be
successfully employed. For financial reporting and tax purposes, the Portfolio
treats mortgage dollar rolls as two separate transactions: one involving
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<PAGE>
the purchase of a security and a separate transaction involving a sale. The
Portfolio does not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing. Under normal conditions, the Portfolio will
not invest more than 20% of its total assets in mortgage dollar rolls.
TEMPORARY INVESTMENTS (ALL PORTFOLIOS)
A Portfolio may, for temporary defensive purposes, invest up to 100% of its
total assets in U.S. Government securities, repurchase agreements collateralized
by U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks, non- convertible
corporate bonds with a remaining maturity of less than one year or, subject to
certain tax restrictions, foreign currencies. When a Portfolio's assets are
invested in such instruments, the Portfolio may not be achieving its investment
objective.
PORTFOLIO TURNOVER (ALL PORTFOLIOS)
Under normal conditions, the turnover rate for each Portfolio generally will
not exceed, in any one year, 250% for the Focus List Portfolio, 150% for the
STARS Portfolio, the International Equity Portfolio or The Insiders Select
Fund, 100% for the Large Cap and Small Cap Portfolios, and 30% for the
Balanced Portfolio. However, the portfolio turnover rate may exceed this rate
when the Adviser or Sub-Adviser, as the case may be, 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 diversified Portfolio
may also 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 a 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 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 Objective and Management Policies--Investment Restrictions" in
the 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. See
"Investment Objective and Management Policies--Investment Restrictions" in the
Statement of Additional Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject
investors to certain risks which should be considered. The following risks
apply to each Portfolio to the extent that they engage in the investment
practices set forth below.
NET ASSET VALUE FLUCTUATIONS
Each Portfolio's net asset value per share is not 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.
EQUITY SECURITIES
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities and
that fluctuations can be pronounced. The securities of smaller-cap companies
may be subject to more abrupt or erratic market movements than those of
larger-cap companies, both because the securities typically are traded in
lower volume and because the issuers typically are subject to a greater degree
to changes in earnings and prospects. Changes
21
<PAGE>
in the value of the equity securities in a Portfolio's portfolio will result
in changes in the value of the Portfolio's shares and thus the Portfolio's
yield and total return to investors.
FIXED-INCOME SECURITIES
Investors should be aware that fixed-income securities fluctuate in value
based on changes in prevailing interest rates. As interest rates go up, the
value of a fixed-income security typically goes down, and vice versa.
Generally, fixed-income securities with longer maturities are more sensitive
to changes in interest rates. Many fixed-income securities, including certain
U.S. corporate fixed-income securities in which a Portfolio 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, the Portfolio may have to replace the called security with a lower
yielding security, resulting in a decreased rate of return for the Portfolio.
FUTURES AND OPTIONS
A Portfolio may trade futures contracts, options and options on futures
contracts. Investors should be aware that the use of derivative instruments
such as futures and options requires special skills and knowledge and
investment techniques that are different from what is required in other
Portfolio investments. If the Adviser trades a futures or options contract at
the wrong time or judges market conditions incorrectly, the strategies may
result in significant losses to the Portfolio and reduce the Portfolio's
return. A Portfolio could also experience losses if the prices of its futures
and options positions were not properly correlated with its other investments
or if it could not close out a position because of an illiquid market for the
future or option.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques such as engaging in options and futures
transactions, engaging in foreign currency exchange transactions, short
selling and lending portfolio securities involves greater risk than that
incurred by many other funds with a similar objective. Using these techniques
may produce higher than normal portfolio turnover and may affect the degree to
which a Portfolio's net asset value fluctuates. Higher portfolio turnover
rates are likely to result in comparatively greater brokerage commissions or
transaction costs. See "Appendix--Investment Techniques."
INVESTING IN FOREIGN SECURITIES
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly,
volume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States. The issuers of some of these securities, such as foreign bank
obligations, may be subject to less stringent or different regulations than
are U.S. issuers. In addition, there may be less publicly available
information about a non-U.S. issuer, and non-U.S. issuers generally are not
subject to uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers.
Because stock certificates and other evidences of ownership of such securities
usually are held outside the United States, a Portfolio will be subject to
additional risks which include possible adverse political and economic
developments, possible seizure or nationalization of foreign deposits and
possible adoption of governmental restrictions that might adversely affect the
payment of principal, interest and dividends on the foreign securities or
might restrict the payment of principal, interest and dividends to investors
located outside the country of the issuers, whether from currency blockage or
otherwise. Custodial expenses for a portfolio of non-U.S. securities generally
are higher than for a portfolio of U.S. securities. Since foreign securities
often are purchased with and payable in currencies of foreign countries, the
value of these assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations.
Some currency exchange costs may be incurred when a Portfolio changes
investments from one country to another.
Furthermore, some of these securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by a Portfolio from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries, although applicable tax conventions may reduce or
eliminate such taxes. All such taxes paid by a Portfolio will reduce its net
income available for distribution to investors.
FOREIGN CURRENCY EXCHANGE
Currency exchange rates may fluctuate significantly over short periods of
time. They 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 perceived changes in interest rates and other
22
<PAGE>
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by
an exchange or clearinghouse, a default on the contract would deprive a
Portfolio of unrealized profits or force a Portfolio to cover its commitments
for purchase or resale, if any, at the current market price.
FOREIGN COMMODITY TRANSACTIONS
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic
exchanges. See "Appendix--Investment Techniques." For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. In
addition, unless a Portfolio hedges against fluctuations in the exchange rate
between the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could
incur losses as a result of those changes.
SIMULTANEOUS INVESTMENTS
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by the Adviser. 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.
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, the Adviser's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from, or make other inquiries of, those parties who provide
computer applications or services that are computer system dependent that the
Adviser has determined are critical to the Portfolios.
At the present time, the Adviser 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 the Adviser 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. The Portfolios' Statement of Additional Information
contains the name and general business experience of each Trustee.
INVESTMENT ADVISER
The Portfolios' investment adviser is Bear Stearns Asset Management (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.
The Adviser 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.
The Adviser supervises and assists in the overall management of the
Portfolios' affairs under an Investment Advisory Agreement between the Adviser
and the Portfolios, subject to the overall authority of the Fund's Board of
Trustees in accordance with Massachusetts law.
Marvin & Palmer Associates, Inc. ("Sub-Adviser") is the Sub-Adviser to the
International Equity Portfolio. The Sub-Adviser is subject to the overall
supervision of the Adviser, provides the International Equity Portfolio with
investment advisory services, including portfolio management, pursuant to a
Sub-Investment Management Agreement (the "Management Agreement"). The Sub-
Adviser, which is registered as an investment adviser under the Investment
Advisers Act of 1940, is a privately held corporation founded in 1986 which
specializes in global, non-United States and emerging market equity portfolio
management for institutional accounts. As of March 31, 1998, the Sub-Adviser
managed over $5.6 billion in assets. The Sub-Adviser has offices at 1201 North
Market Street, Suite 2300, Wilmington, Delaware 19801.
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<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
SUB-ADVISER
A portfolio management committee of investment professionals at the Sub-Adviser
manages the International Equity Portfolio's investments. The committee consists
of David F. Marvin, Chairman of the Board; Stanley Palmer, President, Senior
Managing Director; Terry B. Mason, Senior Vice President; Jay F. Middleton, Vice
President, Todd D. Marvin, Vice President and David L. Schaen, Vice President.
Each member of the committee has been employed with Marvin & Palmer for more
than 5 years and the committee members collectively have over 120 years of
international investment experience.
The Management Agreement provides that, as compensation for services, the Sub-
Adviser is entitled to receive a monthly fee from the Adviser (not the
International Equity Portfolio) calculated on an annual basis equal to .20% of
the Portfolio's total average daily net assets to the extent the Portfolio's
average daily net assets are in excess of $25 million and below $50 million at
the relevant month end, .45% of the Portfolio's total average daily net assets
to the extent the Portfolio's average daily net assets are in excess of $50
million and below $65 million at the relevant month end and 0.60% of the
Portfolio's total average daily net assets to the extent the Portfolio's net
assets are in excess of $65 million at the relevant month end.
Under the terms of the Investment Advisory Agreement, the International Equity
Portfolio has agreed to pay the Adviser a monthly fee at an annual rate of 1%
of the Portfolio's average daily net assets. For the fiscal year ended March
31, 1998, investment advisory fees paid by International Equity Portfolio to
the Adviser amounted to $14,726, all of which was waived.
LARGE CAP VALUE PORTFOLIO, SMALL CAP VALUE PORTFOLIO AND S&P STARS PORTFOLIO
Under the terms of an Investment Advisory Agreement, the Large Cap Value
Portfolio, Small Cap Value Portfolio and S&P STARS Portfolio have agreed to
pay the Adviser a monthly fee at the annual rate of 0.75 of 1% of each
Portfolio's average daily net assets. For the fiscal year ended March 31,
1998, investment advisory fees paid by Large Cap Value Portfolio amounted to
$140,641, all of which was waived. For the fiscal year ended March 31, 1998,
investment advisory fees paid by Small Cap Value Portfolio amounted to
$425,409 of which $412,656 was waived. For the fiscal year ended March 31,
1998, investment advisory fees paid by S&P STARS Portfolio amounted to
$1,262,953.
BALANCED PORTFOLIO AND FOCUS LIST PORTFOLIO
Under the terms of an Investment Advisory Agreement, the Balanced Portfolio
and the Focus List Portfolio have agreed to pay the Adviser a monthly fee at
the annual rate of 0.65 of 1% of each Portfolio's average daily net assets.
For the fiscal year ended March 31, 1998, investment advisory fees paid by the
Balanced Portfolio and the Focus List Portfolio amounted to $6,748 and
$12,178, respectively, all of which was waived.
THE INSIDERS SELECT FUND
Under the terms of an Investment Advisory Agreement, The Insiders Select Fund
has agreed to pay the Adviser a monthly fee at the annual rate of 1% of The
Insiders Select Fund 's average daily net assets (the "Basic Fee"), which will
be adjusted monthly (the "Monthly Performance Adjustment") depending on the
extent to which the investment performance of the class of shares (currently,
Class C) expected to bear the highest total operating expenses, after
expenses, exceeded or was exceeded by the percentage change in the investment
record of the S&P MidCap 400 Index. (Prior to February 1, 1998, the adjustment
was based on the S&P 500 Stock Index.) The Monthly Performance Adjustment may
increase or decrease the total advisory fee payable to the Adviser (the "Total
Advisory Fee") by up to 0.50% per year of the value of The Insiders Select
Fund's average daily net assets.
The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of
the 1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average
daily net assets over the most recent calendar month, giving a dollar amount
which is the Basic Fee for that month; (b) one-twelfth of the applicable
performance adjustment rate from the table below is applied to The Insiders
Select Fund's average daily net assets over the most recent calendar month,
giving a dollar amount which is the Monthly Performance Adjustment (for the
first twelve-month period, no performance adjustment will be made); and (c)
the Monthly Performance Adjustment is then added to or subtracted from the
Basic Fee and the result is the amount payable by The Insiders Select Fund to
the Adviser as the Total Advisory Fee for that month.
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<PAGE>
The full range of Total Advisory Fees on an annualized basis is as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS
PERFORMANCE (NET OF
EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE
AND PERCENTAGE CHANGE IN THE ADJUSTMENT
S&P MIDCAP 400 INDEX BASIS FEE (%) RATE (%) TOTAL FEE (%)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more........... 1% 0.50% 1.50%
+2.75 percentage points or more but less
than +3.00 percentage points............. 1% 0.40% 1.40%
+2.50 percentage points or more but less
than +2.75 percentage points............. 1% 0.30% 1.30%
+2.25 percentage points or more but less
than +2.50 percentage points............. 1% 0.20% 1.20%
+2.00 percentage points or more but less
than +2.25 percentage points............. 1% 0.10% 1.10%
Less than +2.00 percentage points but more
than
-2.00 percentage points.................. 1% 1.00%
- -2.00 percentage points or less but more
than
-2.25 percentage points.................. 1% -0.10% 0.90%
- -2.25 percentage points or less but more
than
-2.50 percentage points.................. 1% -0.20% 0.80%
- -2.50 percentage points or less but more
than
-2.75 percentage points.................. 1% -0.30% 0.70%
- -2.75 percentage points or less but more
than
-3.00 percentage points.................. 1% -0.40% 0.60%
- -3.00 percentage points or less........... 1% -0.50% 0.50%
</TABLE>
The period over which performance is measured is a rolling twelve-month
period. Prior to February 1, 1998, the performance was measured against the
monthly return of the S&P 500 Stock Index. Beginning February 1, 1998,
performance is measured against the monthly return of the S&P Midcap 400
Index. The return of each index is calculated as the sum of the change in the
level of the Index during the period, plus the value of any dividends or
distributions made by the companies whose securities comprise the relevant
index. For the fiscal year ended March 31, 1998, the performance fee
adjustment reduced the advisory fee by $132,242 or 0.45% of the value of the
Insiders Select Funds' average daily net assets and advisory fees paid due to
BSAM amounted to $157,031, all of which was waived.
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 pool investment vehicles with assets at
March 31, 1998 of $3 billion.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law. For providing administrative services to Large Cap Value
Portfolio, Small Cap Value Portfolio, S&P STARS Portfolio and Focus List
Portfolio, 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. Under the terms of an
Administrative Services Agreement with the Fund, 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, not to exceed an annual fee of $150,000 for each Portfolio. Above
$150,000 of average daily net assets, a contractual rate of 0.10 of 1% will be
charged.
For providing administrative services to International Equity Portfolio, The
Insiders Select Fund and Balanced Portfolio, the Fund has agreed to pay PFPC
Inc. a monthly fee equal to an annual rate of 0.10 of 1% of each Portfolio's
average daily net assets up to $200 million, 0.075 of 1% of the next
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<PAGE>
$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 monthly fee of $12,500 for the
Balanced Portfolio and International Equity Portfolio and $11,000 for The
Insiders Select Fund.
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 the
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. Effective May 1, 1996, and until further notice, PFPC Inc.
will reduce each Portfolio's monthly minimum to $7,500 for net assets of less
than $25 million; $9,167 for net assets of $25 million to $50 million; and
$11,000 for net assets in excess of $50 million. 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 Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment
Advisory Agreement is 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, is each Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to each Portfolio.
Prior Performance of the Sub-Adviser of the International Equity Portfolio
The following tables set forth the International Equity Portfolio Sub-
Adviser's composite performance data relating to the historical performance of
institutional private accounts managed by the Sub-Adviser, since the dates
indicated, that have investment objectives, policies, strategies and risks
substantially similar to those of the International Equity Portfolio. The data
is provided to illustrate the past performance of the Sub-Adviser in managing
substantially similar accounts as measured against the specified market index
and does not represent the performance of the International Equity Portfolio.
Investors should not consider this performance data as an indication of future
performance of the Portfolio or of the Sub-Adviser.
The Sub-Adviser's composite performance data shown below is calculated in
accordance with the standards of the Association for Investment Management and
Research ("AIMR"(1)), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends
and interest, accrued income and realized and unrealized gains and losses. All
returns reflect the imposition of foreign withholding taxes on interest,
dividends and capital gains and the deduction of all fees and expenses paid by
the Accounts including, investment advisory fees,
- ------
(1) AIMR is a nonprofit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and
fair presentations by investment advisers of their performance results,
and (ii) ensure uniformity in reporting so that performance results of
investment advisers are directly comparable. Note, however, that the
formula for calculation of performance mandated by the Securities and
Exchange Commission differs from that mandated by AIMR.
26
<PAGE>
brokerage commissions and execution costs, but not the imposition of federal
or state income taxes or custodial fees, if any. The Sub-Adviser's composite
includes all actual, fee-paying, discretionary institutional private accounts
managed by the Sub-Adviser that have investment objectives, policies,
strategies and risks substantially similar to those of the Portfolio. The
composite, however, excludes certain accounts with similar investment
objectives which, in the opinion of the Sub-Adviser, were not managed in a
manner similar to the manner in which the Portfolio will be managed as a
result of asset size, investment restrictions or other variables. Securities
transactions are accounted for on the trade date and accrual accounting is
utilized. Cash and equivalents are included in performance returns. The
monthly returns of the Sub-Adviser's composites combine the individual
accounts' returns (calculated on a time-weighted rate of return that is
revalued whenever cash flows exceed $500) by asset-weighing each individual
account's asset value as of the beginning of the month. Quarterly and yearly
returns are calculated by geometrically linking the monthly and quarterly
returns, respectively. The yearly returns are computed by geometrically
linking the returns of each quarter within the calendar year. For additional
information concerning the composite performance data, please see the
Statement of Additional Information.
The institutional private accounts that are included in the Sub-Adviser's
composite are not subject to the same types of expenses to which the Portfolio
is subject nor to the diversification requirements, specific tax restrictions
and investment limitations imposed on the International Equity Portfolio by
the Investment Company Act or Subchapter M of the Code. Consequently, the
performance results for the Sub-Adviser's composite could have been adversely
affected if the institutional private accounts included in the composites had
been regulated as investment companies under the federal securities laws.
The investment results of the Sub-Adviser's composite presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the International Equity Portfolio or an individual investor
investing in the Portfolio. Investors should also be aware that the use of a
methodology different from that used below to calculate performance could
result in different performance data.
THE SUB-ADVISER'S NON-U.S. COMPOSITE PERFORMANCE
AS OF MARCH 31, 1998
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
SUB-ADVISER
NON-U.S. MSCI
TIME PERIOD COMPOSITE INDEX EAFE
- --------------------------------------------------------------------------------
<S> <C> <C>
1997.................................................... 19.74% 1.78%
1996.................................................... 9.74 6.05
1995.................................................... 9.78 11.21
1994.................................................... (10.31) 7.78
1993.................................................... 49.03 32.56
1992.................................................... (0.21) (12.17)
1991.................................................... 16.07 12.13
1990.................................................... (13.26) (23.45)
1989.................................................... 19.88 10.53
1988.................................................... 10.18 15.67
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS: Since Inception
Annualized % (Ending 12/31/97) 1 YR 5 YR (12/31/88)
Non-U.S. Composite............................... 19.74 14.03 9.81%
MSCI EAFE Index.................................. 1.78 11.39 4.05%
</TABLE>
- ------
(1) Returns for time periods of less than one year are annualized.
27
<PAGE>
Prior Performance of Related Accounts for
Balanced Portfolio
Set forth in the following table is the performance history of a composite of
institutional private accounts with investment objectives, policies, strategies
and risks substantially similar to those of the Balanced Portfolio. The accounts
constituting the composite were managed during the periods indicated by a
division of Bear Stearns which was then known as Bear Stearns Asset Management
(the "Division"). Bear Stearns recently reorganized its asset management
operations so that the Division was consolidated with the Adviser. Prior to such
consolidation, the Division rendered advisory services to separate accounts,
while the Adviser rendered advisory services to registered investment companies.
During all periods reflected in the table below, both the Division and the
Adviser were commonly managed and shared portfolio management personnel,
including the portfolio managers of the Balanced Portfolio, who have been and
are responsible for managing the accounts reflected in the composite. Therefore,
the Adviser believes that the performance data reflected below are illustrative
of the past performance of the Adviser in managing a composite set of accounts
substantially similar to the Portfolio. For that reason, this performance
history may be relevant to potential investors in the Balanced Portfolio.
Investors should note, however, that prior to January 1, 1997, the portfolio
managers of the Balanced Portfolio reported to a Director of Equities who is no
longer an employee of the Adviser or any of its affiliates.
The data does not represent the past performance of the Balanced Portfolio and
prospective investors should not consider these performance figures as
indicative of the future performance of the Portfolio or of the Adviser.
The composite performance data shown below were calculated in accordance with
the standards of the Association for Investment Management and Research (See
(1) on pg. 34), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends
and interest, accrued income and realized and unrealized gains and losses. All
returns reflect the deduction of all fees and expenses paid by the accounts
including, investment advisory fees, brokerage commissions and execution
costs, but not the imposition of federal or state income taxes or custodial
fees, if any. The composite includes all actual fee-paying, discretionary
accounts managed by the Division that have investment objectives, policies,
strategies and risks substantially similar to those of the Balanced Portfolio.
The composite, however, excludes certain accounts with similar investment
objectives which, in the opinion of the Adviser, were not managed in a manner
similar to the manner in which the Balanced Portfolio will be managed as a
result of asset size, investment restrictions or other variables. Securities
transactions are accounted for on the trade date and accrual accounting is
utilized. Cash and equivalents are included in performance returns. For
additional information regarding the composite performance data, please see
the Statement of Additional Information.
The institutional private accounts that are included in the composite are not
subject to the same types of expenses to which the Portfolio is subject nor to
the diversification requirements, specific tax restrictions and investment
limitations imposed on the Balanced Portfolio by the Investment Company Act or
Subchapter M of the Code. Consequently, the performance results for the
composites could have been adversely affected if the institutional private
accounts included in the composites had been regulated as investment companies
under the federal securities laws.
The investment results of the composites presented below are unaudited and are
not intended to predict or suggest the returns that might be experienced by
the Balanced Portfolio or an individual investor investing in the Balanced
Portfolio. Investors should also be aware that the use of a methodology
different from that used below to calculate performance could result in
different performance data.
28
<PAGE>
BALANCED COMPOSITE PERFORMANCE SUMMARY
AS OF MARCH 31, 1998
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
LIPPER BALANCED INVESTMENT ADVISER'S
TIME PERIOD FUNDS INDEX BALANCED COMPOSITE
- --------------------------------------------------------------------------------
<S> <C> <C>
1997....................................... 20.05% 21.51%
1996....................................... 13.01 12.77
1995....................................... 24.89 31.04
1994....................................... -2.05 -0.39
1993....................................... 11.95 9.84
1992....................................... 7.46 7.81
1991....................................... 25.83 22.97
4/1/90 to 12/31/90......................... 3.07 4.62
</TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
LIPPER BALANCED INVESTMENT ADVISER'S
TIME PERIOD(1) FUNDS INDEX BALANCED COMPOSITE
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year..................................... 28.98% 28.18%
5 Years.................................... 13.87 15.22
Since Inception (4/1/90)................... 13.70 14.41
</TABLE>
- ------
(1) Returns for periods of less than one year are annualized.
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
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" if purchased directly from the Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--
[Name of 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."
29
<PAGE>
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in a Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with a Portfolio may be established by
completing and signing the Account Information Form indicating which class of
shares is being purchased, a copy of which is attached to this Prospectus, and
mailing it, together with a check to cover the purchase, to PFPC Inc.,
Attention: The Bear Stearns Funds--[Name of Portfolio]--Class Y, P.O. Box
8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The
Portfolio account number should appear on the check.
Shareholders may not purchase shares of the Fund with a check issued by a
third party and endorsed over to the Fund.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the Portfolio calculates its
net asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next
determined.
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Equity 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 Portfolios'
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 Fund 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 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
30
<PAGE>
made, the shareholder may contact the Transfer Agent by telephone at 1-800-
447-1139 to request the exchange. During periods of substantial economic or
market change, telephone exchanges may be difficult to complete and
shareholders may have to submit exchange requests to the Transfer Agent in
writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for
losses or expenses arising out of telephone instructions reasonably believed
to be genuine.
If the exchanging shareholder does not currently own Class Y Shares of the
portfolio or fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. To
participate in the Systematic Investment Plan, or establish automatic
withdrawal for the new account, however, an exchanging shareholder must file a
specific written request. The Exchange Privilege may be modified or terminated
at any time, or from time to time, by the Fund on 60 business days' notice to
the affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Fund will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have a value of at least the minimum initial
investment required for the portfolio or fund into which the exchange is being
made; if making an exchange to an existing account, the dollar value must
equal or exceed the applicable minimum for subsequent investments. If any
amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
Portfolio or Fund.
Class Y Shares will be exchanged at the next determined net asset value. No
fees currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a $5.00 fee in accordance with rules
promulgated by the Securities and Exchange Commission. The Fund reserves the
right to reject any exchange request in whole or in part. The Exchange
Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one portfolio or fund for Class Y 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 is currently 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
31
<PAGE>
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any
request for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the
investor owns fewer shares of the class than specified to be redeemed, the
redemption request may be delayed until the Transfer Agent receives further
instructions from the investor, the investor's Bear Stearns account executive
or the investor's Authorized Dealer. The Fund imposes no charges when shares
are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be transmitted until the check used for investment has cleared, which
may take up to 15 business days. The Fund will reject requests to redeem
shares by telephone or wire for a period of 15 business days after receipt by
the Transfer Agent of the purchase check against which such redemption is
requested. This procedure does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 business days' written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a
redemption request by repurchasing 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 Fund 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 Fund may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Fund 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], 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 Portfolios against fraudulent transactions by
unauthorized persons. A signature
32
<PAGE>
guarantee may be obtained from a domestic bank or trust company, recognized
broker, dealer, clearing agency or savings association who are participants in
a medallion program by the Securities Transfer Association. The three
recognized medallion programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a
part of these programs will not be accepted. Please note that a notary public
stamp or seal is not acceptable. The Fund reserves the right to amend or
discontinue its signature guarantee policy at any time and, with regard to a
particular redemption transaction, to require a signature guarantee at its
discretion. Any questions with respect to signature-guarantees should be
directed to the Transfer Agent by calling 1-800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, each Portfolio's net asset value
may fluctuate.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional Portfolio shares at
net asset value, unless payment in cash is requested or dividends are
redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income at
least once a year. Each 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 1940 Act. No Portfolio will 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 Portfolio shares at net asset value,
unless payment in cash is requested or dividends are redirected into another
fund pursuant to the Redirected Distribution Option. All expenses are accrued
daily and deducted before declaration of dividends to investors. Dividends
paid by each class of each 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 of a Portfolio will be borne
exclusively by such class.
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 the same or
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's 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.
The Large Cap Portfolio, Small Cap Value Portfolio, The Insiders Select Fund,
STARS Portfolio and Balanced Portfolio may make short sales "against the box."
See "Description of the Portfolios--Investment Techniques." Any gains realized
by a Portfolio as such sales will be recognized at the time the Portfolio
enters into the short sale.
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 certain 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.
33
<PAGE>
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 the Adviser 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.
Generally, the Fund must 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 that the TIN furnished in connection with opening an account is
correct and 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 direct the Fund to institute backup withholding if
the IRS determines that 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 and local taxes in respect of
their investment in Portfolio shares. Management of the Fund believes that
each Portfolio has qualified for the fiscal year ended March 31, 1998 as a
"regulated investment company" under the Code. Each Portfolio intends 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. A Portfolio may be subject to a non-
deductible 4% excise tax, measured with respect to certain undistributed
amounts of taxable investment income and capital gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in a Portfolio.
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 the Portfolio
during the measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in 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 such 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 such 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
34
<PAGE>
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 each Portfolio's shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index,
Standard & Poor's Midcap 400 Index, Wilshire 4500 Stock Index, Russell Small
Cap Index, the Dow Jones Industrial Average and other industry publications.
Performance information that may be used in advertising or marketing the Bond
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.
General Information
The Fund 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 Fund is 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 Fund 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 Fund" 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 Fund 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 Fund) 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 Fund has 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 Fund, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by such matter. Rule 18f-2
further provides that a portfolio shall be deemed to be affected by a matter
unless it is clear that the interests of such portfolio in the matter are
identical or that the matter does not affect any interest of such portfolio.
However, Rule 18f-2 exempts the selection of independent accountants and the
election of Trustees from the separate voting requirements of Rule 18f-2.
35
<PAGE>
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 Fund 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.
36
<PAGE>
Appendix
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, each Portfolio may
employ, among others, certain of the following investment techniques which may
involve certain risks. Options and futures transactions involve "derivative
securities."
LENDING PORTFOLIO SECURITIES (ALL PORTFOLIOS)
From time to time, each Portfolio may lend securities from its portfolio of
investments to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the value of a Portfolio's total assets. In connection with such
loans, a Portfolio will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Each Portfolio can increase its income through the
investment of such collateral. A Portfolio continues to be entitled to
payments in amounts equal to the interest, dividends and other distributions
payable on the loaned security and receives interest on the amount of the
loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio. The Portfolios have appointed Custodial Trust Company (CTC), an
affiliate of the Adviser. CTC receives a fee for these services.
BORROWING MONEY (ALL PORTFOLIOS)
As a fundamental policy, each Portfolio is permitted to borrow 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.
However, each Portfolio currently intends to borrow money only for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of a Portfolio's total
assets, such Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS (LARGE CAP PORTFOLIO,
STARS PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, SMALL CAP VALUE PORTFOLIO AND
FOCUS LIST PORTFOLIO)
Each Portfolio's assets may be invested in the securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depositary Receipts
("CDRs"), are receipts issued in Europe typically by non-United States banks
and trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and CDRs
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without
participation by the issuer of the deposited security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
FOREIGN SECURITIES (LARGE CAP PORTFOLIO, SMALL CAP PORTFOLIO, FOCUS LIST
PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND STARS PORTFOLIO)
Each Portfolio may purchase securities of foreign issuers, which may involve
more risks than investment in securities issued by domestic companies.
Securities of foreign issuers may be traded in the United States in the form
of American Depository Receipts (ADRs) and other similar instruments, but most
are traded primarily in foreign markets. The risks of investing in foreign
securities include, among other things:
. POLITICAL AND ECONOMIC RISK. Foreign investments are subject to increased
political and economic risks, especially in developing countries. In some
countries, there is the risk that assets may be confiscated or taxed by
foreign governments.
A-1
<PAGE>
. REGULATORY RISK. Foreign securities markets may be subject to less
government regulation and foreign issuers may not be subject to uniform
accounting, auditing and financial reporting standards.
. CURRENCY RISK. Foreign securities denominated in foreign currencies may be
subject to the additional risk of fluctuations in the value of the currency
as compared to the U.S. dollar.
. MARKET RISK. Foreign securities markets may be subject to greater
volatility and may be less liquid than domestic markets.
. TRANSACTION COSTS. Transaction costs involving foreign securities tend to
be higher than similar costs applicable to transactions in U.S. securities.
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which at the time 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 (ALL PORTFOLIOS)
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 (ALL PORTFOLIOS)
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 (ALL PORTFOLIOS)
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.
A-2
<PAGE>
Bankers' 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.
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.
WARRANTS (ALL PORTFOLIOS)
Each Portfolio may invest up to 5% of its net assets in warrants, except that
this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time.
INVESTMENT COMPANY SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, a Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of such Portfolio's total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies will involve duplication of advisory fees and certain other
expenses.
ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Portfolio's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, options traded in the over-the-counter market and securities
used to cover such options, and certain asset-backed and mortgage-backed
securities, such as certain collateralized mortgage obligations and stripped
mortgage-backed securities. As to these securities, each Portfolio is subject
to a risk that should such Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value,
the value of such Portfolio's net assets could be adversely affected.
RATINGS (ALL PORTFOLIOS)
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the
quality of the obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Therefore, although these ratings may be an initial criterion for selection of
portfolio investments, BSAM also will evaluate such obligations and the
ability of their issuers to pay interest and principal. Each Portfolio will
rely on BSAM's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, BSAM will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the quality of the issuer's
management and regulatory matters. It also is possible that a rating agency
might not timely change the rating on a particular issue to reflect subsequent
events. Once the rating of a security held by a Portfolio has been changed,
BSAM will consider all circumstances deemed relevant in determining whether
such Portfolio should continue to hold the security.
A-3
<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
Sub Adviser
International Equity
Marvin & Palmer Associates, Inc.
1201 N. Market Street
Suite 2300
Wilmington, DE 19801
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
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
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.
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS Y SHARES
The Bear Stearns Funds and Bear Stearns Investment Trust are separate open-end
management investment companies, known as mutual funds (together the "Funds").
By this Prospectus, the Funds offer Class Y shares of one non-diversified
portfolio, the Emerging Markets Debt Portfolio (the "Debt Portfolio") and two
diversified portfolios, the Total Return Bond Portfolio (the "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.
TOTAL RETURN BOND PORTFOLIO
Seeks maximization of total return, 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 July 28,
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.
JULY 28, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 6
Description of the Portfolios.............................................. 8
Investment Objectives and Policies......................................... 8
Investment Techniques...................................................... 12
Risk Factors............................................................... 22
Management of the Portfolios............................................... 30
How to Buy Shares.......................................................... 32
Net Asset Value............................................................ 33
Shareholder Services....................................................... 33
How to Redeem Shares....................................................... 35
Dividends and Distributions................................................ 36
Taxes...................................................................... 37
Performance Information.................................................... 38
General Information........................................................ 39
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURN BOND 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>
TOTAL RETURN BOND 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>
TOTAL RETURN BOND 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 Bond Portfolio, BSAM has undertaken to waive its
investment advisory fee and assume certain expenses of the Bond 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 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 would have been 2.41%.
4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment
results for the periods indicated has been audited by Deloitte & Touche LLP.
Further financial data and related notes appear in the Portfolio's Annual
Report for the fiscal year ended March 31, 1998 which is incorporated by
reference into each Portfolio's Statement of Additional Information which is
available upon request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class Y
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>
For the period
For the fiscal year For the fiscal year September 8, 1995
ended March 31, 1998 ended March 31, 1997 through March 31, 1996
-------------------- -------------------- ----------------------
TOTAL RETURN BOND
PORTFOLIO(1)
CLASS Y
<S> <C> <C> <C>
Net asset value,
beginning of period .............. $ 12.03 $ 12.26 $ 12.35
-------- -------- -------
Net investment income(2) ......... 0.80 0.77 0.41
Net realized and unrealized
gain/(loss) on investments(3) ... 0.36 (0.20) (0.05)
-------- --------- --------
Dividends and distributions
to shareholders from
net investment income ........... (0.80) (0.77) (0.41)
net realized
capital gains ................... (0.02) (0.03) (0.04)
--------- --------- --------
(0.82) (0.80) (0.45)
--------- --------- --------
Net asset value, end of
period .......................... $ 12.37 $ 12.03 $ 12.26
======== ======== ========
Total investment return(4)....... 9.81% 4.77% 2.92%
======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's omitted) .......... $ 4,339 $ 13,486 $ 12,199
Ratio of expenses to
average net assets(2) .......... 0.45% 0.45% 0.45%(5)
Ratio of net investment income
to average net assets(2) ........ 6.39% 6.34% 5.93%(5)
Increase/(Decrease) reflected
in expense ratios and net
investment income due to waivers
and related reimbursements ...... 1.78% 1.73% 2.89%(5)
Portfolio turnover rate ......... 244.78% 262.95% 107.35%
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Class Y shares commenced its initial public offering on September 8, 1995.
(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. 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.
(4) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, If any. Total investment return is not annualized.
(5) Annualized.
6
<PAGE>
Description of the Portfolios
GENERAL
Each of The Bear Stearns Funds and Bear Stearns Investment Trust is known as a
"series fund," which is a mutual fund divided into separate portfolios. Each
portfolio is treated as a separate entity for certain purposes under the
Investment Company Act of 1940, as amended (the "1940 Act"), and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of
any other portfolio. As described below, for certain matters the Funds
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, shares of the Debt Portfolio, the Bond 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.
TOTAL RETURN BOND PORTFOLIO ("BOND PORTFOLIO")
The Bond Portfolio's investment objective is to maximize total return,
consistent with preservation of capital.
The Bond Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Portfolio
is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of
domestic and foreign issuers. These debt securities include bonds, debentures,
notes, money market instruments (including foreign bank obligations, such as
time deposits, certificates of deposit and bankers' acceptances, commercial
paper and other short-term corporate debt obligations, and repurchase
agreements), mortgage-related securities (including interest-only and
principal-only stripped mortgage-backed securities), asset-backed securities,
municipal obligations and convertible debt obligations. The issuers may
include domestic and foreign corporations, partnerships or trusts, and
governments or their political subdivisions, agencies or instrumentalities.
Under normal market conditions, the Portfolio seeks to provide performance
results that equal or exceed the Salomon Brothers BIG Bond Index, which is a
market-capitalization weighted index that includes U.S. Treasury, Government-
sponsored, mortgage and investment grade fixed-rate corporate fixed-income
securities with a maturity of one year or longer and a minimum of $50 million
amount outstanding at the time of inclusion in the Salomon Brothers BIG Bond
Index. As of March 31, 1998, the weighted average maturity of securities
comprising the Salomon Brothers BIG Bond
7
<PAGE>
Index was approximately eight and 1/2 years and their average duration was
approximately four and 1/2 years. Under normal market conditions, the
Portfolio invests in a portfolio of securities with a dollar-weighted average
maturity ranging from four to 13 years and a duration of not less than 65% of
the Salomon Brothers BIG Bond Index and not more than 135% of the Salomon
Brothers BIG Bond Index.
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 70% of the value of the Portfolio's net assets must consist of
securities which, in the case of bonds and other debt instruments, are rated
no lower than A 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") or, if unrated, deemed to be of comparable quality by BSAM. Up to 30%
of the value of the Bond Portfolio's net assets may consist of securities
which, in the case of bonds and other debt instruments, are rated no lower
than Baa by Moody's or BBB by S&P, Fitch and Duff or, if unrated, deemed to be
of comparable quality by BSAM. The Bond 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"
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 65% of its total
8
<PAGE>
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.
9
<PAGE>
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
10
<PAGE>
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 its 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.
11
<PAGE>
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 (ALL PORTFOLIOS)
Each Portfolio 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.
12
<PAGE>
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 Bond Portfolio and 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 High Yield Portfolio may borrow money to the extent
permitted under the 1940 Act. A Portfolio may not purchase securities when
borrowings exceed 5% of its total assets. If market fluctuations in the value
of the Debt Portfolio's portfolio holdings or other
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factors cause the ratio of the Portfolio's total assets to outstanding
borrowings to fall below 300%, within three days of any such event the Debt
Portfolio may be required to sell portfolio securities to restore the 300%
asset coverage, even though from an investment standpoint such sales might be
disadvantageous. Borrowings may be utilized to meet share redemptions of the
Debt Portfolio or to pay dividends and distributions to Shareholders of the
Portfolio, in instances where the Debt Portfolio does not desire to liquidate
its portfolio holdings. The Debt Portfolio expects that some of its borrowings
may be made on a secured basis. In such situations, either the custodian will
segregate the pledged assets for the benefit of the lender or arrangements
will be made with a suitable subcustodian, which may include the lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that a Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income
from the assets obtained with borrowed funds is not sufficient to cover the
cost of borrowing, the net income of the Portfolio will be less than if
borrowing were not used, and therefore the amount available for distribution
to Shareholders as dividends will be reduced.
RESTRICTED AND ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase securities that are not registered or are offered
in an exempt non-public offering ("restricted securities") under the
Securities Act of 1933, as amended (the "Securities Act"), including
securities offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act. Each Portfolio will not invest more than 15% of
its net assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable
and restricted securities that are not eligible for sale under Rule 144A.
Restricted securities eligible for sale under Rule 144A are also subject to
this 15% limitation, unless the Board of Trustees (or BSAM pursuant to a
delegated authority) determines, based upon a continuing review of the trading
markets for the specific restricted securities sold under Rule 144A, that such
restricted securities are liquid. The Board of Trustees has adopted guidelines
and delegated to BSAM the function of determining and monitoring the liquidity
of Rule 144A securities, although the Board of Trustees retains ultimate
responsibility for any determination regarding whether a liquid market exists
for Rule 144A securities. The liquidity of Rule 144A securities will be
monitored by BSAM and, if as a result of changed conditions, it is determined
that a Rule 144A security is no longer liquid, the respective Portfolio's
holdings of illiquid securities will be reviewed to determine what, if any,
action is required to assure that the Portfolio does not exceed its applicable
percentage limitation for investments in illiquid securities. In reaching
liquidity decisions, BSAM may consider, inter alia, the following factors: (1)
the unregistered nature of the security; (2) the frequency of trades and
quotes for the security; (3) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (4) dealer
undertakings to make a market in the security; and (5) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). Investing in Rule 144A securities could have the effect of
increasing the level of portfolio illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and
related options (including interest rate futures contracts and options
thereon), options on securities, financial indices and currencies, and forward
currency exchange contracts. The Portfolios' ability to use these strategies
may be limited by market conditions, regulatory limits and tax considerations
and there can be no assurance that any of these strategies will succeed. See
"Portfolio Securities" in the Statement of Additional Information for The Bear
Stearns Funds and "Investment Practices" in the Statement of Additional
Information for the Bear Stearns Investment Trust. New financial products and
risk management techniques continue to be developed and the Portfolios may use
these new investments and techniques to the extent consistent with their
investment objective and policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options
made for "bona fide hedging purposes."
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OPTIONS ON SECURITIES AND INDICES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered call
options. 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. (See "Risk Factors" and the Statement 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 Bond 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 Bond and High Yield Portfolios have appointed Custodial Trust Company (CTC),
an affiliate of BSAM, as securities lending agent. CTC receives a fee for these
services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each Portfolio may enter into repurchase agreements, which may be viewed as a
type of secured lending by the Portfolio, and which typically involves the
acquisition by the Portfolio of debt securities from a selling financial
institution, such as a bank, savings and loan association or broker-dealer. In
a repurchase agreement, the Portfolio purchases a debt security from a seller
which undertakes to repurchase the security at a specified resale price on an
agreed future date (ordinarily a week or less). The resale price generally
exceeds the purchase price by an amount which reflects an agreed-upon market
interest rate for the term of the repurchase agreement. The principal risk is
that, if the seller defaults, the Portfolio might suffer a loss to the extent
the proceeds from the sale of the underlying securities and other collateral
held by the Portfolio in connection with the related repurchase agreement are
less than the repurchase price. Repurchase agreements maturing in more than
seven days are considered by the Portfolios to be illiquid.
SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a
decline in the market value of that security (short sales). To complete the
transaction, a Portfolio will borrow the security to make
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delivery to the buyer. A Portfolio is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security
was sold by the Portfolio. Until the security is replaced, a Portfolio is
required to pay to the lender any dividends or interest which accrue during
the period of the loan. To borrow the security, a Portfolio may be required to
pay a premium, which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until a Portfolio replaces the borrowed security, it will (a) maintain in a
segregated account cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short
and will not be less than the market value of the security at the time it was
sold short or (b) otherwise cover its short position through a short sale
"against-the-box," which is a short sale in which the Portfolio owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. There
are certain tax implications associated with this strategy. See "Dividends,
Distributions and Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss will be increased, by the
amount of any premium, dividends or interest paid in connection with the short
sale. Under normal conditions, a Portfolio will not engage in short sales to
the extent that the Portfolio would be required to segregate with its
Custodian, or deposit as collateral to replace borrowed securities, more than
25% of its net assets. The Debt Portfolio may not make short sales of
securities, except short sales against the box.
BRADY BONDS (DEBT PORTFOLIO)
"Brady bonds" are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging Countries in
connection with sovereign debt restructurings, under a plan, introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady, known as the Brady
Plan. Agreements implemented under the Brady Plan are designed to reduce the
debt service burden of heavily indebted nations, in exchange for various forms
of credit enhancement coupled with economic policy reforms designed to improve
the debtor country's ability to service its external obligations. The Brady
Plan only sets forth the guiding principles for debt reduction and economic
reform, emphasizing that solutions must be negotiated on a case by case basis
between debtor nations and their creditors. As a result, the financial
packages offered by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money
by existing lenders. Credit enhancement may take the form of collateralizing
the principal with U.S. Treasury zero coupon bonds with a maturity equal to
the final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain
types of Brady bonds may be collateralized by cash or securities agreed upon
by creditors.
As a pre-condition to issuing Brady bonds, debtor nations are generally
required to agree to the implementation of certain domestic monetary and
fiscal reform measures with the World Bank or the IMF. Such measures have
included the liberalization of trade and foreign investments, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to improve the
debtor's ability to service its external obligations and promote its growth
and development.
Brady bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring
that will result in the issuance of Brady bonds. For purposes of applicable
tax and 1940 Act rules and regulations, Brady bonds are not considered U.S.
Government securities.
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The Debt Portfolio may invest in either collateralized or uncollateralized
Brady bonds. Brady bonds are issued in various currencies (primarily U.S.
dollars) and are actively traded in the over-the-counter ("OTC") secondary
market for debt of Emerging Country issuers. Because of the large size of most
Brady bond issues, Brady bonds are generally highly liquid instruments. Brady
bonds may be collateralized or uncollateralized, may carry floating or fixed
rates of interest, and may have maturities of up to 30 years. The most common
are 30-year collateralized fixed-rate "par bonds" and floating-rate "discount
bonds," which are collateralized as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the Brady bonds, and carry at least one
year's rolling interest-rate guarantee in the form of cash or marketable
securities.
Investors should recognize that Brady bonds have been issued only recently,
and accordingly they do not have a long payment history. There can be no
assurance that the Brady bonds in which the Portfolio may invest will not be
subject to restructuring arrangements or to requests for new credit which may
cause the Portfolio to suffer a loss of interest or principal on any of its
holdings. For a discussion of the risks involved in investing in Brady bonds,
see "Risk Factors and Special Considerations--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 (BOND AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Bond 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 Portfolio's operations. In
addition, special tax considerations may apply. The Portfolio does not intend
to invest in such vehicles or funds unless, in the judgment of 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, the
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 BOND PORTFOLIOS)
The High Yield and Bond Portfolios may each invest in mortgage-related
securities, consistent with their investment objectives, that provide funds
for mortgage loans made to residential homeowners. These include securities
which represent interests in pools of mortgage loans made by lenders such as
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled for sale to investors by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities,
which normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Prepayments are caused by repayments of principal resulting from
the sale of the underlying residential property, refinancing or foreclosure,
net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may in addition be the originators of the underlying mortgage loans as well as
the guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Portfolios may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan
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experience and practices of the poolers, BSAM determines that the securities
meet the Portfolios investment criteria. Although the market for such
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. Under normal conditions,
the High Yield Portfolio will not invest more than 20% of its total assets in
mortgage-related securities.
EQUITY SECURITIES (HIGH YIELD PORTFOLIO)
In seeking to meet its objective, the High Yield Portfolio may invest in
"equity" securities, including distressed securities, as described below.
These securities include foreign and domestic common stocks or preferred
stocks, rights and warrants and debt securities or preferred stock which are
convertible or exchangeable for common stock or preferred stock. To the extent
the Portfolio invests in equity securities, there may be a diminution in the
Portfolio's overall yield. See "Distressed Securities" below. Under normal
conditions, the High Yield Portfolio will not invest more than 20% of its
total assets in equity securities.
DISTRESSED SECURITIES (HIGH YIELD PORTFOLIO)
The High Yield Portfolio may invest in debt or equity securities of
financially troubled or bankrupt companies (financially troubled issuers) and
in debt or equity securities of companies, that in the view of the Adviser are
currently undervalued, out of favor or price depressed relative to their long-
term potential for growth and income (operationally troubled issuers)
(collectively "distressed securities"). Investment in distressed securities
involves certain risks. See "Risk Factors." Under normal conditions, the
Portfolio will not invest more than 20% of its total assets in distressed
securities.
ASSET-BACKED SECURITIES (BOND PORTFOLIO)
The Bond Portfolio 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.
MUNICIPAL OBLIGATIONS (BOND PORTFOLIO)
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 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 it from municipal obligations generally will be
subject to federal income tax. Municipal obligations bear fixed, floating or
variable rates of interest, which are determined in some instances by formulas
under which the municipal obligation's interest rate will change directly or
inversely to changes in interest rates or an index, or multiples thereof, in
many cases subject to a maximum and minimum. The Bond Portfolio currently
intends to invest no more than 25% of its assets in municipal obligations.
However, this percentage may be varied from time to time without shareholder
approval.
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TEMPORARY STRATEGIES (ALL PORTFOLIOS)
Each Portfolio retains the flexibility to respond promptly to changes in
market and economic conditions. Accordingly, consistent with a Portfolio's
investment objectives, BSAM may employ a temporary defensive investment
strategy if it determines such a strategy is warranted. Under such a defensive
strategy, a Portfolio temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100% of its
assets in high quality fixed-income securities or money market instruments of
U.S. or foreign issuers, and most or all of the Portfolio's investments may be
made in the United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of a Portfolio
shares or to meet ordinary daily cash needs, a Portfolio temporarily may hold
cash (U.S. dollars, foreign currencies or multinational currency units) and
may invest any portion of its assets in high quality foreign or domestic money
market instruments (See Appendix B).
SIMULTANEOUS INVESTMENTS (ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to
dispose of, securities of the type in which a Portfolio invests at the same
time as the Portfolio, available investments or opportunities for sales will
be allocated equitably to each. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by the Portfolio.
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 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 Bond 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 Portfolios 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 Statement
of Additional Information.
20
<PAGE>
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 they engage 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 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
Portfolio 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 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 the Portfolio's ability to effectively hedge its portfolio. There is
also the risk of loss by the 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." Securities rated below investment grade and
comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks
than higher-rated securities. Under rating agency guidelines, medium- and
lower-rated securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Certain of the
debt securities in which a Portfolio may invest may have, or be considered
comparable to securities having, the lowest ratings for non-subordinated debt
instruments assigned by Moody's, S&P or D&P (i.e., rated C by Moody's or CCC
or lower by S&P or D&P). Under rating agency guidelines, these securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default,
to be unlikely to have the capacity to pay interest and repay principal when
due in the event of adverse business, financial or economic conditions, and/or
to be in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and lowest-
rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by a Portfolio with a commensurate effect on the
value of its respective shares. Therefore, an investment in a Portfolio should
not be considered as a complete investment program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities
are characterized by relatively few market makers, and participants in the
market are mostly institutional investors, including insurance companies,
banks, other financial institutions and mutual funds. In addition, the trading
volume for high yield, high risk debt securities is generally lower than that
for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on a Portfolio's ability to dispose of particular portfolio
investments and may limit its ability to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If a Portfolio
is not able to obtain precise or accurate market quotations for a particular
security, it will become more difficult for the Funds' Board of Trustees to
value the Portfolio's securities and the Funds' Trustees may have to use a
greater degree of judgment in making such valuations. Furthermore, adverse
publicity and investor perceptions about lower-rated securities, whether or
not based on fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities. Less liquid secondary markets may
also affect a Portfolio's ability to sell securities at their fair value. In
addition, each Portfolio may invest up to 15% of its net assets, measured at
the time of investment, in illiquid securities, which may be more difficult to
value and to sell at fair value. If the secondary markets for high yield, high
risk debt securities contract due to adverse economic conditions or for other
reasons, certain previously liquid securities in a Portfolio may become
illiquid and the proportion of the Portfolio's assets invested in illiquid
securities may increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned
and the time it is updated. In addition, there may be varying degrees of
difference in credit risk of securities within each rating category. See
Appendix A to this Prospectus for a description of such ratings.
23
<PAGE>
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their Debt
Obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default in payment of
interest or principal by such issuers is significantly greater than with
investment grade securities because such securities generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back
features which permit the issuer of the security to call or repurchase it.
Such securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have
to replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
a Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing
and emerging countries or the governmental authorities that control repayment
of their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant
country. Countries such as those in which a Portfolio may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, trade difficulties
and extreme poverty and unemployment. Many of these countries are also
characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but
are not limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
its debt service burden to the economy as a whole, and its government's policy
towards the International Monetary Fund, the World Bank and other
international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of
the defaulting party itself, and the ability of the holder of foreign
sovereign debt securities to obtain recourse may be subject to the political
climate in the relevant country. In addition, no assurance can be given that
the holders of commercial bank debt will not contest payments to the holders
of other foreign sovereign Debt Obligations in the event of default under
their commercial bank loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may
be subject to greater price volatility than other securities in which the
Portfolio invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of
financially troubled issuers are more likely to go into default than
securities of other issuers. In addition, it may be difficult to obtain
information about financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The
market prices of such securities are subject to erratic and abrupt market
movements and the spread between bid and asked prices may be greater than
normally expected. In addition, it is anticipated that many of such portfolio
investments may not be widely traded and that the Portfolio's position in such
securities may be substantially relative to the market for such securities. As
a result, the Portfolio may experience delays and incur losses and other costs
in connection with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include
securities of companies involved in bankruptcy proceedings, reorganizations
and financial restructurings. To the extent the Portfolio invests in such
securities, it may have a more active participation in the affairs of issuers
than
24
<PAGE>
is generally assumed by an investor. This may subject the Portfolio to
litigation risks or prevent the Portfolio from disposing of securities. In a
bankruptcy or other proceeding, the Portfolio as a creditor may be unable to
enforce its rights in any collateral or may have its security interest in any
collateral challenged, disallowed or subordinated to the claims of the
creditors. See "Portfolio Securities-- Bankruptcy and Other Proceedings--
Litigation Risks" in the Statement of Additional Information.
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85%
consisted of portfolio investments and 5.15% consisted of other assets in
excess of liabilities. The percentage of the Portfolio's investments invested
in securities rated by S&P and Moody's as of March 31, 1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the Debt
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt Portfolio's total investments in securities rated by
S&P or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa, A, Ba
or B by Moody's) by monthly dollar-weighted average is set forth below. It
should be noted that this information reflects the average composition of the
Debt Portfolio's assets during the most recent period and is not necessarily
representative of the Debt Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
<TABLE>
- --------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's investments
invested in securities rated by S&P and Moody's as of March 31, 1998 are as
follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
25
<PAGE>
Based on the weighted average ratings of all investments held during the High
Yield Portfolio's most recent fiscal period (the fiscal year ended March 31,
1998), the percentage of the High Yield Portfolio's total investments in
securities rated by S&P or Moody's applicable rating category (AAA, A, BB, or B
by S&P or Aaa, A, Ba or B by Moody's) by monthly dollar-weighted average is set
forth below. It should be noted that this information reflects the average
composition of the High Yield Portfolio's assets during the most recent period
and is not necessarily representative of the High Yield Portfolio's assets as of
the end of such period, the current fiscal period or at any time in the future.
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 0.68%
BB Ba 0.97%
B Ba 1.31%
B B 63.27%
B Caa 12.45%
CCC B 3.67%
CCC Caa 4.31%
NR NR 13.34%
</TABLE>
- ------
* Equivalent Unrated-These categories represent the comparable quality of
unrated securities as determined by the Adviser. For foreign government
obligations not individually rated by an internationally recognized
statistical rating organization, the Debt Portfolio assigns a rating based
on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolios may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed rates.
Changes in interest rates generally will cause the value of debt securities
held by the Portfolio to vary inversely to changes in prevailing interest
rates. A Portfolio's investments in fixed-rate debt securities with longer
terms to maturity are subject to greater volatility than the Portfolio's
investments in short-term obligations. Brady bonds and other Debt Obligations
acquired at a discount are subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities which are not subject to a discount.
DISCOUNT OBLIGATIONS
The Portfolios expect to invest in both short-term and long-term Debt
Obligations purchased at a discount, for example, zero coupon securities. The
amount of original issue discount and/or market discount on obligations
purchased by a Portfolio may be significant, and accretion of market discount
together with original issue discount, will cause the Portfolio to realize
income prior to the receipt of cash payments with respect to these securities.
See "Taxation" in the Statement of Additional Information for a discussion of
original issue discount and market discount. In order to distribute income
realized by a Portfolio and thereby maintain its qualification as a "regulated
investment company" under the Code, a Portfolio may be required to liquidate
portfolio securities that it might otherwise have continued to hold, use its
cash assets or borrow funds on a temporary basis necessary to declare and pay
a distribution to shareholders. Under adverse market conditions, this may
result in shareholders receiving a portion of their original purchase price as
a taxable dividend and could further negatively impact net asset value.
POLITICAL AND ECONOMIC FACTORS
Investing in Debt Obligations of emerging countries involves risks relating to
political and economic developments abroad. The value of a Portfolio's
investments will be affected by commodity prices, inflation, interest rates,
taxation, social instability, and other political, economic or diplomatic
developments in or affecting the Emerging Countries in which the Portfolio has
invested. In many cases, governments of Emerging Countries continue to
exercise a significant degree of control over the economy, and government
actions concerning the economy may adversely effect issuers within that
country. Government actions relative to the economy, as well as economic
developments generally, may also effect a given country's international
foreign currency reserves. Fluctuations in the level of these reserves affect
the amount of foreign exchange readily available for external debt payments
and thus could have a bearing on the capacity of Emerging Country issuers to
make payments on their Debt Obligations regardless of their financial
condition. In addition, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, or other similar developments which could affect investments in
those countries.
27
<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.
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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.
<PAGE>
YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from or make other inquiries of those parties who provide
computer applications or services that are computer system dependent that BSAM
has determined are critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information
contains the name and general business experience of each Trustee.
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INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575
Lexington Avenue, New York, New York 10022. The Bear Stearns Companies Inc. is
a holding company which, through its subsidiaries including its principal
subsidiary, Bear Stearns, is a leading United States investment banking,
securities trading and brokerage firm serving United States and foreign
corporations, governments and institutional and individual investors. BSAM is
a registered investment adviser and offers, either directly or through
affiliates, investment advisory services to open-end and closed-end investment
funds and other managed pooled investment vehicles with net assets at June 30,
1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios'
affairs under an Investment Advisory Agreement between BSAM and the
Portfolios, subject to the overall authority of the Fund's Board of Trustees
in accordance with Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio
managers, assistant portfolio managers and analysts performing as a dynamic
unit to manage the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to
receive from the Bond Portfolio and High Yield Portfolio a monthly fee equal
to an annual rate of 0.45% and 0.60%, respectively, of each Portfolio's
average daily net assets. For the fiscal year ended March 31, 1998, investment
advisory fees accrued by the Bond Portfolio and High Yield Bond Portfolio
amounted to $91,715 and $28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which
would have the effect of lowering the Debt Portfolio's expense ratio and
increasing yield to investors at the time such amounts are waived or assumed,
as the case may be. The Debt Portfolio will not pay BSAM at a later time for
any amounts it may waive, nor will the Debt Portfolio reimburse BSAM for any
amounts it may assume until such time as the average net assets of the Debt
Portfolio exceed $50 million or the total operating expenses of the Debt
Portfolio are less than 1.75%, 2.40% and 2.40% of the Class A shares, Class B
and Class C shares, respectively, of the Debt Portfolio. The investment
management fees paid by the Debt Portfolio are greater than those paid by most
funds, but are believed by BSAM to be appropriate for fees paid by funds with
a global investment strategy.
ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New
York 10167. BSFM offers administrative services to open-end and closed-end
investment funds and other managed pooled investment vehicles with assets at
June 30, 1998 of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed
to pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1%
of each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
From time to time, BSFM may waive receipt of its fees and/or voluntarily
assume certain Portfolio expenses, which would have the effect of lowering a
Portfolio's expense ratio and increasing yield to
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investors at the time such amounts are waived or assumed, as the case may be.
No Portfolio will pay BSFM at a later time for any amounts it may waive, nor
will a Portfolio reimburse BSFM for any amounts it may assume. From time to
time PFPC Inc. may waive a portion of its fee. PFPC Inc. reserves the right to
revoke this voluntary fee waiver at any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of
Additional Information.
Bear Stearns has agreed to permit the Funds to use the name "Bear Stearns" or
derivatives thereof as part of the Funds name for as long as the Investment
Advisory and Management Agreements are in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, acts as the custodian for the Bond Portfolio and
the High Yield Portfolio.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Debt Portfolio's assets.
PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington,
Delaware 19809 acts as each Portfolio's administrator, transfer agent,
dividend-paying agent and registrar.
Rules adopted under the 1940 Act permit the Portfolios to maintain their
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolios' portfolio of securities
and cash invested in securities of foreign countries are held by their
subcustodians, who are approved by the Trustees of the Portfolios in
accordance with the rules of the Securities and Exchange Commission.
How to Buy Shares
GENERAL
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request.
The Fund reserves the right to reject any purchase order. The Fund reserves
the right to vary the initial and subsequent investment minimum requirements
at any time. Investments by employees of Bear Stearns and its affiliates are
not subject to the minimum investment requirement. In addition, accounts under
the discretionary management of Bear Stearns and its affiliates are not
subject to the minimum investment requirement.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the National Association of Securities Dealers, Inc. who have sales
agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a
Portfolio's shares also may be made directly through the Transfer Agent.
Investors must specify that Class Y is being purchased.
Purchases are effected at Class Y Shares' net asset value next determined
after a purchase order is received by Bear Stearns, an Authorized Dealer or
the Transfer Agent (the "trade date"). Payment for Portfolio shares generally
is due to Bear Stearns or the Authorized Dealer on the third business day (the
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment for payment until the settlement date.
If a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made
before the settlement date.
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PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--[Name of
Portfolio]--Class Y" or "Bear Stearns Investment Trust--Emerging Markets Debt
Portfolio--Class Y" if purchased directly from a Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--
[Name of Portfolio]--Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Payment by check or Federal Reserve draft must be received within three business
days of receipt of the purchase order by Bear Stearns or an Authorized Dealer.
Orders placed directly with the Transfer Agent must be accompanied by payment.
Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding
payment promptly to the Fund. The Fund will charge $7.50 for each wire
redemption. The payment proceeds of a redemption of shares recently purchased by
check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in a Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with a Portfolio may be established by
completing and signing the Account Information Form indicating which class of
shares is being purchased, a copy of which is attached to this Prospectus, and
mailing it, together with a check to cover the purchase, to PFPC Inc.,
Attention: The Bear Stearns Funds--[Name of Portfolio]--Class Y, P.O. Box
8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The
Portfolio account number should appear on the check.
Shareholders may not purchase shares of the Fund with a check issued by a
third party and endorsed over to the Fund.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the Portfolio calculates its
net asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next
determined.
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Fund's Board of Trustees. For further information
regarding the methods employed in valuing each Portfolio's investments, see
"Determination of Net Asset Value" in The Bear Stearns Funds' Statement of
Additional Information and "Net Asset Value" in Bear Stearns Investment
Trust's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to
the Funds could subject the investor to backup withholding and a $50 penalty
imposed by the Internal Revenue Service (the "IRS").
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for Class
Y shares of a Portfolio, Class Y shares of the Fund's other portfolios or
shares of certain other funds sponsored or advised by Bear Stearns, including
the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and
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the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares
are offered for sale in the investor's state of residence. These funds have
different investment objectives which may be of interest to investors. To use
this privilege, investors should consult their account executive at Bear
Stearns, their account executive at an Authorized Dealer or the Transfer Agent
to determine if it is available and whether any conditions are imposed on its
use. To use this privilege, exchange instructions must be given to the
Transfer Agent in writing or by telephone. A shareholder wishing to make an
exchange may do so by sending a written request to the Transfer Agent at the
address given above in "How to Buy Shares--General." Shareholders are
automatically provided with telephone exchange privileges when opening an
account, unless they indicate on the account application that they do not wish
to use this privilege. Shareholders holding share certificates are not
eligible to exchange shares of the Portfolio by phone because share
certificates must accompany all exchange requests. To add this feature to an
existing account that previously did not provide for this option, a Telephone
Exchange Authorization Form must be filed with the Transfer Agent. This form
is available from the Transfer Agent. Once this election has been made, the
shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to
request the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to
submit exchange requests to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for
losses or expenses arising out of telephone instructions reasonably believed
to be genuine. If the exchanging shareholder does not currently own Class Y
shares of the portfolio or fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options and Authorized Dealer of record as the account from which shares are
exchanged, unless otherwise specified in writing by the shareholder with all
signatures guaranteed by an eligible guarantor institution as described below.
To participate in the Systematic Investment Plan, or establish automatic
withdrawal for the new account, however, an exchanging shareholder must file a
specific written request. The Exchange Privilege may be modified or terminated
at any time, or from time to time, by the Fund on 60 business days' notice to
the affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Fund will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have a value of at least the minimum initial
investment required for the portfolio or fund into which the exchange is being
made; if making an exchange to an existing account, the dollar value must
equal or exceed the applicable minimum for subsequent investments. If any
amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
portfolio or Fund.
Class Y Shares will be exchanged at the next determined net asset value. No
fees currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a $5.00 fee in accordance with rules
promulgated by the Securities and Exchange Commission. The Fund reserves the
right to reject any exchange request in whole or in part. The Exchange
Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the Class Y shares given
in exchange by the shareholder and, therefore, an exchanging shareholder may
realize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid by a
Portfolio in Class Y shares of another portfolio of the Fund
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or a fund advised or sponsored by Bear Stearns of which the shareholder is an
investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the current net asset value.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request. Investors may request redemption of Portfolio
shares at any time. Redemption requests may be made as described below. When a
request is received in proper form, the Portfolio will redeem the shares at
the next determined net asset value. If the investor holds Portfolio shares of
more than one class, any request for redemption must specify the class of
shares being redeemed. If the investor fails to specify the class of shares to
be redeemed or if the investor owns fewer shares of the class than specified
to be redeemed, the redemption request may be delayed until the Transfer Agent
receives further instructions from the investor, the investor's Bear Stearns
account executive or the investor's Authorized Dealer. The Fund imposes no
charges when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be transmitted until the check used for investment has cleared, which
may take up to 15 business days. The Fund will reject requests to redeem
shares by telephone or wire for a period of 15 business days after receipt by
the Transfer Agent of the purchase check against which such redemption is
requested. This procedure does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 business days' written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a
redemption request by repurchasing Funds shares from a redeeming shareholder
at the shares' net asset value next computed after receipt of the request by
Bear Stearns or the Authorized Dealer. Under normal circumstances, within
three days, redemption proceeds will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder. Bear
Stearns account executives or Authorized Dealers are responsible for promptly
forwarding redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably
believed by the Transfer Agent to be genuine. The Funds will require the
Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Transfer Agent or the Funds may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Funds nor the Transfer Agent will be liable for following telephone
instructions reasonably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Funds shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960,
Wilmington, Delaware 19899-8960.
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ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any
Authorized Dealer, or to the Transfer Agent if the shares are not held in a
brokerage account.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly
endorsed share certificates, must be received by the Transfer Agent in proper
form and signed exactly as the shares are registered. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any
eligible guarantor institution. A signature guarantee is designed to protect
the shareholders and the Portfolio against fraudulent transactions by
unauthorized persons. A signature guarantee may be obtained from a domestic
bank or trust company, recognized broker, dealer, clearing agency or savings
association who are participants in a medallion program by the Securities
Transfer Association. The three recognized medallion programs are Securities
Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program
(SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP).
Signature Guarantees which are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Funds reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature-guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, each Portfolio's net asset value
may fluctuate.
Dividends and Distributions
BOND 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
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another fund pursuant to the Redirected Distribution Option. This election
should initially be made on a Shareholder's Account Information Form and may
be changed upon written notice to either Bear Stearns, an Authorized Dealer or
the Transfer Agent at any time prior to the record date for a particular
dividend or distribution. If no election is made, all dividends and
distributions will be reinvested in the Portfolio. The Portfolio distributes
net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the Investment Company Act. The Portfolio will not make
distributions from net realized securities gains unless capital loss
carryovers, if any, have been utilized or have expired. Dividends are
automatically reinvested in additional shares of the Portfolio at net asset
value. All expenses are accrued daily and deducted before declaration of
dividends to investors.
All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made
upon the condition that the Transfer Agent is thereby automatically appointed
as agent of the investor to receive all dividends and capital gains
distributions on shares owned by the investor. Such dividends and
distributions will be paid, at the net asset value per share, in shares of the
Portfolio (or in cash if the shareholder so requests) as of the close of
business on the record date. At any time an investor may request the Transfer
Agent, in writing, to have subsequent dividends and/or capital gains
distributions paid to him or her in cash rather than shares. In order to
provide sufficient time to process the change, such request should be received
by the Transfer Agent at least five (5) business days prior to the record date
of the dividend or distribution. In the case of recently purchased shares for
which registration instructions have not been received on the record date,
cash payments will be made to Bear Stearns or the Authorized Dealer which will
be forwarded to the shareholder, upon the receipt of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the
Portfolio or unrealized appreciation of the Portfolio's securities. Therefore,
subsequent distributions (or portions thereof) attributable to such items, may
be taxable to the investor even if the distributions (or portions thereof) in
reality represent a return of a portion of the purchase price.
Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid
by a Portfolio will be taxable to U.S. shareholders as ordinary income,
whether received in cash or reinvested in additional shares of such Portfolio
or redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and
certain capital gains of individuals may be subject to a lower tax rate.
Dividends and distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description
of the Portfolio-Investment Instruments and Strategies." Any gains realized by
a Portfolio on such sales will be recognized at the time the Portfolio enters
into the short sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term
securities gains paid by a Portfolio to a foreign investor as well as the
proceeds of any redemptions from a foreign investor's account, regardless of
the extent to which gain or loss may be realized, generally will not be
subject to U.S. nonresident withholding tax. However, such distributions may
be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
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Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSAM or its
affiliates within 91 days of purchase and such other fund reduces or
eliminates its otherwise applicable sales load for the purpose of the
exchange. In this case, the amount of the sales load charged the investor for
such shares, up to the amount of the reduction of the sales load charge on the
exchange, is not included in the basis of such shares for purposes of
computing gain or loss on the exchange, and instead is added to the basis of
the fund shares received on the exchange.
Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on
a federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend
and interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's federal
income tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of
their investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to
so qualify if such qualification is in the best interests of its shareholders.
Such qualification relieves a Portfolio of any liability for federal income
tax to the extent its earnings are distributed in accordance with applicable
provisions of the Code. In addition, a Portfolio is subject to a non-
deductible 4% excise tax, measured with respect to certain undistributed
amounts of taxable investment income and capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net
income at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
For a detailed discussion of certain federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
Performance Information
For purposes of advertising, performance for Class Y shares may be calculated
on the basis of average annual total return and/or total return. These total
return figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by a Portfolio during
the measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in a Portfolio was purchased with an initial
payment of $1,000 and that the investment was redeemed at the end of a stated
period of time, after giving effect to the reinvestment of dividends and
distributions, if any, during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result
in the redeemable value of the investment at the end of the period.
Advertisements of each Portfolio's performance will include the Portfolio's
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average annual total return for one, five and ten year periods, or for shorter
periods depending upon the length of time during which the Portfolio has
operated. Computations of average annual total return for periods of less than
one year represent an annualization of the Portfolio's actual total return for
the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions, if any. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value per share
at the beginning of the period. Advertisements may include the percentage rate
of total return or may include the value of a hypothetical investment at the
end of the period which assumes the application of the percentage rate of
total return.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the High Yield Portfolio's shares, including data
from Lipper Analytical Services, Lehman Brothers High Yield Bond Index, Credit
Suisse First Boston High Yield Bond Index and other industry publications.
Performance information that may be used in advertising or marketing the Total
Return Bond Portfolio's shares can include data from Lipper Analytical
Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond
Survey Bond Index, Lehman Brothers Aggregate Bond Index, Salomon Brothers
Broad Investment-Grade Index and components thereof, Mutual Fund Values,
Mutual Fund Forecaster, Mutual Fund Investing and other industry publications.
Comparative performance information may be used from time to time in
advertising or marketing the Emerging Markets Debt Portfolio's shares,
including data from Lipper Analytical Services, Inc., Morningstar, Inc.,
Moody's Bond Survey Index and components thereof, Mutual Fund Values, Mutual
Fund Forecaster, Mutual Fund Investing and other industry publications.
DEBT PORTFOLIO
Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the average net asset value during
the period for which the distribution rates are being calculated.
The Debt Portfolio may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
the Portfolio may from time to time advertise its performance relative to
certain performance rankings and indices.
The investment results of the Debt Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be
considered a representation of what an investment in the Debt Portfolio may
earn or what the Debt Portfolio's performance may be in any future period.
In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
Portfolio's performance will be included in the Portfolio's annual report to
shareholders which will be made available to shareholders upon request and
without charge.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated September 29, 1994, and commenced operations on or
about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992 as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
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The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and
shareholders will vote in the aggregate and not by class, except as otherwise
required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove
Trustees. To date, the Fund's Board has authorized the creation of 10
portfolios of shares. All consideration received by the Funds for shares of
one of the portfolios and all assets in which such consideration is invested
will belong to that portfolio (subject only to the rights of creditors of the
Funds) and will be subject to the liabilities related thereto. The assets
attributable to, and the expenses of, one portfolio (and as to classes within
a portfolio) are treated separately from those of the other portfolios (and
classes). The Funds have the ability to create, from time to time, new
portfolios of shares without shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the holders of the outstanding voting securities of an investment
company, such as the Funds, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that
the interests of such portfolio in the matter are identical or that the matter
does not affect any interest of such portfolio. However, Rule 18f-2 exempts
the selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account. Shareholder inquiries may be made by
writing to the Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each Portfolio means the vote
of the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's
Day, President's Day, Good Friday, Martin Luther King's Day, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in each
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made.
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Appendix 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
A-1
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changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable
grace period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and
ample asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well-established access to a
range of financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
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Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1---High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
----------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
After purchase by the Funds, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Funds. Neither
event will require a sale of such security by the Funds. However, BSAM will
consider such event in its determination of whether the Funds should continue
to hold the security. To the extent that the ratings given by Moody's, S&P or
D&P may change as a result of changes in such organizations or their rating
systems, the Funds will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
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.
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,
B-1
<PAGE>
determined by BSAM to be of comparable quality to those rated obligations
which may be purchased by a Portfolio. Each Portfolio may purchase floating
and variable rate demand notes and bonds, which are obligations ordinarily
having stated maturities in excess of one year, but which permit the holder to
demand payment of principal at any time or at specified intervals.
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>
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
Prime Money Market Portfolio
CLASS Y SHARES
THE BEAR STEARNS FUNDS (the "Fund") is an open-end management investment com-
pany, known as a mutual fund. The Fund permits you to invest in separate port-
folios. By this Prospectus shares of the Prime Money Market Portfolio (the
"Portfolio"), a diversified no-load money market portfolio, are offered. The
Portfolio's investment objective is to seek to provide liquidity and current
income consistent with stability of principal. The Portfolio seeks to achieve
its objective by investing in a broad range of short-term instruments, includ-
ing obligations of the U.S. Government, bank and commercial obligations, and
repurchase agreements relating to such obligations.
By this Prospectus, the Portfolio is offering Class Y shares.
Bear Stearns Asset Management Inc. ("BSAM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the Portfolio's investment adviser.
BSAM is also referred to herein as the "Adviser." Bear Stearns Funds Manage-
ment Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies
Inc., is the Administrator of the Portfolio. Bear, Stearns & Co. Inc. ("Bear
Stearns"), an affiliate of BSAM, serves as the Portfolio's distributor. Bear
Stearns is also referred to herein as the "Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFER-
ENCE.
Part B (also known as the Statement of Additional Information), dated July 28,
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
(the "SEC") and is incorporated herein by reference. For a free copy, write to
the address or call one of the telephone numbers listed under "General Infor-
mation" 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 en-
dorsed by, any bank, and are not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board, or any other agency. The Port-
folio is subject to investment risks, including possible loss of principal.
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JULY 28, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Background and Expense Information......................................... 3
Financial Highlights....................................................... 4
Description of the Portfolio............................................... 5
Portfolio Instruments and Practices........................................ 6
Management of the Portfolio................................................ 8
How to Buy Shares.......................................................... 9
How to Redeem Shares....................................................... 11
Dividends, Distributions and Taxes......................................... 12
Performance Information.................................................... 13
General Information........................................................ 15
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Background and Expense Information
The Portfolio currently offers one class of shares, Class Y shares, which is
offered by this Prospectus. In the future, the Portfolio may offer other clas-
ses of shares. Investors may obtain information concerning the Portfolio by
calling Bear Stearns at 1-800-766-4111.
Expense Summary
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price).................................................................. None
Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of
the amount subject to charge)........................................... None
ANNUAL PORTFOLIO OPERATING EXPENSES (AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS)
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waivers)*...................................... 0%
12b-1 Fees.............................................................. None
Other Expenses (after expense reimbursement)*........................... 0.13%
-----
Total Portfolio Operating Expenses (after fee waivers and expense
reimbursements)*........................................................ 0.13%
=====
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 YEAR................................................................. $2
3 YEARS................................................................ $6
</TABLE>
- ------
*"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 Portfolio, extraordinary items, interest and taxes to the
extent Total Portfolio Operating Expenses exceed 0.20%. Without such waivers
and expense reimbursements which may be discontinued at any time upon notice
to shareholders, Advisory Fees stated above would be 0.20%. Other Expenses are
estimated to be 0.25% and Total Portfolio Operating Expenses would be 0.45%.
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
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolio and investors, the payment of which will
reduce investors' annual return. See "How to Redeem Shares." For a description
of the expense reimbursement or waiver arrangements in effect, see "Management
of the Fund."
3
<PAGE>
T H E B E A R S T E A R N S F U N D S
Prime Money Market Portfolio
Financial Highlights
- --------------------------------------------------------------------------------
The information in the table below covering the Portfolio's investment results
for the period 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
the Portfolio's Statement of Additional Information. Set forth below is per
share operating performance data for each share outstanding, total investment
return, ratios to average net assets and other supplemental data for the peri-
od. This information has been derived from information provided in the finan-
cial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 14, 1997*
THROUGH MARCH 31, 1998
----------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................. $ 1.00
Net investment income(1).............................. 0.0399
--------
Net increase in net assets resulting from operations.. 0.0399
--------
Dividends to shareholders from net investment income.. (0.0399)
--------
Net asset value, end of period........................ $ 1.00
========
Total investment return (2)(3)........................ 5.72%
========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)............. $121,460
Ratio of expenses to average net assets (1)(3)(4)..... 0.13%
Ratio of net investment income to average net assets
(1)(3)............................................... 5.58%
Decrease reflected in above expense ratio and net in-
vestment income due to waivers and related reimburse-
ments (3)............................................ 0.52%
</TABLE>
- ------
* Commencement of investment operations
(1) Reflects waivers and related reimbursements.
(2) Total investment return is calculated assuming a purchase of shares on the
first day and a sale of shares on the last day of the period and includes
reinvestment of dividends.
(3) Annualized
(4) Without the waiver of advisory fee and related reimbursement of certain
operating expenses, the annualized ratio of expenses to average net assets
for Prime Money Market Portfolio would have been 0.65% for the period July
14, 1997 through March 31, 1998.
Further information about performance is contained in the Portfolio's State-
ment of Additional Information and Annual Report, which may be obtained with-
out charge by writing to the address or calling one of the telephone numbers
listed under General Information.
4
<PAGE>
Description of the Portfolio
INVESTMENT OBJECTIVE
The Portfolio seeks to provide liquidity and current income consistent with
stability of principal. The Portfolio's investment objective cannot be changed
without approval by the holders of a majority as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), of the Portfolio's outstand-
ing voting shares. There can be no assurance that the Portfolio's investment
objective will be achieved.
MANAGEMENT POLICIES
The Portfolio seeks to maintain a net asset value of $1.00 per share, although
there is no assurance that it will be able to do so on a continuing basis. The
Portfolio intends to comply with all rules applicable to money market funds
under Rule 2a-7 of the 1940 Act. The Portfolio operates as a diversified in-
vestment portfolio. Certain securities held by the Portfolio may have remain-
ing maturities in excess of stated limitations discussed below if securities
provide for adjustments in their interest rates not less frequently than such
time limitations. The Portfolio will maintain a dollar-weighted average port-
folio maturity of 90 days or less.
In pursuing its investment objective, the Portfolio invests in a broad range
of short-term instruments, including obligations of the U.S. Government, bank
and commercial obligations, and repurchase agreements relating to such obliga-
tions. It may also invest in securities of foreign issuers. The Portfolio in-
vests only in securities that are payable in U.S. dollars and that have (or
pursuant to regulations adopted by the SEC will be deemed to have) remaining
maturities of 397 days or less at the date of purchase by the Portfolio.
The Portfolio invests in securities rated by the "Requisite NRSROs." "Requi-
site NRSROs" means (a) any two nationally recognized statistical rating orga-
nizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO
has issued such a rating at the time that the Portfolio acquires the security.
Currently, there are six NRSROs: Standard & Poor's, a division of The McGraw-
Hill Companies ("S&P"); Moody's Investors Service, Inc. ("Moody's"); Fitch In-
vestors Services, Inc.; Duff and Phelps, Inc.; IBCA Limited and its affiliate,
IBCA, Inc.; and Thomson Bankwatch. A discussion of the ratings categories of
the NRSROs is contained in the Appendix to the Statement of Additional Infor-
mation.
The Portfolio will limit its portfolio investments to securities that the
Board of Trustees determines present minimal credit risks and that are "Eligi-
ble Securities" at the time of acquisition by the Portfolio. The term Eligible
Securities includes securities rated by the Requisite NRSROs in one of the two
highest short-term rating categories, securities of issuers that have received
such rating with respect to other short-term debt securities and comparable
unrated securities.
The Portfolio generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. Government securities. In addi-
tion, the Portfolio may not invest more than 5% of its total assets in Eligi-
ble Securities that have not received the highest rating from the Requisite
NRSROs and comparable unrated securities ("Second Tier Securities") and may
not invest more than 1% of its total assets in the Second Tier Securities of
any one issuer. The Portfolio may invest more than 5% (but no more than 25%)
of the then-current value of the Portfolio's total assets in the securities of
a single issuer for a period of up to three business days, provided that (a)
the securities either are rated by the Requisite NRSROs in the highest short-
term rating category or are securities of issuers that have received such rat-
ing with respect to other short-term debt securities or are comparable unrated
securities, and (b) the Portfolio does not make more than one such investment
at any one time.
The Portfolio may purchase obligations of issuers in the banking industry,
such as commercial paper, notes, certificates of deposit, bankers acceptances
and time deposits and U.S. dollar-denominated instruments issued or supported
by the credit of U.S. or foreign banks or savings institutions having total
assets at the time of purchase in excess of $1 billion. The Portfolio may also
make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of its total assets in any one institution.
The Portfolio is managed by a team consisting of Jeffrey Bagaglio and Scott
Pavlak.
Mr. Bagaglio joined Bear Stearns Asset Management in 1994 and specializes in
portfolio management of short-term fixed income and separate account products.
Prior to this, he was a Senior Busi-
5
<PAGE>
ness Analyst at Dresdner Bank where he was responsible for foreign exchange
and interest rate derivative systems. Mr. Bagaglio's corporate treasury expe-
rience includes managing money market investments, revolving credit lines, and
purchasing and selling currencies in the foreign exchange markets. Mr.
Bagaglio holds a B.A. in Economics from Miami University, and an M.B.A. in Fi-
nance from the University of New Haven.
Mr. Pavlak joined Bear Stearns Asset Management in 1991 as a portfolio manager
and specializes in short-term and intermediate fixed income products. From
1987 to 1990, he was an officer at Beechwood Securities, where he managed pri-
vate portfolios for high-net-worth individuals. Mr. Pavlak received his B.S.
in Finance from Fairleigh Dickinson University and M.B.A. in Economics and Fi-
nance from New York University. He is a member of the Fixed Income Analysts
Society.
Portfolio Instruments and Practices
INVESTMENT STRATEGIES
Investment strategies that are available to the Portfolio are set forth below.
Additional information concerning certain of these strategies and their re-
lated risks is contained in the Appendix and Statement of Additional Informa-
tion.
U.S. GOVERNMENT OBLIGATIONS
The Portfolio may purchase obligations issued or guaranteed by the U.S. Trea-
sury (including STRIPS), U.S. Government agencies, or U.S. Government-spon-
sored enterprises.
REPURCHASE AGREEMENTS
The Portfolio may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed upon time
and price within one year from the date of acquisition ("repurchase agree-
ments").
REVERSE REPURCHASE AGREEMENTS
The Portfolio may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with the investment restrictions described
below. Pursuant to such agreements, the Portfolio would only sell portfolio
securities to financial institutions and agree to repurchase them at an agreed
upon date and price. The Portfolio would consider entering into reverse repur-
chase agreements to avoid otherwise selling securities during unfavorable mar-
ket conditions. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the price of
the securities the Portfolio is obligated to repurchase. The Portfolio may en-
gage in reverse repurchase agreements provided that the amount of the reverse
repurchase agreements and any other borrowings does not exceed one-third of
the value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings).
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Portfolio will generally not pay for
such securities or start earning interest on them until they are received. Se-
curities purchased on a when-issued basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of inter-
est rates. The Portfolio expects that commitments to purchase when-issued se-
curities will not exceed 25% of the value of its total assets absent unusual
market conditions. The Portfolio does not intend to purchase when-issued secu-
rities for speculative purposes but only in furtherance of its investment ob-
jectives.
ILLIQUID SECURITIES
The Portfolio will not knowingly invest more than 10% of the value of its to-
tal net assets in illiquid securities, including time deposits and repurchase
agreements having maturities longer than seven days. Securities that have
readily available market quotations are not deemed illiquid for purposes of
this limitation (irrespective of any legal or contractual restrictions on re-
sale).
FOREIGN SECURITIES
The Portfolio may invest in dollar-denominated securities of foreign issuers,
including obligations of foreign banks or foreign branches of U.S. banks. In-
vestments in foreign banks or foreign issuers present certain risks, including
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, the possible imposi-
tion of currency ex-
6
<PAGE>
change blockages or other foreign governmental laws or restrictions, and re-
duced availability of public information. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or
to other regulatory practices and requirements applicable to domestic issuers.
CERTAIN FUNDAMENTAL POLICIES
The policies described below are fundamental and cannot be changed as to the
Portfolio without approval by holders of a majority (as defined in the 1940
Act) of the Portfolio's outstanding voting shares. See "Investment Objective
and Management Policies--Investment Restrictions" in the Statement of Addi-
tional Information.
The Portfolio may not:
1. Borrow money, except that the Portfolio may (i) borrow money for tempo-
rary or emergency purposes (not for leveraging or investment) from banks,
or, subject to specific authorization by the SEC, from portfolios advised
by BSAM or an affiliate of BSAM, and (ii) engage in reverse repurchase
agreements, provided that (i) and (ii) in combination do not exceed one-
third of the value of the Portfolio's total assets (including the amount
borrowed) less liabilities (other than borrowings).
2. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of such purchase to be invested in the secu-
rities of one or more issuers conducting their principal business activi-
ties in the same industry, provided that there is no limitation with re-
spect to investments in U.S. Government securities or bank instruments is-
sued by domestic banks.
3. Make loans except that the Portfolio may (i) purchase or hold debt ob-
ligations in accordance with its investment objective and policies, (ii)
enter into repurchase agreements for securities, and (iii) subject to spe-
cific authorization by SEC, lend money to other portfolios advised by BSAM
or an affiliate of BSAM.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The Portfolio may not mortgage, pledge or hypothecate any assets except in
connection with permitted borrowings and reverse repurchase agreements and
then only in amounts not exceeding one-third of the value of the Portfolio's
total assets at the time of such borrowing. Additional investments will not be
made by the Portfolio when borrowings exceed 5% of the Portfolio's assets. The
Portfolio may invest up to 10% of the value of its net assets in repurchase
agreements having maturities longer than seven days and in other illiquid se-
curities. See "Investment Objective and Management Policies--Investment Re-
strictions" in the Statement of Additional Information.
RISK FACTORS
No investment is free from risk. Investing in the Portfolio will subject in-
vestors to certain risks which should be considered. Although the Portfolio
will attempt to maintain its net asset value at $1.00 per share, there can be
no assurance that it will achieve this goal. Neither BSFM nor its affiliates
guarantees that the Portfolio will be able to maintain its net asset value of
$1.00 per share. The Portfolio is subject to risks common to money market
funds, including credit risk and interest-rate risk. The Board of Trustees has
adopted procedures to ensure that the Portfolio invests in high-quality in-
struments.
DIVERSIFIED STATUS The Portfolio is classified as a "diversified" portfolio. A
"diversified" in- vestment company is required by the 1940 Act generally, with
respect to 75% of its total assets, to invest not more than 5% of such assets in
the securities of a single issuer and to hold not more than 10% of the
outstanding voting se- curities of a single issuer. In addition the Portfolio
intends to comply with the diversification requirements applicable to Money
Market Funds. 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 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 in- vested 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 securi-
7
<PAGE>
ties of such issuer, and (ii) not more than 25% of the value of its total as-
sets be invested in the securities of any one issuer (other than U.S. Govern-
ment securities or the securities of other regulated investment companies).
The Portfolio intends to comply with the more restrictive diversification re-
quirements applicable to money market funds, discussed above.
SIMULTANEOUS INVESTMENTS
Investment decisions for the 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 dis-
pose of, securities of the type in which the 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 the Portfolio
or the price paid or received by the Portfolio.
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 Portfolio is not negatively impacted by the Year 2000 Issue,
BSAM's corporate parent through its relevant subsidiaries or its affiliates
commenced in 1996, and have made significant progress on, a coordinated effort
to identify and correct any Year 2000 Issues that could potentially arise in
internally developed computer systems and to either obtain representations from
or make other inquiries of those parties who provide computer applications or
services that are computer system dependent that BSAM has determined are
critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolio is dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolio.
Management of the Portfolio
BOARD OF TRUSTEES
The Portfolio's business affairs are managed under the general supervision of
its Board of Trustees. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Trustee.
INVESTMENT ADVISER
The Portfolio's investment adviser is BSAM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc., which is located at 575 Lexington Avenue, New
York, New York 10022. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment ad-
viser 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 March 31, 1998 of over $8.5 billion.
BSAM supervises and assists in the overall management of the Portfolio's af-
fairs under an Investment Advisory Agreement between BSAM and the Fund, sub-
ject to the overall authority of the Fund's Board of Trustees in accordance
with Massachusetts law.
BSAM may render services through its own employees or the employees of one or
more affiliated companies that are qualified to act as an investment adviser
to the Portfolio under applicable laws and are under the common control of
Bear Stearns as long as all such persons are functioning as part of an orga-
nized group of persons, and such organized group of persons, with respect to
the services used by the Portfolio, is managed at all times by authorized of-
ficers of BSAM. BSAM will be as fully responsible to the Fund for the acts and
omissions of such persons as it is for its own acts and omissions. The Portfo-
lio pays BSAM a monthly advisory fee at an annual rate equal to 0.20% of the
Portfolio's average daily net assets.
ADMINISTRATOR
BSFM serves as the Portfolio's administrator. The Portfolio pays BSFM a
monthly administration fee at the annual rate of 0.05 of 1% of its average
daily net assets. Under the terms of an Administration Agreement with the
Portfolio, BSFM generally supervises all aspects of the operation of the Port-
folio, subject to the overall authority of the Fund's Board of Trustees in ac-
cordance with Massachusetts law. BSFM offers administrative services to open-
end and closed-end investment funds and other managed pool investment vehicles
with net assets at March 31, 1998 of over $3 billion.
Under the terms of an Administrative Services Agreement with the Portfolio,
PFPC Inc. provides certain administrative services to the Portfolio. For pro-
viding these services, the Portfolio has agreed to pay PFPC Inc. an annual
fee, as follows: 0.075 of 1% per annum of the first $150 million of the Port-
folio's average daily net assets, 0.04 of 1% per annum of the next $150 mil-
lion up to $300 mil- lion of the Portfolio's average daily net assets, 0.02 of
1% of the next $300 million up to $600 million of the Portfolio's average
daily net assets, 0.0125 of 1% of per annum of average daily net assets in ex-
cess of $600 million. The administration fees payable to PFPC Inc. are subject
to a monthly minimum fee of $6,250.
8
<PAGE>
Bear Stearns has agreed to permit the Portfolio to use the name "Bear Stearns"
or derivatives thereof as part of the Portfolio name for as long as the In-
vestment Advisory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the Portfolio's principal underwriter and distributor of the Portfolio's
shares pursuant to an agreement which is renewable annually.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
EXPENSE LIMITATION
From time to time, BSAM may waive receipt of its fees and/or voluntarily as-
sume certain Portfolio expenses, which would have the effect of lowering the
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. The Portfolio will not pay
BSAM at a later time for any amounts it may waive, nor will the Portfolio re-
imburse BSAM for any amounts it may assume. From time to time, PFPC Inc. may
voluntarily waive a portion of its fee.
BSAM has voluntarily undertaken to waive its investment advisory fee and as-
sume certain expenses of the Portfolio, extraordinary items, interest and
taxes to the extent Total Portfolio Operating Expenses exceed 0.20% of Class
Y's average daily net assets. Such waivers and expense reimbursement may be
discontinued at any time upon 60 days notice to shareholders.
How to Buy Shares
GENERAL
The minimum initial investment in Class Y shares is $3,000,000; there is no
minimum for subsequent investments. Shares of the Portfolio may be purchased
by wire only. Shares are sold at the net asset value next determined after re-
ceipt of a purchase order in the manner described below. Purchase orders are
accepted on any day on which the New York Stock Exchange and the Federal Re-
serve Bank of New York are open ("Portfolio Business Day") between the hours
of 9:00 a.m. and 5:00 p.m. (Eastern Time). The Portfolio does not determine
net asset value, and purchase orders are not accepted, on the days those in-
stitutions observe the following holidays: New Year's Day, Martin Luther King,
Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas.
PURCHASE PROCEDURES
Purchase orders of the Portfolio's shares may be made through a brokerage ac-
count maintained with Bear Stearns, the Transfer Agent, or through certain in-
vestment dealers who are members of the National Association of Securities
Dealers, Inc., who have sales agreements with Bear Stearns (an "Authorized
Dealer").
To purchase shares of the Portfolio by Federal Reserve wire, call the Transfer
Agent, PFPC Inc., at 1-800-447-1139 or call your account executive. If the
Transfer Agent receives a firm indication of the approximate size of the in-
tended investment before 2:30 p.m. (Eastern Time) and the completed purchase
order before 3:00 p.m. (Eastern Time), and the Custodian receives Federal
Funds the same day, purchases of shares of the Portfolio begin to earn divi-
dends that day. Completed orders received after 3:00 p.m. begin to earn divi-
dends the next Portfolio Business Day upon receipt of Federal Funds.
To allow the Adviser to manage the Portfolio most effectively, investors are
encouraged to execute as many trades as possible before 2:30 p.m. To protect
the Portfolio's performance and shareholders, the Adviser discourages frequent
trading in response to short-term market fluctuations. The Portfolio reserves
the right to refuse any investment that, in its sole discretion, would disrupt
the Portfolio's management.
9
<PAGE>
If the Public Securities Association recommends that the government securities
markets close early, the Portfolio may advance the time at which the Transfer
Agent must receive notification of orders for purposes of determining eligi-
bility for dividends on that day. Investors who notify the Transfer Agent af-
ter the advanced time become entitled to dividends on the following Portfolio
Business Day.
If an investor does not remit Federal Funds, such payment must be converted
into Federal Funds. This usually occurs within one Portfolio Business Day of
receipt of a bank wire. Prior to receipt of Federal Funds, the investor's mon-
ies will not be invested.
The following procedure will help assure prompt receipt of your Federal Funds
wire:
A. Telephone the Transfer Agent, PFPC Inc., toll free at 1-800-447-1139
and provide the following information:
YOUR NAME
ADDRESS
TELEPHONE NUMBER
TAXPAYER ID NUMBER
THE AMOUNT BEING WIRED
THE IDENTITY OF THE BANK WIRING FUNDS
You will then be provided with a Portfolio account number. (Investors with ex-
isting accounts must also notify the Portfolio before wiring funds.)
B. Instruct your bank to wire the specified amount to the Portfolio as
follows:
PNC BANK, N.A.
ABA #031000053
CREDIT ACCOUNT NUMBER: #86-1030-3398
FROM: (NAME OF INVESTOR)
ACCOUNT NUMBER: (INVESTOR'S ACCOUNT NUMBER WITH THE PORTFOLIO)
FOR PURCHASE OF: PRIME MONEY MARKET PORTFOLIO
AMOUNT: (AMOUNT TO BE INVESTED)
An investor may open an account when placing an initial order by telephone,
provided the investor thereafter submits an Account Information Form by mail.
An Account Information Form is included with this Prospectus. PFPC Inc. will
not process redemptions until it receives a fully completed and signed Account
Information Form.
The Fund and the Transfer Agent each reserve the right to reject any purchase
order for any reason.
SHARE CERTIFICATES. The Transfer Agent maintains a share account for each
shareholder. The Fund does not issue share certificates.
ACCOUNT STATEMENTS. Monthly account statements are sent to investors to report
transactions such as purchases and redemptions as well as dividends paid dur-
ing the month.
MINIMUM INVESTMENT REQUIRED. The minimum initial investment in the Portfolio
is $3,000,000. There is no minimum subsequent investment. The Fund reserves
the right to waive the minimum investment requirement.
COMPUTATION OF NET ASSET VALUE. Shares of the Portfolio are sold on a continu-
ous basis. Net asset value per share is determined as of 3:00 p.m., New York
time on each Portfolio Business Day and at such times as may be appropriate or
necessary. The net asset value per share of the Portfolio is computed by di-
viding the value of the Portfolio's net assets (i.e., the value of its assets
less liabilities) by the total number of shares outstanding. The Portfolio
seeks to maintain a $1.00 net asset value; therefore the Portfolio uses the
"Amortized Cost Method" to value individual holdings. For further information
regarding the methods employed in valuing the Portfolio's investments, see
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
10
<PAGE>
Treasury regulations require that investors provide a certified Taxpayer Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to backup withholding and a penalty imposed by
the Internal Revenue Service (the "IRS").
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request. Holders of shares of the Portfolio may redeem
their shares without charge at the net asset value next determined after the
Portfolio receives the redemption request. Redemption requests must be re-
ceived in proper form and can be made by telephone request or wire request on
any Portfolio Business Day between the hours of 9:00 a.m. and 5:00 p.m. (East-
ern Time).
REDEMPTION PROCEDURES
Clients with a Bear Stearns brokerage account may submit redemption requests
to their account executives or Authorized Dealers in person or by telephone,
mail or wire. Bear Stearns account executives or Authorized Dealers are re-
sponsible for promptly forwarding redemption requests to the Transfer Agent.
REDEMPTION DIRECTLY THROUGH THE TRANSFER AGENT
BY TELEPHONE. Provided your account is maintained directly with the Transfer
Agent, redemption requests may be made by telephoning the Transfer Agent, PFPC
Inc., at 1-800-447-1139. Shareholders must provide the Transfer Agent with the
shareholder's account number, the exact name in which the shares are regis-
tered and some additional form of identification such as a password. A redemp-
tion by telephone may be made only if the telephone redemption authorization
has been completed on the Account Information Form included with this Prospec-
tus. In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, the Transfer Agent will follow reasonable procedures to confirm
that such instructions are genuine. If such procedures are followed, neither
the Transfer Agent nor the Portfolio will be liable for any losses due to un-
authorized or fraudulent redemption requests.
WRITTEN REQUESTS. If it is inconvenient to make redemptions by telephone, re-
demption requests may be mailed or hand-delivered to the Transfer Agent.
Redemption requests may be made by writing to the Prime Money Market Portfo-
lio, c/o PFPC Inc., P.O. Box 8960, Wilmington, Delaware 19899-8960. Written
requests must be in proper form. The shareholder will need to provide the ex-
act name in which the shares are registered, the Portfolio name, account num-
ber, and the share or dollar amount requested.
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 share-
holder is a corporation, partnership, trust or fiduciary, signature(s) must be
guaranteed by any eligible guarantor institution. A signature guarantee is de-
signed to protect the shareholders and the Portfolio against fraudulent trans-
actions by unauthorized persons. When a signature guarantee is required, each
signature must be guaranteed. A signature guarantee may be obtained from a do-
mestic bank or trust company, broker-dealer, clearing agency or savings asso-
ciation that are participants in a medallion program recognized by the securi-
ties transfer association. The three recognized medallion programs are Securi-
ties Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Pro-
gram (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program
(MSP). Signature guarantees that are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion.
The Transfer Agent may request additional documentation to establish that a
redemption request has been authorized properly. A redemption request will not
be considered to have been received in proper form until such additional docu-
mentation has been submitted to the Transfer Agent.
11
<PAGE>
<TABLE>
<CAPTION>
FIRM INDICATION OF COMPLETED
REDEMPTION REQUEST REDEMPTION
AND APPROXIMATE ORDER REDEMPTION
SIZE OF REDEMPTION RECEIVED PROCEEDS DIVIDENDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Should be received by By 3:00 p.m. Wired same Portfolio Not earned on day
2:30 p.m. Eastern Time Eastern Time business day requested
After 3:00 p.m. Wired next Portfolio Earned on day
Eastern Time business day requested
</TABLE>
If the Public Securities Association recommends that the government securities
markets close early, the Portfolio may advance the time at which the Transfer
Agent must receive notification of orders for purposes of determining eligi-
bility for dividends on that day. If the Transfer Agent receives notification
of a redemption request after the advanced time, it ordinarily will wire re-
demption proceeds on the next Portfolio Business Day.
Due to the cost to the Fund of maintaining smaller accounts, the Fund reserves
the right to redeem, upon 60 days' written notice, all shares in an account
with an aggregate net asset value of less than $500,000 unless an investment
is made to restore the minimum value. The Fund will not redeem accounts that
fall below this amount solely as a result of a reduction in the net asset
value of the Portfolio's shares.
PFPC Inc. may request additional documentation to establish that a redemption
request has been authorized properly. A redemption request will not be consid-
ered to have been received in proper form until such additional documentation
has been submitted to PFPC Inc.
The Portfolio reserves the right to wire redemption proceeds within seven days
after receiving the redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect the Portfolio. In addition, the Portfo-
lio may redeem shares involuntarily or suspend the right of redemption as per-
mitted under the 1940 Act, or under certain special circumstances described in
the Statement of Additional Information under "Additional Purchase and Redemp-
tion Information."
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional Portfolio shares at
net asset value, unless payment in cash is requested. The Portfolio's net in-
vestment income is declared daily as a dividend on shares held of record at
the close of business on the date of declaration. Shares begin accruing divi-
dends on the day the purchase order for the shares is effective and continue
to accrue dividends through the day before such shares are redeemed. All ex-
penses are accrued daily and deducted before declaration of dividends to in-
vestors. Cash dividends are paid monthly by check or wire transfer at the end
of the month or after a redemption of all of an investor's shares.
Dividends are declared daily and paid monthly, following the close of the last
Portfolio Business Day of the month. Shares purchased by wire before 3:00 p.m.
(Eastern Time) begin earning dividends that day. The election to reinvest div-
idends and distributions or receive them in cash may be changed at any time
upon written notice to the Transfer Agent. All dividends and other distribu-
tions are treated in the same manner for federal income tax purposes whether
received in cash or reinvested in shares of the Portfolio. If no election is
made, all dividends and distributions will be reinvested.
Net realized short-term capital gains, if any, will be distributed whenever
the Trustees determine that such distributions would be in the best interest
of the shareholders, which would be at least once per year. The Portfolio 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 provi-
sions of the 1940 Act. The Portfolio does not anticipate that it would realize
any long-term capital gains, but should they occur, they also will be distrib-
uted at least once every 12 months.
Dividends, together with distributions of net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of market discount bonds paid by the Portfolio to a foreign investor
generally are subject to U.S. withholding tax at the rate of 30%, unless the
foreign investor claims the benefit of a lower rate specified in an applicable
tax treaty. Such distributions may also be subject to backup withholding, as
described below, unless the foreign investor certifies his non-U.S. residency
status.
12
<PAGE>
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 distribu-
tions from securities gains, if any, paid during the year.
Generally, the Portfolio must withhold ("backup withholding") and remit to the
U.S. Treasury 31% of dividends and 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 that the TIN furnished in connection with opening an account is
correct and that such shareholder has not received notice from the IRS of be-
ing subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a federal income tax return. Further-
more, the IRS may direct the Portfolio to institute backup withholding if the
IRS determines that 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 the Portfolio is not expected to have any federal tax liability, invest-
ors should expect to be subject to federal, state and local taxes in respect
of their investment in Portfolio shares. The Portfolio intends to qualify as a
regulated investment company for federal income tax purposes if such qualifi-
cation is in the best interests of its shareholders. Such qualification re-
lieves the Portfolio of any liability for federal income tax to the extent its
earnings are distributed in accordance with applicable provisions of the Code.
However, the Portfolio may be subject to a nondeductible 4% excise tax, mea-
sured with respect to certain undistributed amounts of taxable investment in-
come and capital gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in the Portfolio.
Performance Information
From time to time, the "yields" and "effective yields" may be quoted in adver-
tisements or in reports to shareholders. The "yield" quoted in advertisements
for shares refers to the income generated by an investment in such shares over
a specific period (such as a seven-day period) identified in the advertise-
ment. This income is then "annualized"; that is, the amount of income gener-
ated by the investment during that period is assumed to be generated each such
period over a 52-week or one-year period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an ini-
tial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable 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 the Portfolio's actual total return for the applicable peri-
od.
Total return is computed on a per-share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percent-
age rate, which is calculated by combining the income and principal changes
for a specified period and dividing them 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.
The Portfolio's yield figures represent past performance, will fluctuate and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio
13
<PAGE>
quality and maturity, type of investment and operating expenses. Any fees
charged by institutional investors directly to their customers in connection
with investments in Portfolio shares are not reflected in the Portfolio's ex-
penses or yields; and, such fees, if charged, would reduce the actual return
received by customers on their investments. The methods used to compute the
Portfolio's yields are described in more detail in the Statement of Additional
Information. Investors may call 1-800-447-1139 to obtain current yield infor-
mation.
The Portfolio performance may be compared to those of other mutual funds with
similar objectives, to other relevant indices, or to rankings prepared by in-
dependent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in na-
tional financial publications such as Morningstar, Inc., Barron's, IBC Money
Fund Report(R), The Wall Street Journal and The New York Times; reports pre-
pared by Lipper Analytical Services, Inc., and publications of a local or re-
gional nature.
14
<PAGE>
General Information
The Fund was organized as an unincorporated 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. The Fund commenced op-
erations on or about April 3, 1995, in connection with the offer of shares of
certain of its other portfolios. The Fund is authorized to issue an unlimited
number of shares of beneficial interest, par value $.001 per share. The Port-
folio's shares are classified into two Classes--Class A and Class Y. Each
share has one vote and shareholders will vote in the aggregate and not by
class, except as otherwise required by law. As of this date, only Class Y
Shares are being offered.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain matters
under the 1940 Act, and for other purposes, and a shareholder of one portfolio
is not deemed to be a shareholder of any other portfolio. As described below,
for certain matters Fund shareholders vote together as a group; as to others
they vote separately by portfolio. By this Prospectus, Class Y shares of the
Portfolio are being offered. From time to time, other portfolios and related
classes of shares may be established and sold pursuant to other offering docu-
ments. See "General Information."
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Portfolio and requires that notice of such disclaimer be given in each agree-
ment, obligation or instrument entered into or executed by the Fund or a
Trustee. The Trust Agreement provides for indemnification from the Portfolio's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Portfolio. Thus, the risk of a shareholder incur-
ring financial loss on account of a shareholder liability is limited to cir-
cumstances in which the Portfolio itself would be unable to meet its obliga-
tions, a possibility which management believes is remote. Upon payment of any
liability incurred by the Portfolio, the shareholder paying such liability
will be entitled to reimbursement from the general assets of the Portfolio.
The Fund's Trustees intend to conduct the operations of the Portfolio in a way
that would avoid, as far as possible, ultimate liability of the shareholders
for liabilities of the Portfolio. As discussed under "Management of the Fund"
in the Portfolio's Statement of Additional Information, the Portfolio ordinar-
ily 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 ten portfolios of
shares. All consideration received by the Fund for shares of one of the port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) 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 Fund
has 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 submit-
ted 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 Fund, will not be deemed to have been effectively acted upon un-
less 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 portfo-
lio shall be deemed to be affected by a matter unless it is clear that the in-
terests 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 se-
lection of independent accountants and the election of Trustees from the sepa-
rate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: Prime Money Market Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-
8960, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
15
<PAGE>
Appendix
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, the Portfolio may
employ, among others, the following investment techniques which may involve
certain risks.
BORROWING MONEY
As a fundamental policy, the Portfolio is permitted to borrow 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.
However, the Portfolio currently intends to borrow money only for temporary or
emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market value, less liabilities (not including the amount borrowed) at the
time the borrowing is made. While borrowings exceed 5% of the Portfolio's to-
tal assets, the Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
MONEY MARKET INSTRUMENTS
The Portfolio may invest, in the circumstances described under "Description of
the Fund--Management Policies," in the following types of money market instru-
ments, each of which at the time of purchase must have or be deemed to have
under rules of the SEC remaining maturities of 397 days or less.
U.S. GOVERNMENT SECURITIES
The Portfolio may purchase securities issued or guaranteed by the U.S. Govern-
ment, its agencies, or Government-sponsored enterprises, which include U.S.
Treasury securities 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. Some obligations
issued or guaranteed by U.S. Government agencies and Government-sponsored en-
terprises, 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 is-
suer to borrow from the U.S. 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 Government-spon-
sored enterprise; and others, such as those issued by the Student Loan Market-
ing Association, only by the credit of the agency or Government-sponsored en-
terprise. 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 finan-
cial support to such U.S. Government agencies or Government-sponsored enter-
prises, no assurance can be given that it will always do so, since it is not
so obligated by law.
Securities issued or guaranteed by the U.S. Government, its agencies or Gov-
ernment-sponsored enterprises have historically involved little risk of loss
of principal if held to maturity. However, due to fluctuations in interest
rates, the market value of the securities may vary during the period an in-
vestor owns shares of the Portfolio.
U.S. TREASURY STRIPS
The Portfolio may invest in separately traded principal and interest compo-
nents of securities backed by the full faith and credit of the U.S. Treasury.
The principal and interest components of U.S. Treasury bonds with remaining
maturities of longer than ten years are eligible to be traded independently
under the Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program. Under the STRIPS program, the principal and interest com-
ponents are separately issued by the U.S. Treasury at the request of deposi-
tory financial institutions, which then trade the component parts separately.
Under the stripped bond rules of the Code, investments by the Portfolio in
STRIPS will result in the accrual of interest income on such investments in
advance of the receipt of the cash corresponding to such income. The interest
component of STRIPS may be more volatile than that of U.S. Treasury bills with
comparable maturities. In accordance with Rule 2a-7, the Portfolio's invest-
ments in STRIPS are limited to those with maturity components not exceeding
397 days.
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which the Portfolio may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at
predesignated periods. Interest on a floating rate obligation is adjusted
when-
A-1
<PAGE>
ever there is a change in the market rate of interest on which the interest
rate payable is based. Variable and floating rate obligations are less effec-
tive than fixed rate instruments at locking in a particular yield. Such obli-
gations may fluctuate in value in response to interest rate changes if there
is a delay between changes in market interest rates and the interest reset
date for the obligation. The Portfolio will take demand or reset features into
consideration in determining the average portfolio duration of the Fund and
the effective maturity of individual securities.
BANK OBLIGATIONS
The Portfolio may invest in bank obligations, including certificates of depos-
it, 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 subsidi-
aries of domestic banks, and domestic and foreign branches of foreign banks,
the 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 ob-
ligations of U.S. domestic issuers. Such risks include possible future politi-
cal 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 restric-
tions which might adversely affect the payment of principal and interest on
these securities and the possible seizure or nationalization of foreign depos-
its.
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 the Portfolio will not benefit from insurance from the Bank In-
surance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio will not invest more than
10% 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 unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an under-
lying debt instrument, subject to an obligation of the seller to repurchase,
and the Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. Certain costs may be incurred by the Portfo-
lio in connection with the sale of the securities if the seller does not re-
purchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the securi-
ties, realization on the securities by the Portfolio may be delayed or limit-
ed.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs.
INVESTMENT COMPANY SECURITIES
The Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, the Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Portfolio's total assets with re-
spect to any one investment company and (iii) 10% of the Portfolio's total as-
sets in the aggregate. Investments in the securities of other investment com-
panies will involve duplication of advisory fees and certain other expenses.
ILLIQUID SECURITIES
The Portfolio may invest up to 10% of the value of its net assets in securi-
ties as to which a liquid trading market does not exist, provided such invest-
ments are consistent with the Portfolio's investment objective. Such securi-
ties may include securities that are not readily marketable, such as certain
securities that are subject to legal or contractual restrictions on resale and
repurchase agreements that have a term of more than seven days. As to these
securities, the Portfolio is subject to a
A-2
<PAGE>
risk that should the Portfolio desire to sell them when a ready buyer is not
available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
The Portfolio may invest in commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper"). The
Portfolio may also purchase securities that are not registered under the Secu-
rities Act of 1933, as amended, but which can be sold to qualified institu-
tional buyers in accordance with Rule 144A under that Act ("Rule 144A securi-
ties"). Section 4(2) paper is restricted as to disposition under the federal
securities laws and generally is sold to institutional investors such as the
Portfolio that agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other institu-
tional investors such as the Portfolio through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in Section 4(2) pa-
per or Rule 144A securities is not determined to be liquid, that investment
will be included within the percentage limitation on investment in illiquid
securities.
A-3
<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
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
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 PRIME MONEY MARKET PORTFOLIOOS
PROSPECTUS AND IN THE PRIME MONEY MARKET PORTFOLIOOS OFFICIAL SALES LITERATURE
IN CONNECTION WITH THE OFFER OF PRIME MONEY MARKET PORTFOLIOOS SHARES, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND. THE PRIME MONEY MARKET PORTFOLIOOS
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
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JULY 28, 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 Total Return
Bond Portfolio (the "Bond 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. (Bond 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. (Bond 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. (Bond 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 Bond Portfolio will
invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Bond 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. (Bond 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 Bond Portfolio. Neither event
will require the sale of such securities by the Bond Portfolio, but BSAM will
consider such event in determining whether the Bond 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 Bond
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,
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<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. (Equity Portfolios) If an Equity
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 Equity
Portfolio in an amount at least equal to the value of the Equity 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 Equity Portfolio's commitment with respect to the
contract.
B-7
<PAGE>
At or before the maturity of a forward contract, the Equity 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 Equity Portfolio will obtain,
on the same maturity date, the same amount of the currency which it is obligated
to deliver. If the Equity Portfolio retains the portfolio security and engages
in an offsetting transaction, such Equity 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 Equity 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 Equity 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 Equity
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 Equity 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, an Equity 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 Equity 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 March 31, 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 Bond 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 Bond Portfolio has
agreed to pay BSAM a monthly fee at the annual rate of 0.45 of 1% of the value
of the Bond 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 Bond 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 Bond 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 Bond Portfolio. In addition, BSAM reimbursed
$161,196, $86,666 and $280,261 for Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond 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 Bond 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 Bond 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 Bond 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 Bond
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 Bond 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
Bond 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 Total Return Bond 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 Bond 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 Total Return Bond 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 Bond 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 Total Return Bond 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>
Total Return Bond 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 Bond Portfolio (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 B shares or Class C shares of
B-16
<PAGE>
the Bond 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."
B-17
<PAGE>
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 Bond
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 Bond 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 Bond 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 Bond 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 Bond 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 Bond 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
====== =======
BOND 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
B-18
<PAGE>
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,
B-19
<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 Bond 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 Bond
B-20
<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
B-22
<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.
B-23
<PAGE>
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
B-24
<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).
B-25
<PAGE>
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. Bond 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 Bond 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. Bond
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 Bond 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 Bond 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 1.60% and 5.05%,
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 Bond 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 Bond
Portfolio is computed pursuant to a formula which operates as follows: The
amount of the Bond 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 Bond 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 Bond 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 Bond 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 December 26, 1997, 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. 19.0%
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. 15.2%
FBO 051-35974-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 8.7%
FBO 039-46545-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 8.6%
FBO 041-43773-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 8.6%
FBO 822-00772-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.2%
FBO 520-66907-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.2%
FBO 520-66906-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 8.6%
FBO 220-81425-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Southwest Securities Inc. FBO 8.5%
Marilyn A. Mayer
Acct. 54135371
P.O. Box 509002
Dallas, TX 75250
Percent of Large Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 6.7%
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. 10.1%
FBO 049-40734-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-33
<PAGE>
Bear, Stearns Securities Corp. 5.2%
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. 5.5%
FBO 051-36492-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
EAMCO 13.5%
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. 5.6%
FBO 042-13302-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
Mainstreet Trust Company 5.4%
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. 6.0%
FBO 984- 13624-25
1 Metrotech Center North
Brooklyn, NY 01201-3859
A G Edwards Sons Inc. C F 5.7%
Jagdish M. Davda
Rollover IRA Account
1118 Strathaven Dr. H
Worthington OH 43085-2986
Bear Stearns Securities Corp. 9.2%
FBO 486-99223-12
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 22.8%
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 Total Return
Bond Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 29.3%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.6%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total Return
Bond Portfolio
Name and Address Class B Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 10.2%
FBO 037-12362-17
1 Metrotech Center North
Brooklyn, NY 01201-3859
Bruce E. Brizzi 60.2%
and Pamela J. Brizzi
JT Ten Wros
131 Oristmill LN
Zeliehople, PA 16063
Bear Stearns Securities Corp. 20.2%
FBO 559-02898-14
1 Metrotech Center North
Brooklyn, NY 01201-3859
Bear Stearns Securities Corp. 9.2%
FBO 486-99223-12
1 Metrotech Center North
Brooklyn, NY 01201-3859
Percent of Total Return
Bond Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 12.8%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-35
<PAGE>
Bear, Stearns Securities Corp. 8.1%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.7%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.6%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total Return
Bond Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 12.0%
FBO 049- 40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 11.0%
FBO 051-98474-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.2%
FBO 046-03216-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 6.2%
FBO 049-40716-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 9.2%
FBO 051-35282-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 14.6%
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.
B-37
<PAGE>
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.
B-38
<PAGE>
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.
B-39
<PAGE>
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.
B-40
<PAGE>
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.
B-41
<PAGE>
THE BEAR STEARNS FUNDS
INTERNATIONAL EQUITY PORTFOLIO
CLASS A, B, C AND Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
July 28, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1998 of the International Equity Portfolio (the
"Portfolio") of The Bear Stearns Funds (the "Fund"), as each may be revised from
time to time. To obtain a free copy of such Prospectus, please write to the Fund
at PFPC Inc. ("PFPC"), Attention: The International Equity 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 the Portfolio's
investment adviser. Marvin & Palmer Associates, Inc. (the "Sub-Adviser") has
been engaged to provide investment advisory services, including portfolio
management, to the Portfolio subject to the supervision of BSAM. BSAM and the
Sub-Adviser are collectively referred to herein as the "Advisers."
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............................. B-2
Management of the Fund................................................... B-22
Management Arrangements.................................................. B-25
Purchase and Redemption of Shares........................................ B-31
Determination of Net Asset Value......................................... B-33
Dividends, Distributions and Taxes....................................... B-34
Portfolio Transactions................................................... B-40
Performance Information.................................................. B-41
Code of Ethics........................................................... B-41
Information About the Fund............................................... B-42
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors......................................... B-43
FINANCIAL STATEMENTS..................................................... B-43
-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
Portfolio."
Portfolio Securities
Convertible Securities. The Portfolio may invest in convertible
securities, including debt securities and preferred stock of an issuer
convertible at a stated exchange rate into common stock of the issuer.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
When the market price of the common stock underlying a convertible security
exceeds the conversion price, however, the convertible security tends to reflect
the market price of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not decline in price to the same
extent as the underlying common stock. Convertible securities rank senior to
common stocks in an issuer's capital structure and consequently entail less risk
than the issuer's common stock. In evaluating a convertible security, The
convertible securities in which the Portfolio may invest are subject to the same
rating criteria as the Portfolio's investments in non-convertible debt
securities. Convertible debt securities are equity investments for purposes of
the Portfolio's investment policies.
Warrants and Stock Purchase Rights. The Portfolio may invest up to 5%
of its net assets, calculated at the time of purchase, in warrants or rights
(other than those acquired in units or attached to other securities) which
entitle the holder to buy equity securities at a specific price for a specific
period of time. The Portfolio will invest in warrants and rights only if such
equity securities are deemed appropriate by the Advisers for investment by the
Portfolio. Warrants and rights have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
Foreign Securities. The Portfolio may invest in securities issued by
foreign companies, foreign branches of U.S. banks, foreign banks, or other
foreign issuers, including sponsored and unsponsored American Depositing
Receipts ("ADRs"), Global Depositing Receipts ("GDRs") and European Depository
Receipts ("EDRs") and securities purchased in foreign securities exchanges.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, the Portfolio's investments in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. The Portfolio may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods
of time. They 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, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and
-2-
<PAGE>
liquidity in most foreign securities markets are less than in the United States
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although the Portfolio endeavors to achieve the most favorable net results on
its portfolio transactions. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, dealers and listed and
unlisted companies than in the United States.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of the Portfolio's assets are uninvested and no
return is earned on such assets. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio securities or, if
the Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Portfolio's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The Portfolio may invest in foreign securities which take the form of
sponsored and unsponsored ADRs, GDRs, EDRs or other similar instruments
representing securities of foreign issuers (collectively "Depository Receipts").
An ADR is a negotiable receipt, usually issued by a U.S. bank, that evidences
ownership of a specified number of foreign securities on deposit with a U.S.
depository and entities the shareholder to all dividends and capital gains of
the underlying securities. ADRs are traded on domestic exchanges or in the U.S.
over-the-counter market and, generally, are in registered form. EDRs and GDRs
are receipts evidencing an arrangement with a non-U.S. bank similar to that for
ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs
are not necessarily quoted in the same currency as the underlying security.
ADRs are classified as either "unsponsored" or "sponsored." With
sponsored ADRs, the issuer of the underlying foreign security and the depository
enter into a deposit agreement, which sets out the rights and responsibilities
of the issuer, the depository and the ADR holder. Under the terms of most
sponsored arrangements, depositaries agree to distribute notices of shareholder
meetings and voting instructions, thereby ensuring that ADR holders will be able
to exercise voting rights through the depositary with respect to deposited
securities. In addition, the depositary usually agrees to provide shareholder
communications and other information to the ADR holder at the request of the
issuer of the deposited securities. With an unsponsored ADR, there is no
agreement between the depositary and the issuer and the depositary is usually
under no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of deposited securities. With regard to unsponsored ADRs held
by the Portfolio, there may be an increased possibility that the Portfolio would
not become aware of or be able to respond to corporate actions such as stock
splits or rights offerings in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
The Portfolio may invest in emerging market countries (as defined in
the Prospectus). Political and economic structures in many emerging market
countries may be undergoing significant evolution and rapid development, and
emerging market countries may lack the social, political and economic stability
characteristic of more developed countries. Certain emerging market countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the
-3-
<PAGE>
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. See "Investing in Emerging Market Countries,"
below.
The Portfolio may invest in securities quoted or denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community from time to time to
reflect changes in relative values of the underlying currencies. In addition,
the Portfolio may invest in securities quoted or denominated in other currency
"baskets."
Foreign Government Securities. The Portfolio may invest in debt
obligations of foreign governments and governmental agencies, including those of
emerging market countries. Investment in sovereign debt obligations involves
special risks not present in debt obligations of corporate issuers. The issuer
of the debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt, and the Portfolio may have limited
recourse in the event of a default. Periods of economic uncertainty may result
in the volatile sovereign debt market prices. A sovereign debtor's willingness
or ability to repay principal and pay interest in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign currency reserves, the availability of sufficient foreign exchange on
the date a payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy toward international lenders
and the political constraints to which a sovereign debtor may be subject.
Certain emerging market governments that issue lower quality debt
securities are among the largest debtors to commercial banks, foreign
governments and supranational organizations such as the World Bank, and may be
unwilling or unable to make repayments as they become due. Lower quality debt
securities are generally unsecured and may be subordinated to the claims of
other creditors. Accordingly, the risk of loss due to default by the issuer is
significantly greater for the holders of lower quality securities.
Emerging Market Securities. The Portfolio may invest in the securities
of issuers located in emerging market countries. "Emerging market countries" are
countries that are considered to be emerging or developing by the World Bank,
the International Finance Corporation, or the United Nations and its
authorities. A company is considered to be an emerging market company if (i) its
securities are principally traded in the capital markets of an emerging market
country; (ii) it derives at least 50% of its total revenue from either goods
produced or services rendered in emerging market countries or from sales made in
emerging market countries, regardless of where the securities of such companies
are principally traded; (iii) it maintains 50% or more of its assets in one or
more emerging market countries; or (iv) it is organized under the laws of, or
has a principal office in, an emerging market country.
The securities markets of certain emerging market countries are marked
by a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging market countries are in the
earliest stages of their development. Even the markets for relatively widely
traded securities in emerging markets may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
emerging markets may also affect the Portfolio's ability to accurately value its
portfolio securities or to acquire or dispose of securities at the price and
time it wishes to do so or in order to meet redemption requests.
-4-
<PAGE>
Transaction costs, including brokerage commissions or dealer mark-ups,
in emerging market countries may be higher than in the United States and other
developed securities markets. In addition, the securities of non-U.S. issuers
generally are not registered with the Securities and Exchange Commission, nor
are the issuers thereof usually subject to the Securities and Exchange
Commission's reporting requirements. Accordingly, there may be less publicly
available information about foreign securities and issuers than is available
with respect to U.S. securities and issuers. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable in the U.S. In
addition, existing laws and regulations of emerging market countries are often
inconsistently applied. As legal systems in emerging market countries develop,
foreign investors may be adversely affected by new or amended laws and
regulations. In circumstances where adequate laws exist, it may not be possible
to obtain swift and equitable enforcement of the law.
Certain emerging market countries require governmental approval prior
to investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. In addition, the
repatriation of both investment income and capital from several of the emerging
market countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Portfolio. The Portfolio may be required to
establish special custodial or other arrangements before investing in certain
emerging market countries.
Emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Portfolio may invest and adversely
affect the value of the Portfolio's assets.
The economies of emerging market countries may differ unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments. Many emerging market countries have experienced in the past, 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. The economies of many emerging market
countries are heavily dependent upon international trade and are accordingly
affected by protective trade barriers and the economic conditions of their
trading partners. In addition, the economies of some emerging market countries
are vulnerable to weakness in world prices for their commodity exports.
The Portfolio's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
See "Dividends, Distributions and Taxes."
Equity Securities. Equity securities consist of common stocks,
convertible securities and preferred stocks. Preferred stock generally receives
dividends before distributions are paid on common stock and ordinarily has a
priority claim over common stockholders if the issuer of the stock is
liquidated. Domestic and foreign stocks, and American Depositary Receipts (ADRs)
are eligible for inclusion of the Focus List.
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Bank Obligations. 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 the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the 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 the 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
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.
Repurchase Agreements. The 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, the 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
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respect to securities of the type in which the 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. The Advisers will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. The Portfolio will consider on an
ongoing basis the credit worthiness of the institutions with which it enters
into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the 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 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, the
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, the Advisers 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 the Portfolio may invest in them only
if at the time of an investment the borrower meets the criteria set forth in the
Portfolio's Prospectus for other commercial paper issuers.
Illiquid Securities. The Portfolio may hold up to 15% of its net assets
in repurchase agreements that have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market (either within or outside of the
United States) or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
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requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. BSAM anticipates that the market for certain
restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. BSAM will monitor the liquidity of
such restricted securities subject to the supervision of the Board of Trustees.
In reaching liquidity decisions, BSAM will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) 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). In addition, in order for commercial
paper that is issued in reliance on Section 4(2) of the Securities Act to be
considered liquid, (i) it must be rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of BSAM; and (ii) it must
not be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
The staff of the Securities and Exchange Commission has taken the
position that purchased over-the-counter (OTC) options and the assets used as
"cover" for written OTC options are illiquid securities unless the Portfolio and
the counterparty have provided for the Portfolio, at the Portfolio's election,
to unwind the OTC option. The exercise of such an option would ordinarily
involve the payment by the Portfolio of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the securities used as "cover" as liquid.
Corporate Debt Obligations. The Portfolio may, under normal market
conditions, invest in corporate debt obligations, including obligations of
industrial, utility and financial issuers. Corporate debt obligations are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
An economic downturn could severely affect the ability of highly
leveraged issuers of junk bond securities to service their debt obligations or
to repay their obligations upon maturity. Factors having an adverse impact on
the market value of junk bonds will have an adverse effect on the Portfolio's
net asset value to the extent it invests in such securities. In addition, the
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in payment of principal or interest on its portfolio
holdings.
The secondary market for junk bonds, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities. This reduced liquidity may have an adverse effect
on the ability of the Portfolio to dispose of a particular security when
necessary to meet its redemption requests or other liquidity needs. Under
adverse market or economic conditions, the secondary market for junk bonds could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisers could find it difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower rated or unrated securities, under such circumstances, may be less
than the prices used in calculating the Portfolio's net asset value.
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Since investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type in which the
Portfolio may invest, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Portfolio's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
Zero Coupon Bonds. The Portfolio's investments in fixed income
securities may include zero coupon bonds, which are debt obligations issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds would have accrued and compounded over
the period until maturity. Zero coupon bonds do not require the periodic payment
of interest. Such investments benefit the issuer by mitigating its need for cash
to meet debt service but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such investments may
experience greater volatility in market value than debt obligations which
provide for regular payments of interest. In addition, if an issuer of zero
coupon bonds held by the Portfolio defaults, the Portfolio may obtain no return
at all on its investment. The Portfolio will accrue income on such investments
for each taxable year which (net of deductible expenses, if any) is
distributable to shareholders and which, because no cash is generally received
at the time of accrual, may require the liquidation of other portfolio
securities to obtain sufficient cash to satisfy the Portfolio's distribution
obligations. See "Dividends, Distributions and Taxes."
Variable and Floating Rate Securities. The interest rates payable on
certain fixed-income securities in which the Portfolio may invest are not fixed
and may fluctuate based upon changes in market rates. A variable rate obligation
is one whose terms provide for the readjustment of its interest rate on set
dates and which, upon such readjustment, reasonably can be expected to have a
market value that approximate its par value. A floating rate obligation is one
whose terms provide for the readjustment of its interest rate whenever a
specified interest rate changes and which, at any time, reasonably can be
expected to have a market value that approximates its par value. Variable and
floating rate obligations provide holders with protection against rises in
interest rates, but pay lower yields than fixed rate obligations of the same
maturity. Variable rate obligations may fluctuate in value in response to
interest rate changes if there is a delay between changes in market interest
rates and the interest reset date for the obligation.
Custodial Receipts. The Portfolio may invest up to 5% of its net assets
in custodial receipts in respect of securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, instrumentalities,
political subdivisions or authorities. Such custodial receipts evidence
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ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, instrumentalities,
political subdivisions or authorities. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investors Growth
Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities"
("CATs"). For certain securities law purposes, custodial receipts are not
considered U.S. Government securities.
Mortgage-Related Securities. The Portfolio may invest in
mortgage-related securities. Mortgage-related securities are backed by mortgage
obligations including, among others, conventional 30-year fixed rate mortgage
obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, mortgage-related securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. The Portfolio may purchase mortgage-related securities
at a premium or at a discount.
U.S. Government Agency Securities. 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. 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.
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Asset-Backed Securities. Asset-backed securities represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
Like mortgage-related securities, asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. The Portfolio's ability to maintain positions in such securities will be
affected by reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that the Portfolio invests in asset-backed securities, the values of its
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-related securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables 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. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers 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 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 the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Management Policies
The Portfolio engages in the following practices in furtherance of its
objective.
Options on Securities. The Portfolio may purchase put and call options
and write covered put and call options on debt and equity securities, financial
indices (including stock indices), U.S. and foreign government debt securities
and foreign currencies. These may include options traded on U.S. or foreign
exchanges and options traded on U.S. or foreign over-the-counter markets ("OTC
options"), including OTC options with primary U.S. government securities dealers
recognized by the Federal Reserve Bank of New York.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
"exercise price" or "strike price"). By writing a call option, the Portfolio
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities or a specified amount of cash to the purchaser
against receipt of the exercise price. When the Portfolio writes a call option,
the Portfolio loses the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
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the specified exercise price. By writing a put option, the Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
The writer of an option retains the amount of the premium, although
this amount may be offset or exceeded, in the case of a covered call option, by
a decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
The Portfolio may wish to protect certain portfolio securities against
a decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other carefully selected securities, the values of which BSAM
expects will have a high degree of positive correlation to the values of such
portfolio securities. If BSAM's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If BSAM'S judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Portfolio's investments and therefore the put option may not provide complete
protection against a decline in the value of the Portfolio's investments below
the level sought to be protected by the put option.
The Portfolio may similarly wish to hedge against appreciation in the
value of securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other carefully selected securities the values of which BSAM expects
will have a high degree of positive correlation to the values of the securities
that the Portfolio intends to acquire. In such circumstances the Portfolio will
be subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Portfolio is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Portfolio.
The Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely, by the
premium received.
The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the 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. If the call option is exercised in such a transaction, the
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of the decline will be offset in part, or entirely, by the premium
received.
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Prior to being notified of the exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
canceled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
OTC options are contracts between the Portfolio and its contra-party with no
clearing organization guarantee. Thus, when the Portfolio purchases an OTC
option, it relies on the dealer from which it has purchased the OTC option to
make or take delivery of the securities underlying the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Portfolio as
well as the loss of the expected benefit of the transaction.
When the Portfolio writes an OTC option, it generally will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Portfolio originally wrote the
OTC option. While the Portfolio will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate an OTC option at a favorable price at any time prior
to expiration. Until the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option the Portfolio has written, it will not
be able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
contra-party, the Portfolio may be unable to liquidate an OTC option. See
"Illiquid Securities" below.
OTC options purchased by the Portfolio will be treated as illiquid
securities subject to any applicable limitation on such securities. Similarly,
the assets used to "cover" OTC options written by the Portfolio will be treated
as illiquid unless the OTC options are sold to qualified dealers who agree that
the Portfolio may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option Agreement. The "cover" for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. See "Illiquid Securities" below.
The Portfolio may write only "covered" options. This means that so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and maintain with its
custodian for the term of the option a segregated account consisting of cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, having a value equal to or greater than the
exercise price of the option. In the case of a straddle written by the
Portfolio, the amount maintained in the segregated account will equal the
amount, if any, by which the put is "in-the-money."
Options on Securities Indices. The Portfolio also may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase. Through the writing or purchase of index options, the
Portfolio can achieve many of the same objectives as through the use of options
on individual securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to
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receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
This amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities. Price movements in securities that the Portfolio owns or intends to
purchase will probably not correlate perfectly with movements in the level of an
index and, therefore, the Portfolio bears the risk that a loss on an index
option would not be completely offset by movements in the price of such
securities.
When the Portfolio writes an option on a securities index, it will be
required to deposit with its custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks
relating to transactions in financial futures contracts described below. Also,
an option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
Risks of Options Transactions. An exchange-traded option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Portfolio will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option at any particular time, and for some
exchange-traded options, no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options, with the result that the Portfolio would have to exercise its
exchange-traded options in order to realize any profit and may incur transaction
costs in connection therewith. If the Portfolio as a covered call option writer
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.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
clearinghouse, such as The Options Clearing Corporation (the "O.C.") to handle
current trading volume; or (f) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the O.C. as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. Similarly,
in the event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by BSAM.
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<PAGE>
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Risks of Options on Foreign Currencies. Options on foreign currencies
involve the currencies of two nations and therefore, developments in either or
both countries affect the values of options on foreign currencies. Risks include
those described in the Prospectus under "Risk Factors -- Foreign Securities,"
including government actions affecting currency valuation and the movements of
currencies from one country to another. The quantity of currency underlying
option contracts represent odd lots in a market dominated by transactions
between banks; this can mean extra transaction costs upon exercise. Option
markets may be closed while round-the-clock interbank currency markets are open,
and this can create price and rate discrepancies.
Futures Contracts and Related Options. The Portfolio may enter into
futures contracts for the purchase or sale of debt securities and financial
indices (collectively, "interest rate futures contracts") and currencies in
accordance with the Portfolio's investment objective. A "purchase" of a futures
contract (or a "long" futures position) means the assumption of a contractual
obligation to acquire a specified quantity of the securities underlying the
contract at a specified price at a specified future date. A "sale" of a futures
contract (or a "short" futures position) means the assumption of a contractual
obligation to deliver a specified quantity of the securities underlying the
contract at a specified price at a specified future date. At the time a futures
contract is purchased or sold, the Portfolio is required to deposit cash or
securities with a futures commission merchant or in a segregated custodial
account representing between approximately 10% to 5% of the contract amount,
called "initial margin." Thereafter, the futures contract will be valued daily
and the payment in cash of "maintenance" or "variation margin" may be required,
resulting in the Portfolio paying or receiving cash that reflects any decline or
increase in the contract's value, a process known as "marking-to-market."
Some futures contracts by their terms may call for the actual delivery
or acquisition of the underlying assets and other futures contracts must be
"cash settled." In most cases the contractual obligation is extinguished before
the expiration of the contract by buying (to offset an earlier sale) or selling
(to offset an earlier purchase) an identical futures contract calling for
delivery or acquisition in the same month. The purchase (or sale) of an
offsetting futures contract is referred to as a "closing transaction."
The Portfolio's ability to establish and close out positions in futures
contracts and options on futures contracts would be impacted by the liquidity of
these markets. Although the Portfolio generally would purchase or sell only
those futures contracts and options thereon for which there appeared to be a
liquid market, there is no assurance that a liquid market on an exchange will
exist for any particular futures contract or option at any particular time. In
the event no liquid market exists for a particular futures contract or option
thereon in which the Portfolio maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Portfolio would have to either make or take delivery under the
futures contract or, in the case of a written call option, wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Portfolio had written and which the
Portfolio was unable to close, the Portfolio would be required to maintain
margin deposits on the futures contract or option and to make variation margin
payments until the contract is closed.
Risks inherent in the use of these strategies include (1) dependence on
BSAM's ability to predict correctly movements in the direction of interest
rates, securities prices and markets; (2) imperfect correlation between the
price of futures contracts and options thereon and movement in the prices of the
securities being hedged; (3) the fact that the skills needed to use these
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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 the
Portfolio to sell a portfolio security at a time that otherwise would be
favorable for it to do so. In the event it did sell the security and eliminated
its "cover," it would have to replace its "cover" with an appropriate futures
contract or option or segregate securities with the required value, as described
below under "Limitations on the Purchase and Sale of Futures Contracts and
Related Options--Segregation Requirements."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when BSAM's expectations are not met, assuming proper
adherence to the segregation requirement, the volatility of the Portfolio as a
whole should be no greater than if the same strategy had been pursued in the
cash market.
Exchanges on which futures and related options trade may impose limits
on the positions that the Portfolio may take in certain circumstances. In
addition, the hours of trading of financial futures contracts and options
thereon may not conform to the hours during which the Portfolio may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended
(the "Commodity Exchange Act"), all futures contracts and options thereon must
be traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counter party
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Portfolio, as the holder of an option on futures contracts, would
have to exercise the option and comply with the margin requirements for the
underlying futures contract to utilize any profit, and if the Portfolio were the
writer of the option, its obligation would not terminate until the option
expired or the Portfolio was assigned an exercise notice.
Limitations on the Purchase and Sale of Futures Contracts and Related
Options.
CFTC Limits. In accordance with Commodity Futures Trading Commission
(CFTC) regulations, the Portfolio is not permitted to purchase or sell futures
contracts or options thereon for return enhancement or risk management purposes
if immediately thereafter the sum of the amounts of initial margin deposits on
the Portfolio's existing futures and premiums paid for options on futures exceed
5% of the liquidation value of such Portfolio's total assets (the "5% CFTC
limit"). This restriction does not apply to the purchase and sale of futures
contracts and options thereon for bona fide hedging purposes.
Segregation Requirements. To the extent the Portfolio enters into
futures contracts, it is required by the Securities and Exchange Commission to
maintain a segregated asset account with its custodian (or a futures commission
merchant) sufficient to cover the Portfolio's obligations with respect to such
futures contracts, which will consist of cash, U.S. government securities, or
other liquid, unencumbered assets marked-to-market daily, in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Portfolio with
the custodian (or a futures commission merchant) with respect to such futures
contracts. Offsetting the contract by another identical contract eliminates the
segregation requirement.
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<PAGE>
With respect to options on futures, there are no segregation
requirements for options that are purchased and owned by the Portfolio. However,
written options, since they involve potential obligations of the Portfolio, may
require segregation of Portfolio assets if the options are not "covered" as
described under "Options on Futures Contracts." If the Portfolio writes a call
option that is not "covered," it must segregate and maintain with the custodian
(or a futures commission merchant) for the term of the option cash or liquid
securities equal to the fluctuating value of the optioned futures. If the
Portfolio writes a put option that is not "covered," the segregated amount would
have to be at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Portfolio with the custodian or a futures
commission merchant) with respect to such option.
Uses of Interest Rate Futures Contracts. Futures contracts will be used
for bona fide hedging, risk management and return enhancement purposes.
Position Hedging. The Portfolio might sell interest rate futures
contracts to protect the Portfolio against a rise in interest rates which would
be expected to decrease the value of debt securities which the Portfolio holds.
This would be considered a bona fide hedge and, therefore, is not subject to the
5% CFTC limit. For example, if interest rates are expected to increase, the
Portfolio might sell futures contracts on debt securities, the values of which
historically have correlated closely or are expected to correlate closely to the
values of the Portfolio's portfolio securities. Such a sale would have an effect
similar to selling an equivalent value of the Portfolio's portfolio securities.
If interest rates increase, the value of the Portfolio's portfolio securities
will decline, but the value of the futures contracts to the Portfolio will
increase at approximately an equivalent rate thereby keeping the net asset value
of the Portfolio from declining as much as it otherwise would have. The
Portfolio could accomplish similar results by selling debt securities with
longer maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a hedging
technique would allow the Portfolio to maintain a defensive position without
having to sell portfolio securities. If in fact interest rates decline rather
than rise, the value of the futures contract will fall but the value of the
bonds should rise and should offset all or part of the loss. If futures
contracts are used to hedge 100% of the bond position and correlate precisely
with the bond position, there should be no loss or gain with a rise (or fall) in
interest rates. However, if only 50% of the bond position is hedged with
futures, then the value of the remaining 50% of the bond position would be
subject to change because of interest rate fluctuations. Whether the bond
positions and futures contracts correlate precisely is a significant risk
factor.
Anticipatory Position Hedging. Similarly, when it is expected that
interest rates may decline and the Portfolio intends to acquire debt securities,
the Portfolio might purchase interest rate futures contracts. The purchase of
futures contracts for this purpose would constitute an anticipatory hedge
against increases in the price of debt securities (caused by declining interest
rates) which the Portfolio subsequently acquires and would normally qualify as a
bona fide hedge not subject to the 5% CFTC limit. Since fluctuations in the
value of appropriately selected futures contracts should approximate that of the
debt securities that would be purchased, the Portfolio could take advantage of
the anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Portfolio could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.
Risk Management and Return Enhancement. The Portfolio might sell
interest rate futures contracts covering bonds. This has the same effect as
selling bonds in the portfolio and holding cash and reduces the duration of the
portfolio. (Duration measures the price sensitivity of the portfolio to interest
rates. The longer the duration, the greater the impact of interest rate changes
on the portfolio's price.) This should lessen the risks associated with a rise
in interest rates. In some circumstances, this may serve as a hedge against a
loss of principal, but is usually referred to as an aspect of risk management.
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<PAGE>
The Portfolio might buy interest rate futures contracts covering bonds
with a longer maturity than its portfolio average. This would tend to increase
the duration and should increase the gain in the overall portfolio if interest
rates fall. This is often referred to as risk management rather than hedging
but, if it works as intended, has the effect of increasing principal value. If
it does not work as intended because interest rates rise instead of fall, the
loss will be greater than would otherwise have been the case. Futures contracts
used for these purposes are not considered bona fide hedges and, therefore, are
subject to the 5% CFTC limit.
Options on Futures Contracts. The Portfolio may enter into options on
futures contracts for certain bona fide hedging, risk management and return
enhancement purposes. This includes the ability to purchase put and call options
and write (i.e., sell) "covered" put and call options on futures contracts that
are traded on commodity and futures exchanges.
If the Portfolio purchases an option on a futures contract, it has the
right but not the obligation, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call or a
short position if the option is a put) at a specified exercise price at any time
during the option exercise period.
Unlike purchasing an option, which is similar to purchasing insurance
to protect against a possible rise or fall of security prices or currency
values, the writer or seller of an option undertakes an obligation upon exercise
of the option to either buy or sell the underlying futures contract at the
exercise price. A writer of a call option has the obligation upon exercise to
assume a short futures position and a writer of a put option has the obligation
to assume a long futures position. Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise 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. If
there is no balance in the writer's margin account, the option is "out of the
money" and will not be exercised. The Portfolio, as the writer, has income in
the amount it was paid for the option. If there is a margin balance, the
Portfolio will have a loss in the amount of the balance less the premium it was
paid for writing the option.
When the Portfolio writes a put or call option on futures contracts,
the option must either be "covered" or, to the extent not "covered," will be
subject to segregation requirements. The Portfolio will be considered "covered"
with respect to a call option it writes on a futures contract if the Portfolio
owns the securities or currency which is deliverable under the futures contract
or an option to purchase that futures contract having a strike price equal to or
less than the strike price of the "covered" option. A Portfolio will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option.
To the extent the Portfolio is not "covered" as described above with
respect to written options, it will segregate and maintain with its custodian
for the term of the option cash or liquid securities as described above under
"Limitations of the Purchase and Sale of the Futures Contracts and Related
Options--Segregation Requirements."
Uses of Options on Futures Contracts. Options on futures contracts
would be used for bona fide hedging, risk management and return enhancement
purposes.
Position Hedging. The Portfolio may purchase put options on interest
rate or currency futures contracts to hedge its portfolio against the risk of a
decline in the value of the debt securities it owns as a result of rising
interest rates.
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<PAGE>
Anticipatory Hedging. The Portfolio may also purchase call options on
futures contracts as a hedge against an increase in the value of securities the
Portfolio might intend to acquire as a result of declining interest rates.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the
Portfolio might intend to acquire. If the futures price at expiration of the
option is above the exercise price, the Portfolio retains the full amount of the
option premium which provides a partial hedge against any increase that may have
occurred in the price of the debt securities the Portfolio intended to acquire.
If the market price of the underlying futures contract is below the exercise
price when the option is exercised, the Portfolio would incur a loss, which may
be wholly or partially offset by the decrease in the value of the securities the
Portfolio might intend to acquire.
Whether options on futures contracts are subject to or exempt from the
5% CFTC limit depends on whether the purposes of the options constitutes a bona
fide hedge.
Risk Management and Return Enhancement. Writing a put option that does
not relate to securities the Portfolio intends to acquire would be a return
enhancement strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also
a return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call is below the exercise price, the
Portfolio would retain the full amount of the option premium increasing the
income of the Portfolio. If the futures price when the option is exercised is
above the exercise price, however, the Portfolio would sell the underlying
securities which were the "cover" for the contract and incur a gain or loss
depending on the cost basis for the underlying asset.
Writing a covered call option as in any return enhancement strategy can
also be considered a partial hedge against a decrease in the value of a
Portfolio's portfolio securities. The amount of the premium received acts as a
partial hedge against any decline that may have occurred in the Portfolio's debt
securities.
There can be no assurance that the Portfolio's use of futures contracts
and related options will be successful and the Portfolio may incur losses in
connection with its purchase and sale of future contracts and related options.
Risks Related to Forward Foreign Currency Exchange Contracts. The
Portfolio may enter into forward foreign currency exchange contracts in several
circumstances. When the Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Portfolio
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Portfolio may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when BSAM believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Portfolio may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
the Portfolio's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
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of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. If the Portfolio enters into a position
hedging transaction, the transaction will be covered by the position being
hedged or the Portfolio's custodian will place cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets in a segregated account
of the Portfolio (less the value of the "covering" positions, if any) in an
amount equal to the value of the Portfolio's total assets committed to the
consummation of the given forward contract. The assets placed in the segregated
account will be marked-to-market daily, and if the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will, at
all times, equal the amount of the Portfolio's net commitment with respect to
the forward contract.
The Portfolio generally will not enter into a forward contract with a
term of greater than one year. At the maturity of a forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of a particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Portfolio is obligated to deliver, then it would be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Portfolio will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. Of course, the
Portfolio is not required to enter into such transactions with regard to its
foreign currency-denominated securities. It also should be recognized that this
method of protecting the value of the Portfolio's portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities which are unrelated to exchange rates.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend physically to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the spread) between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
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Lending Portfolio Securities. To a limited extent, the 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, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the 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 the Portfolio to be the equivalent of cash.
From time to time, the Portfolio may return to the borrower or a third party
which is unaffiliated with the 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)
the 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) the Portfolio must be
able to terminate the loan at any time; (4) the 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) the 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.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 7 as fundamental policies. These restrictions
cannot be changed, as to the Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting shares. Investment
restrictions numbered 8 through 13 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. The Portfolio may
not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. Government securities.
3. 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 the 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.
4. 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.
-21-
<PAGE>
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. The Portfolio, however,
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.
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indices.
Non-Fundamental Restrictions.
8. Knowingly invest more than 15% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
9. Purchase securities on margin, but the 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.
10. 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 respect
to options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indexes.
11. Make short sales of securities, other than short sales "against the
box."
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
13. Make additional investments when borrowing exceeds 5% of Portfolio
assets.
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 POSITION PRINCIPAL OCCUPATION
(AND AGE) 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.
-22-
<PAGE>
John R. McKernan, Jr. Trustee Chairman and Chief Executive
(50) Officer of McKernan
P.O. Box 15213 Enterprises Inc. since January
Portland, ME 04112 1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (56) President and Chief Executive
700 13th St., N.W., Suite 400 Trustee Officer, Association of
Washington, D.C. 20005 American Railroads since June
1997; 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.
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.
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.
William J. Montgoris (51) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer, Bear
New York, NY 10167 Stearns.
Peter B. Fox (46) Executive Vice Founder, Fox Development
Three First National Plaza President Corp., 1998; Managing Director
Chicago, IL 60602 - Emeritus, Bear Stearns since
February 1997; Senior Managing
Director, Public Finance, Bear
Stearns from 1987 to 1997.
-23-
<PAGE>
Stephen A. Bornstein (55) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset Management.
Frank J. Maresca (40) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September 1994;
New York, NY 10167 Chief Executive Officer and
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.
Ellen T. Arthur (45) 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 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:
-24-
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Board Aggregate Pension or Estimated Annual Total
Member Compensation Retirement Benefits Benefits Upon Compensation from
from Fund* Accrued as Part of Retirement Fund and Fund
Fund's Expenses Complex Paid to
Board Members
- -----------------------------------------------------------------------------------------------------------------------------
<S> <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 $8,600 for 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 March 31, 1998.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plan" 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 Portfolio's Prospectus entitled "Management of the
Portfolio."
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated September 8, 1997, with the Fund. The Agreement will remain
in effect for two years from the date of execution and shall continue from year
to year thereafter if it is approved 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 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
Agreement is terminable, as to the 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. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
-25-
<PAGE>
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.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSAM a monthly fee at the annual rate of 1.00% of value of the Portfolio's
average daily net assets. For the period from December 29, 1997 (commencement of
investment operations) through March 31, 1998, the investment advisory fees
amounted to $14,726. For the fiscal year ended March 31, 1998, the investment
advisory fees amounted to $14,726. These amounts were waived pursuant to a
voluntary undertaking by BSAM, resulting in no fees being paid by the Portfolio.
In addition, the Adviser reimbursed $14,726 in order to maintain the voluntary
expense limitation.
Sub-Investment Advisory Agreement. Marvin & Palmer Associates, Inc.
(the "Sub-Adviser") also provides investment advisory services to the Portfolio
pursuant to the Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement")
dated September 8, 1997 and February 4, 1998 with BSAM. The Sub- Advisory
Agreement will remain in effect for one year from the date of execution and
thereafter shall continue automatically for successive annual periods ending on
September 8, 1999 of each year, provided such continuance is specifically
approved at least annually by (i) the Fund's Board of Trustees or (ii) a vote of
a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
securities, 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, BSAM or the Sub- Adviser, by vote cast in
person at a meeting called for the purpose of voting on such approval. The
Sub-Advisory Agreement is terminable, as to the Portfolio, without penalty, (i)
by BSAM upon 60 days' notice to the Sub- Adviser, (ii) by the Fund's Board of
Trustees or by vote of the holders of a majority of the Portfolio's shares upon
60 days' notice to the Sub-Adviser, or (iii) by the Sub-Adviser upon not less
than 90 days' notice to the Fund and BSAM. The Sub-Advisory Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act). As compensation for the Sub- Adviser's services BSAM has agreed to pay the
Sub-Adviser a monthly fee calculated on an annual basis equal to 0.20% of the
Portfolio's total average daily net assets to the extent the Portfolio's average
daily net assets are in excess of $25 million and below $50 million at the
relevant month end, 0.45% of the Portfolio's total average daily net assets to
the extent the Portfolio's average daily net assets are in excess of $50 million
and below $65 million at the relevant month end, and 0.60% of the Portfolio's
total average daily net assets to the extent the Portfolio's average daily net
assets are in excess of $65 million at the relevant month end.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated as of February 22,
1995, as revised April 11, 1995, June 2, 1997 , September 8, 1997 and February
4, 1999, with the Fund. The Administration Agreement will continue until
February 22, 1999 and thereafter will be subject to annual approval by (i) the
Fund's Board 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 without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
Portfolio's shares or upon not less than 90 days' notice by BSFM. The
Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
-26-
<PAGE>
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 the Portfolio's
average daily net assets. For the period from December 29, 1997 (commencement of
operations) through March 31, 1998, the administration fees accrued amounted to
$2,209.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated as
of 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 Portfolio's Prospectus.
Distribution Plan. 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 plan (the "Distribution Plan") with respect to Class A, B
and C shares. The Fund's Board of Trustees believes that there is a reasonable
likelihood that the Distribution Plan will benefit the Portfolio and the holders
of its Class A, B, and C shares.
A quarterly report of the amounts expended under the Distribution Plan
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the 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 Distribution 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 Distribution 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 the
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 separately by
class. The 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 was approved on September 8, 1997 and
February 4, 1998. The Distribution Plan is terminable at any time, as to each
class of the 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 Distribution 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 the 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 the Portfolio, in the event of its assignment (as defined in
the 1940 Act). For the period December 29, 1997 (commencement of operations)
through March 31, 1998, the Portfolio paid Bear Stearns $2,887, $4,481 and
$4,471 with respect to Class A, B and C shares, respectively, under the Plan. Of
such amounts, the following were paid as indicated for Class A, B and C shares
of the Portfolio:
Class A Class B Class C
Payments to Broker or Dealers $1,444 ---- ----
Payments to Underwriters $1,443 $4,481 $4,471
-27-
<PAGE>
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the 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.
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 Bear Stearns, BSAM or their 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, including,
but not limited to, proportionately in relation to the net assets of each
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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PRIOR PERFORMANCE OF THE SUB-ADVISER
The following tables set forth the Sub-Adviser's composite performance
data relating to the historical performance of institutional private accounts
managed by the Sub-Adviser, since the dates indicated, that have investment
objectives, policies, strategies and risks substantially similar to those of the
Portfolio. The data is provided to illustrate the past performance of the
Sub-Adviser in managing substantially similar accounts as measured against the
specified market index and does not represent the performance of the Portfolio.
-28-
<PAGE>
Investors should not consider this performance data as an indication of future
performance of the Portfolio or of the Sub-Adviser.
The Sub-Adviser's composite performance data shown below is calculated
in accordance with the standards of the Association for Investment Management
and Research ("AIMR"1), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and loses. All
returns reflect the imposition of foreign withholding taxes on interest,
dividends and capital gains and the deduction of all fees and expenses paid by
the Accounts including, investment advisory fees, brokerage commissions and
execution costs, but does not reflect the imposition of federal or state income
taxes or custodial fees, if any. The Sub-Adviser's composite includes all
actual, fee-paying, discretionary institutional private accounts managed by the
Sub-Adviser that have investment objectives, policies, strategies and risks
substantially similar to those of the Portfolio. The composite, however,
excludes certain accounts with similar investment objectives which, in the
opinion of the Sub-Adviser, were not managed in a manner similar to the manner
in which the Portfolio will be managed as a result of asset size, investment
restrictions or other variables. Securities transactions are accounted for on
the trade date and accrual accounting is utilized. Cash and equivalents are
included in performance returns. The monthly returns of the Sub-Adviser's
composites combine the individual accounts' returns (calculated on a
time-weighted rate of return that is revalued whenever cash flows exceed $500)
by asset-weighing each individual account's asset value as of the beginning of
the month. Quarterly and yearly returns are calculated by geometrically linking
the monthly and quarterly returns, respectively. The yearly returns are computed
by geometrically linking the returns of each quarter within the calendar year.
For additional information concerning the composite performance data, please see
the Statement of Additional Information.
The institutional private accounts that are included in the
Sub-Adviser's composite are not subject to the same types of expenses to which
the Portfolio is subject nor to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Portfolio by the
Investment Company Act or Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Consequently, the performance results for the
Sub-Adviser's composite could have been adversely affected if the institutional
private accounts included in the composites had been regulated as investment
companies under the federal securities laws.
The investment results of the Sub-Adviser's composite presented below
are unaudited and are not intended to predict or suggest the returns that might
be experienced by the Portfolio or an individual investor investing in the
Portfolio. Investors should also be aware that the use of a methodology
different from that used below to calculate performance could result in
different performance data.
The information in the columns below headed "Dispersion Max - Min"
reflect the highest and lowest investment performance of the various accounts
which comprise the composite for the relevant period. The information in the
column headed "# of Portfolios" reflects the number of accounts included in the
composite for the relevant period. The information in the column below headed
- ------------
1 AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and
fair presentations by investment advisers of their performance results, and
(ii) ensure uniformity in reporting so that performance results of
investment advisers are directly comparable. Note however that the formula
for calculation of performance mandated by the Securities and Exchange
Commission differs from that mandated by AIMR.
-29-
<PAGE>
"Composite Market Value" reflects the total assets in all accounts included in
the composite for the relevant period (expressed in millions). Lastly, the
information in the column below headed "% of total assets" reflects the
proportion of the total assets managed by the Sub-Adviser which are managed in
accounts comprising the Non-U.S. composite.
THE SUB-ADVISER'S NON-U.S. INVESTMENT PERFORMANCE
NET OF MANAGEMENT FEES (2)
<TABLE>
<CAPTION>
Quarterly
MSCI Comp. % of
Sub-Adviser EAFE Dispersion # of Market Total
Date Quarterly Index Max - Min Portfolios Value Assets
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/88 10.18 15.67 10.39 10.39 1 27.6 23.62%
3/31/89 5.86 0.27 6.06 6.06 1 29.3 22.36%
6/30/89 1.54 (6.17) 1.79 1.79 1 54.5 35.70%
9/30/89 9.28 12.39 9.48 9.48 1 70.3 34.33%
12/31/89 2.06 4.53 2.30 1.96 2 71.9 30.98%
1989 19.88 10.53
3/31/90 (2.18) (19.77) (1.71) (3.21) 2 75.4 26.77%
6/30/90 9.51 9.55 9.81 9.26 2 99.2 29.29%
9/30/90 (22.67) (21.20) (22.28) (22.58) 2 76.8 27.68%
12/31/90 4.72 10.53 5.61 4.77 2 80.6 26.49%
1990 (13.26) (23.45)
3/31/91 7.05 7.44 7.85 7.13 2 86.4 18.18%
6/30/91 (1.29) (5.46) (0.91) (2.03) 2 85.5 16.90%
9/30/91 7.45 8.58 7.66 7.58 2 92.0 16.71%
12/31/91 2.23 1.68 2.43 2.37 2 94.2 14.63%
1991 16.07 12.13
3/31/92 1.94 (11.87) 2.13 2.13 1 79.9 10.58%
6/30/92 1.42 2.11 1.61 1.61 1 81.1 8.90%
9/30/92 (7.70) 1.51 (7.53) (7.53) 1 75.0 8.24%
12/31/92 4.57 (3.86) 4.77 4.77 1 78.6 7.30%
1992 (0.21) (12.17)
3/31/93 6.70 11.99 6.90 6.90 1 84.0 5.60%
6/30/93 2.73 10.06 2.92 2.92 1 86.5 5.13%
9/30/93 12.86 6.63 13.07 13.07 1 97.8 4.90%
12/31/93 20.47 0.86 20.69 20.69 1 118.0 4.96%
1993 49.03 32.56
3/31/94 (7.04) 3.50 (6.87) (6.87) 1 109.9 4.62%
6/30/94 1.72 5.11 1.77 1.77 1 246.7 9.85%
9/30/94 4.30 0.10 5.07 4.18 4 257.4 9.11%
12/31/94 (9.06) (1.02) (8.37) (9.08) 4 234.2 9.04%
1994 (10.31) 7.78
3/31/95 (8.88) 1.86 (8.35) (8.97) 4 213.6 8.58%
6/30/95 8.96 0.73 9.25 9.12 4 232.9 8.43%
9/30/95 11.48 4.17 11.83 11.55 2 108.1 3.44%
12/31/95 (0.81) 4.05 (0.56) (0.72) 2 107.3 3.49%
1995 9.78 11.21
3/31/96 4.30 2.89 4.57 4.39 2 111.9 3.44%
6/30/96 1.86 1.58 2.11 1.96 2 114.0 3.41%
9/30/96 (1.44) (0.13) (1.24) (1.28) 2 116.9 3.54%
12/31/96 4.81 1.59 5.06 4.96 2 122.4 3.59%
1996 9.74 6.05 10.69 10.39
3/31/97 3.51 (1.57) 3.72 3.69 2 126.7 3.54%
6/30/97 13.53 12.98 13.64 13.61 2 143.3 3.31%
9/30/97 8.35 (0.70) 8.60 8.46 2 155.1 3.33%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ANNUALIZED % 1 YR 2 YR 3 YR 4 YR 5 YR 6 YR 7 YR SINCE
(ENDING INCEPTION
9/30/97)
<S> <C> <C> <C> <C> <C> <C> <C>
Marvin & 21.2 19.3 10.3 14.6 12.8 12.9 8.5 10.93
Palmer
MSCI EAFE 12.8 13.1 9.1 11.0 12.8 10.5 7.0 7.86
Index
</TABLE>
(2) The Sub-Adviser has prepared and presented this report in compliance with
the Performance Presentation Standards of the Association for Investment
Management and Research (AIMR-PPS). AIMR has not been involved with the
preparation of this report. Returns are net of foreign withholding taxes on
dividends, interest, and capital gains, and net of management fees. The
composite holds approximately 7.5% in countries not included in the MSCI EAFE
Index. The composite is currently comprised of two fee paying discretionary
accounts that meet the following criteria: a) Separately managed; b) Initial
market value of $10 million or more; c) Eleemosynary funds for charitable
purposes; d) No social restrictions. The composite is comprised of listed
international equities with sufficient liquidity and adequate financial
reporting capabilities. The account minimum for the composite is $10 million. A
complete list and description of the Sub-Adviser's composites is available upon
request. Past performance results do not guarantee future returns.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated as of February 22, 1995, as
revised September 8, 1997, which is renewable annually. For the period from
December 29, 1997 (commencement of operations) through March 31, 1998, Bear
Stearns retained $58,103 from the sales loads on Class A and $0 from contingent
deferred sales charges ("CDSC") on Class B and C shares. 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 Portfolio's 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.
For the period from December 29, 1997 (commencement of investment
operations) through march 31, 1998, Bear Stearns retained $58,103 from the sales
loads on Class A shares.
Sales Loads - Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of the 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.
Net Asset Value per Share $13.77
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<PAGE>
Per Share Sales Share - 5.50%
of offering price (5.81% of 0.80
net asset value per share)
Per Share Offering Price to $14.57
the Public
Redemption Commitment. The 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 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. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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, B, C and 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 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
C shares and the dividends payable on Class B and C shares will be reduced by
incremental expenses borne solely by that class, including the asset-based sales
charge to which Class B and 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
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<PAGE>
costs, (viii) interest, taxes and brokerage commissions, and (ix) non-recurring
expenses, such as litigation costs. Other expenses that are directly
attributable to a class are allocated equally to each outstanding share within
that class. Such expenses include (a) Distribution and Shareholder Servicing
Plan fees, (b) incremental transfer and shareholder servicing agent fees and
expenses, (c) registration fees and (d) shareholder meeting expenses, to the
extent that such expenses pertain to a specific class rather than to the
Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Exchange traded securities,
including covered call options written by the Portfolio, are valued at the last
sale price on the securities exchange or national securities market on which
such securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates 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 management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
Foreign securities are normally valued at their most recent closing
prices on the principal exchange on which they are traded, even if the close of
that exchange is earlier than the time of the NAV calculation. However, if an
event that is likely to affect materially the value of a portfolio security
occurs after the relevant foreign market has closed (but before calculation of
NAV), the Board of Trustees may, if BSAM determines that the circumstances
warrant such an adjustment, determine the fair value of the security. In such
circumstances, the fair value of a security may be based on: (i) the opening
price of the foreign exchange at which trading in the security begins; or (ii)
objective indicators such as trading of the foreign securities on U.S. and other
foreign markets, bid/ask quotes and off- exchange institutional trading.
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 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 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.
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<PAGE>
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 the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolio and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Code. As a regulated investment company, the 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 the 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 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 the 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 the 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 the 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
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<PAGE>
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 the 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 the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the 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, the 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 the 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 the 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 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. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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, the 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
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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 the
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 the 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.
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, the
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
the 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 the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to 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
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<PAGE>
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 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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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 generally will not
qualify for the 70% dividends-received deduction for corporate shareholders .
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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 the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the 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 the 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.
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
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<PAGE>
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 the 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 the 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 the 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 the Portfolio's assets to be invested in various
countries is not known. If more than 50% of the value of the Portfolio's total
assets at the close of its taxable year consist of the stock or securities of
foreign corporations, the Portfolio may elect to "pass through" to its
shareholders the amount of foreign taxes paid by the Portfolio. If the Portfolio
so elects, each shareholder would be required to include in gross income, even
though not actually received, his pro rata share of the foreign taxes paid by
the Portfolio, but would be treated as having paid his pro rata share of such
foreign taxes and would therefore be allowed to either deduct such amount in
computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
For purposes of the foreign tax credit limitation rules of the Code, each
shareholder would treat as foreign source income his pro rata share of such
foreign taxes plus the portion of dividends received from the Portfolio
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
Each shareholder should consult his own tax adviser regarding the potential
application of foreign tax credits.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares 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 the 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 the
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.
The 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
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<PAGE>
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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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 the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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 the 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. Furthermore, such foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross income resulting from the Portfolio's election to treat any foreign taxes
paid by it as paid by its shareholders, but may not be allowed a deduction
against this gross income or a credit against this U.S. withholding tax for the
foreign shareholder's pro rata share of such foreign taxes which it is treated
as having paid. Such foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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)
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<PAGE>
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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
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.
Such information may be useful to BSAM in serving both the 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 the 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 the Portfolio for transactions in securities of domestic issuers. When
transactions are executed in the over-the-counter market, the Portfolio will
deal with the primary market makers unless a more favorable price or execution
otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
BSAM expects that the turnover on the securities held in the Portfolio will
generally not exceed 150% in any one year. The Portfolio turnover rate for the
period December 29, 1997 (commencement of operations) through March 1998 was
3.26%. This portfolio turnover rate is significantly higher than the portfolio
turnover rates of other mutual funds that invest in equity securities. A higher
portfolio turnover rate means that the Portfolio will incur substantially higher
brokerage costs and may realize a greater amount of short-term capital gains or
losses.
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 the
Portfolio may be executed through Bear Stearns if, in the judgment of BSAM, the
use of Bear Stearns
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<PAGE>
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 adopted by the
Securities and Exchange Commission, Bear Stearns may directly execute such
transactions for the 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 period December 29, 1997 (commencement of operations) through
March 31, 1998, the Portfolio paid total brokerage commissions of $16,474, of
which no amounts were paid to Bear Stearns. The Portfolio paid an average
commission rate per share of $.0683.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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.
The total return for Class A (at maximum offering price) for the period
December 29, 1997 (commencement of investment operations) through March 31, 1998
was 8.44%. Based on net asset value per share, the total return for Class A was
14.75%. The total return for Class B and C was 9.58% and 13.58% (including
contingent deferred sales charges), respectively, for this period.
Total return 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.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
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
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<PAGE>
security for being purchased or sold, or being considered for purchase or sale,
by the Portfolio, 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 the Portfolio; (4) the purchase
of any securities in an initial public offering or private placement transaction
eligible for purchase or sale by the Portfolio without prior approval by the
Fund; and (5) the acceptance of gifts more than a de minimus value from those
doing business with or on behalf of the Portfolio. Certain transactions are
exempt from item (1) of the previous sentence, including: (1) purchases or sales
on the accounts of an access person that are not under the control of or that
are non-volitional with respect to that person; (2) purchases or sales of
securities not eligible for purchase or sale by the Portfolio; (3) purchases or
sales relating to rights issued by an issuer pro rata to all holders of a class
of its securities; and (4) any securities transactions, or series of related
transactions, involving 500 or fewer shares of an issuer having a market
capitalization greater than $1 billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Adviser to the Portfolio may aggregate or bunch trades with other clients
provided that no client is materially disadvantaged. Access persons are required
by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the Investment Company
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 the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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 March 31, 1998 the following shareholders owned,
directly or indirectly, 5% or more of the indicated class of the Portfolio's
outstanding shares.
Percent of Class A
Name and Address Shares Outstanding
- ---------------- ------------------
Bear Stearns Securities Corp. 46.5%
FBO: 001-00317-14
One Metrotech Center North
Brooklyn, NY 11201-3859
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<PAGE>
Bear Stearns Securities Corp. 11.9%
FBO: 049-40880-16
One Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class B
Shares Outstanding
------------------
Bear Stearns Securities Corp.
FBO: 001-00317-14 83.8%
One Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class C
Shares Outstanding
------------------
Bear Stearns Securities Corp.
FBO: 001-00317-14 84.1%
One 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 the 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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of .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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, has provided legal advice as to legal matters
regarding the issuance of the shares of beneficial interest being sold pursuant
to the Portfolio's 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 Portfolio's Annual Report to Shareholders for the period ended
March 31, 1998 is a separate document supplied with this Statement of Additional
Information, and the financial statements and accompanying notes appearing
therein are incorporated by reference into this Statement of Additional
Information.
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<PAGE>
THE BEAR STEARNS FUNDS
BALANCED PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
July 28, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1998 of the Balanced Portfolio (the "Portfolio") of
The Bear Stearns Funds (the "Fund"), as each may be revised from time to time.
To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc.
("PFPC"), Attention: The Balanced 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 the 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 Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
..................................................................... Page
Investment Objective and Management Policies......................... B-2
Management of the Fund............................................... B-16
Management Arrangements.............................................. B-19
Purchase and Redemption of Shares.................................... B-24
Determination of Net Asset Value..................................... B-26
Dividends, Distributions and Taxes................................... B-27
Portfolio Transactions............................................... B-34
Performance Information.............................................. B-35
Code of Ethics....................................................... B-35
Information About the Fund........................................... B-36
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors..................................... B-39
FINANCIAL STATEEMENTS................................................ B-39
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
Portfolio Securities
Bank Obligations. 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 the 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 the 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.
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<PAGE>
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
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.
Repurchase Agreements. The 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, the 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 the 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. The Portfolio will consider on an ongoing basis
the creditworthiness of the institutions with which it enters into repurchase
agreements.
Municipal Obligations. 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 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 Portfolio
will invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Portfolio investments.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the 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, the
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 the Portfolio may invest in them only if at the
time of
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<PAGE>
an investment the borrower meets the criteria set forth in the Portfolio's
Prospectus for other commercial paper issuers.
Corporate Debt Obligations. The Portfolio may invest in corporate debt
obligations rated A or better by Standard & Poor's or Moody's, including
obligations of industrial, utility and financial issuers. The Portfolio may also
invest not more than 5% of its total assets in debt obligations rated below A
but not lower than B. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity. Investment in lower-rated debt securities entails
great speculative risks than those associated with investment in higher-rated
debt securities.
Structured Securities. The Portfolio may invest up to 5% of its net
assets in structured securities, which are "derivative instruments". The value
of the principal of and/or interest on such securities is linked to, or
determined by, reference to changes in the value of specific currencies,
interest rates, commodities, indices or other financial indicators (the
"Reference") or the relative change in two or more References. The interest rate
or the principal amount payable upon maturity or redemption may be increased or
decreased depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, result in the loss of the Portfolio's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in the
interest rates or the value of the security at maturity may be a multiple of
changes in the value of the Reference. Consequently, structured securities may
entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
Equity Securities. Equity securities consist of common stocks,
convertible securities and preferred stocks. Preferred stock generally receives
dividends before distributions are paid on common stock and ordinarily has a
priority claim over common stockholders if the issuer of the stock is
liquidated.
Zero Coupon Bonds. The Portfolio's investments in fixed income
securities may include zero coupon bonds, which are debt obligations issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds would have accrued and compounded over
the period until maturity. Zero coupon bonds do not require the periodic payment
of interest. Such investments benefit the issuer by mitigating its need for cash
to meet debt service but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such investments may
experience greater volatility in market value than debt obligations which
provide for regular payments of interest. In addition, if an issuer of zero
coupon bonds held by the Portfolio defaults, the Portfolio may obtain no return
at all on its investment. The Portfolio will accrue income on such investments
for each taxable year which (net of deductible expenses, if any) is
distributable to shareholders and which, because no cash is generally received
at the time of accrual, may require the liquidation of other portfolio
securities to obtain sufficient cash to satisfy the Portfolio's distribution
obligations. See "Dividends, Distributions and Taxes."
Variable and Floating Rate Securities. The interest rates payable on
certain fixed income securities in which the Portfolio may invest are not fixed
and may fluctuate based upon changes in market rates. A variable rate obligation
is one whose terms provide for the readjustment of its interest rate on set
dates and which, upon such readjustment, reasonably can be expected to have a
market value that approximate its par value. A floating rate obligation is one
whose terms provide for the readjustment of its interest rate whenever a
specified interest rate changes and which, at any time, reasonably can be
expected to have a market value that approximates its
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<PAGE>
par value. Variable and floating rate obligations provide holders with
protection against rises in interest rates, but pay lower yields than fixed rate
obligations of the same maturity. Variable rate obligations may fluctuate in
value in response to interest rate changes if there is a delay between changes
in market interest rates and the interest reset date for the obligation.
Custodial Receipts. The Portfolio may invest up to 5% of its net assets
in custodial receipts in respect of securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, instrumentalities,
political subdivisions or authorities. Such custodial receipts evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, instrumentalities,
political subdivisions or authorities. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investors Growth
Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities"
("CATs"). For certain securities law purposes, custodial receipts are not
considered U.S. Government securities.
Municipal Securities. The Portfolio may invest up to 5% of its net
assets in municipal securities. Municipal securities consist of bonds, notes and
other instruments issued by or on behalf of states, territories and possessions
of the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is exempt
from regular federal income tax. Municipal securities are often issued to obtain
funds for various public purposes. Municipal securities also include "private
activity bonds" or industrial development bonds, which are issued by or on
behalf of public authorities to obtain funds for privately operated facilities,
such as airports and waste disposal facilities, and, in some cases, commercial
and industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the
issuer could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
Inverse Floating Rate Securities. The Portfolio may invest up to 5% of
its net assets in leveraged inverse floating rate debt instruments ("inverse
floaters"). The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed . An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Portfolio's 15% limitation on investments in such securities.
Mortgage-Related Securities. The Portfolio may invest in mortgage-
related securities. Mortgage-related securities are backed by mortgage
obligations including, among others, conventional 30-year fixed rate mortgage
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obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, mortgage-related securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. The Portfolio may purchase mortgage-related securities
at a premium or at a discount.
U.S. Government Agency Securities. 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. 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.
Asset-Backed Securities. Asset-backed securities represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool
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insurance policy issued by a financial institution unaffiliated with the trust
or corporation, or other credit enhancements may be present.
Like mortgage-related securities, asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. The Portfolio's ability to maintain positions in such securities will be
affected by reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that the Portfolio invests in asset-backed securities, the values of its
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-related securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables 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. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers 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 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 the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Real Estate Investment Trusts (REITS). The Portfolio may invest up to
10% of its net assets in shares of REITs. REITs are pooled investment vehicles
which invest primarily in income producing real estate or real estate related
loans or interest. REITs are generally classified as equity REITs, mortgage
REITs or a combination of equity and mortgage REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. Like regulated investment companies such as the
Portfolio, REITs are not taxed on income distributed to shareholders provided
they comply with certain requirements under the Internal Revenue Code of 1986,
as amended (the "Code"). The Portfolio will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by the Portfolio.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "1940 Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
Warrants and Stock Purchase Rights. The Portfolio may invest up to 5%
of its net assets, calculated at the time of purchase, in warrants or rights
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(other than those acquired in units or attached to other securities) which
entitle the holder to buy equity securities at a specific price for a specific
period of time. The Portfolio will invest in warrants and rights only if such
equity securities are deemed appropriate by BSAM for investment by the
Portfolio. Warrants and rights have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
Foreign Securities. The Portfolio may invest up to 5% of its assets in
securities issued by foreign branches of U.S. banks, foreign banks, or other
foreign issuers, including sponsored and unsponsored American Depositing
Receipts (("ADRs"), Global Depositing Receipts ("GDRs") and European Depository
Receipts ("EDRs"), securities purchased in foreign securities exchanges and U.S.
dollar denominated debt obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. dollar-denominated or quoted securities of
U.S. issuers. Investments in foreign securities usually involve currencies of
foreign countries. Accordingly, the Portfolio's investments in foreign
securities may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations and may incur costs in connection with
conversions between various currencies. The Portfolio may be subject to currency
exposure independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods
of time. They 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, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the Portfolio endeavors to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of the Portfolio's assets are uninvested and no
return is earned on such assets. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio securities or, if
the Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Portfolio's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
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The Portfolio may invest in foreign securities which take the form of
sponsored and unsponsored ADRs, GDRs, EDRs or other similar instruments
representing securities of foreign issuers (collectively "Depository Receipts").
An ADR is a negotiable receipt, usually issued by a U.S. bank, that evidences
ownership of a specified number of foreign securities on deposit with a U.S.
depository and entities the shareholder to all dividends and capital gains of
the underlying securities. ADRs are traded on domestic exchanges or in the U.S.
over-the-counter market and, generally, are in registered form. EDRs and GDRs
are receipts evidencing an arrangement with a non-U.S. bank similar to that for
ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs
are not necessarily quoted in the same currency as the underlying security.
ADRs are classified as either "unsponsored" or "sponsored." With
sponsored ADRs, the issuer of the underlying foreign security and the depository
enter into a deposit agreement, which sets out the rights and responsibilities
of the issuer, the depository and the ADR holder. Under the terms of most
sponsored arrangements, depositaries agree to distribute notices of shareholder
meetings and voting instructions, thereby ensuring that ADR holders will be able
to exercise voting rights through the depositary with respect to deposited
securities. In addition, the depositary usually agrees to provide shareholder
communications and other information to the ADR holder at the request of the
issuer of the deposited securities. With an unsponsored ADR, there is no
agreement between the depositary and the issuer and the depositary is usually
under no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of deposited securities. With regard to unsponsored ADRs held
by the Portfolio, there may be an increased possibility that the Portfolio would
not become aware of or be able to respond to corporate actions such as stock
splits or rights offerings in a timely manner. In addition, the lack of
information may result in inefficiences in the valuation of such instruments.
The Portfolio may invest in countries with emerging market countries.
Political and economic structures in many emerging market countries may be
undergoing significant evolution and rapid development, and emerging market
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain emerging market countries may have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks
described above, including the risks of nationalization or expropriation of
assets, may be heightened. See "Emerging Market Securities," below.
The Portfolio may invest in securities quoted or denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community from time to time to
reflect changes in relative values of the underlying currencies. In addition,
the Portfolio may invest in securities quoted or denominated in other currency
"baskets."
Emerging Market Securities. The Portfolio may invest in a limited
extent in the securities of issuers located in emerging market countries.
"Emerging market countries" are countries that are considered to be emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations and its authorities. A company is considered to be an emerging
market company if (i) its securities are principally traded in the capital
markets of an emerging market country; (ii) it derives at least 50% of its total
revenue from either goods produced or services rendered in emerging market
countries or from sales made in emerging market countries, regardless of where
the securities of such companies are principally traded; (iii) it maintains 50%
or more of its assets in one or more emerging market countries;
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or (iv) it is organized under the laws of, or has a principal office in, an
emerging market country.
The securities markets of certain emerging market countries are marked
by a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging market countries are in the
earliest stages of their development. Even the markets for relatively widely
traded securities in emerging markets may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
emerging markets may also affect the Portfolio's ability to accurately value its
portfolio securities or to acquire or dispose of securities at the price and
time it wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups,
in emerging market countries may be higher than in the United States and other
developed securities markets. In addition, existing laws and regulations are
often inconsistently applied. As legal systems in emerging market countries
develop, foreign investors may be adversely affected by new or amended laws and
regulations. In circumstances where adequate laws exist, it may not be possible
to obtain swift and equitable enforcement of the law.
Certain emerging market countries require governmental approval prior
to investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. In addition, the
repatriation of both investment income and capital from several of the emerging
market countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Portfolio. The Portfolio may be required to
establish special custodial or other arrangements before investing in certain
emerging market countries.
Emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Portfolio may invest and adversely
affect the value of the Portfolio's assets.
The economies of emerging market countries may differ unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments. Many emerging market countries have experienced in the past, 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. The economies of many emerging market
countries are heavily dependent upon international trade and are accordingly
affected by protective trade barriers and the economic conditions of their
trading partners. In addition, the economies of some
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emerging market countries are vulnerable to weakness in world prices for their
commodity exports.
The Portfolio's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned on such assets. The inability of the Portfolio to make
intended security purchases or sales due to settlement problems could result
either in losses to the Portfolio due to subsequent declines in value of the
portfolio securities or, if the Portfolio has entered into a contract to sell
the securities, could result in possible liability to the purchaser.
When-Issued and Forward Commitments. The Portfolio may purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the
time the transaction is negotiated. When-issued purchases and forward commitment
transactions are negotiated directly with the other party, and such commitments
are not traded on exchanges. The Portfolio will purchase securities on a
when-issued basis or purchase or sell securities on a forward commitment basis
only with the intention of completing the transaction and actually purchasing or
selling the securities. If deemed advisable as a matter of investment strategy,
however, the Portfolio may dispose of or negotiate a commitment after entering
into it. The Portfolio may realize a capital gain or loss in connection with
these transactions. For purposes of determining the Portfolio's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. The Portfolio is required to hold and maintain in a
segregated account with the Portfolio's custodian until three days prior to the
settlement date, cash and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, the Portfolio may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Portfolio will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
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. If a substantial market of qualified
institutional buyers develops for certain unregistered securities purchased by
the Portfolio pursuant to Rule 144A under the Securities Act of 1933, as
amended, however, the 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 the 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, the Portfolio's investing in such
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securities may have the effect of increasing the level of illiquidity in the
Portfolio during such period.
Management Policies.
The Portfolio engages in the following practices in furtherance of its
objective.
Forward Foreign Currency Exchange Contracts. The Portfolio may enter
into forward foreign currency exchange contracts for hedging purposes and to
seek to increase total return. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are generally charged
at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The Portfolio may enter into forward foreign currency exchange
contracts in several circumstances. First, when the Portfolio enters into a
contract for the purchase or sale of a security denominated or quoted in a
foreign currency, or when the Portfolio anticipates the receipt in a foreign
currency of dividend or interest payments on such a security which it holds, the
Portfolio may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for the purchase or sale, for a fixed amount
of dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the date
on which such payments are made or received.
Additionally, when BSAM believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of the
Portfolio's portfolio securities quoted or denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the Portfolio's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which the Portfolio
can achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of the Portfolio's
foreign assets.
The Portfolio may engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if BSAM determines that there is a pattern
of correlation between the two currencies. The Portfolio may also purchase and
sell forward contracts to seek to increase total return when BSAM anticipates
that the foreign currency will appreciate or depreciate in value,
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but securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Portfolio's portfolio.
The Portfolio's custodian will place cash or liquid assets into a
segregated account of such Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts requiring the Portfolio to purchase foreign
currencies or, in the case of the Portfolio forward contracts entered into to
seek to increase total return. If the value of the securities placed in the
segregated account declines, additional cash or liquid assets will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. In such event, the Portfolio's ability to utilize forward
foreign currency exchange contracts may be restricted.
While the Portfolio will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the Portfolio may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Portfolio than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between the
Portfolio's portfolio holdings of securities quoted or denominated in a
particular currency and forward contracts entered into by the Portfolio. Such
imperfect correlation may cause the Portfolio to sustain losses which will
prevent the Portfolio from achieving a complete hedge or expose the Portfolio to
risk of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive the Portfolio of unrealized profits or force the Portfolio to
cover its commitments for purchase or resale, if any, at the current market
price.
Currency Swaps, Mortgage Swaps, Index Swaps and Interest Rate Swaps,
Caps, Floors and Collars. The Portfolio may, with respect to up to 5% of its net
assets, enter into currency swaps for both hedging purposes and to seek to
increase total return. In addition, the Portfolio may, with respect to 5% of its
net assets, enter into mortgage, index and interest rate swaps and other
interest rate swap arrangements such as rate caps, floors and collars, for
hedging purposes or to seek to increase total return. Currency swaps involve the
exchange by the Portfolio with another party of their respective rights to make
or receive payments in specified currencies. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. Index swaps
involve the exchange by the Portfolio with another party of the respective
amounts payable with respect to a notional principal amount at interest rates
equal to two specified indices. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates.
-13-
<PAGE>
The Portfolio will enter into interest rate, mortgage and index swaps
only on a net basis, which means that the two payment streams are netted out,
with the Portfolio receiving or paying, as the case may be, only the net amount
of the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable
under an interest rate, index or mortgage swap and the entire amount of the
payment stream payable by the Portfolio under a currency swap or an interest
rate floor, cap or collar is held in a segregated account consisting of cash or
liquid assets; BSAM believes that swaps do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions.
The Portfolio will not enter into swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by BSAM.
The use of interest rate, mortgage, index and currency swaps, as well
as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If BSAM is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the Portfolio would be less favorable than it would
have been if this investment technique were not used. The staff of the
Securities and Exchange Commission currently take the position that swaps, caps,
floors and collars are illiquid and thus subject to the Portfolio's 15%
limitation on investments in illiquid securities.
Lending Portfolio Securities. To a limited extent, the 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, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the 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 the Portfolio to be the equivalent of cash.
From time to time, the Portfolio may return to the borrower or a third party
which is unaffiliated with the 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)
the 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) the Portfolio must be
able to terminate the loan at any time; (4) the 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) the 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
-14-
<PAGE>
event adversely affecting the investment occurs. These conditions may be
subject to future modification.
The Portfolio has appointed Custodial Trust Company (CTC), an affiliate
of BSAM, as its Lending Agent. CTC receives a fee for its services.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 7 as fundamental policies. These restrictions
cannot be changed, as to the Portfolio, without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. Investment restrictions numbered 8 through 13 are not fundamental
policies and may be changed by vote of a majority of the Trustees at any time.
The Portfolio may not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. Government securities.
3. 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 the 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.
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. The Portfolio, however,
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.
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indices.
Non-Fundamental Restrictions.
8. Knowingly invest more than 15% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
-15-
<PAGE>
9. Purchase securities on margin, but the 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.
10. 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 respect
to options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indexes.
11. Make short sales of securities, other than short sales "against the
box."
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
13. Make additional investments when borrowing exceeds 5% of Portfolio
assets.
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 POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (64) Trustee President of The Bren
126 East 56th Street Co., since 1969;
New York, NY 10021 President of Koll, Bren
Realty Advisors and
Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (70) Trustee Partner of Bryan Cave, a
7535 Claymont Court law firm in St. Louis
Apt. #2 since January 1993;
Belleville, IL 62223 United States Senator of
Illinois from 1981 to
1993.
John R. McKernan, Jr. (50) Trustee Chairman and Chief
P.O. Box 15213 Portland, Executive Officer of
ME 02110 McKernan Enterprises
since January 1995;
Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (56) Trustee President and Chief
700 13th Street, N.W. Executive Officer,
Suite 400 Association of American
Washington, D.C.20005 Railroads from June 1997
to March 1998; Vice
Chairman of Cassidy &
Associates from February
-16-
<PAGE>
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.
Michael Minikes* (53) Trustee Senior Managing Director
245 Park Avenue Chairman of Bear Stearns since
New York, NY 10167 September 1985; Chairman
of BSFM since December
1997; Treasurer of Bear
Stearns since January
1986; Treasurer of the
Bear Stearns Companies
Inc. since October 1989.
Robert S. Reitzes (54) President President of Mutual
575 Lexington Avenue Funds- Bear Stearns
New York, NY 10022 Asset Management and
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.
William J. Montgoris (51) Executive Vice Chief Financial Officer
245 Park Avenue President and Chief Operating
New York, NY 10167 Officer, Bear Stearns
Peter B. Fox (46) Executive Vice Founder, Fox Development
Three First National Plaza President Corp., 1998; Managing
Chicago, IL 60602 Director - Emeritus,
Bear Stearns since
February 1997; Senior
Managing Director,
Public Finance, Bear
Stearns from 1987 to
1997.
-17-
<PAGE>
Stephen A. Bornstein (55) Vice President Managing Director, Legal
575 Lexington Avenue Department; General
New York, NY 10022 Counsel, Bear Stearns
Asset Management.
Frank J. Maresca (39) Vice President Managing Director of
245 Park Avenue New York, and Treasurer Bear Stearns since
NY 10167 September 1994; Chief
Executive Officer and
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
575 Lexington Avenue of Bear Stearns since
New York, NY 10022 March 1996; previously
Vice President, Asset
Management Group,
Goldman Sachs from 1986
to 1996.
Ellen T. Arthur (45) Secretary Associate Director of
575 Lexington Avenue Bear Stearns since
New York, NY 10022 January 1996; Secretary
of BSAM since December
1997; Senior Counsel and
Corporate Vice President
of PaineWebber Incorpora-
ted from April 1989 to
September 1995.
Vincent L. Pereira (33) Assistant Treasurer Associate Director of
245 Park Avenue New York, Bear Stearns since
NY 10167 September 1995;
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 Secretary Legal Assistant for Bear
575 Lexington Avenue 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
-18-
<PAGE>
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:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Board Aggregate Pension or Estimated Annual Total
Member Compensation Retirement Benefits Benefits Upon Compensation from
from Fund* Accrued as Part of Retirement Fund and Fund
Fund's Expenses Complex Paid to
Board Members
<S> <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 $8,600 for 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 March 31, 1998.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plan" 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 Portfolio's Prospectus entitled "Management of the
Portfolio."
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated September 8, 1997, with the Fund. The Agreement will remain
in effect for two years from the date of execution and shall continue from year
to year thereafter if it is approved 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 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
Agreement is terminable, as to the 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,
-19-
<PAGE>
by BSAM. 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.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSAM a monthly fee at the annual rate of 0.65% of value of the Portfolio's
average daily net assets. For the period from December 29, 1997 (commencement of
investment operations) through March 31, 1998, the investment advisory fees
amounted to $12,178. For the fiscal year ended March 31, 1998, the investment
advisory fees amounted to $12,178. These amounts were waived pursuant to a
voluntary undertaking by BSAM, resulting in no fees being paid by the Portfolio.
In addition, the Adviser reimbursed $46,910 in order to maintain the voluntary
expense limitation.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated as of February 22,
1995, as revised April 11, 1995, June 2, 1997 , September 8, 1997 and February
4, 1998, with the Fund. The Administration Agreement will continue until
February 22, 1999 and thereafter will be subject to annual approval by (i) the
Fund's Board 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 without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
Portfolio's shares or upon not less than 90 days' notice by BSFM. 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 the Portfolio's
average daily net assets. For the period from December 29, 1997 (commencement of
operations) through March 31, 1998 the administration fees accrued amounted to
$2,801.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated as
of February 22, 1995, as revised September 8, 1997 and February 4, 1998 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 Portfolio's Prospectus.
Distribution Plan. 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 plan (the "Distribution Plan") with respect to Class A, B
and C shares. The Fund's Board of Trustees believes
-20-
<PAGE>
that there is a reasonable likelihood that the Distribution Plan will benefit
the Portfolio and the holders of its Class A, B, and C shares.
A quarterly report of the amounts expended under the Distribution Plan
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the 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 Distribution 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 Distribution 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 the
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 separately by
class. The 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 was approved on September 8, 1997 and
February 4, 1998. The Distribution Plan is terminable at any time, as to each
class of the 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 Distribution 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 the 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 the Portfolio, in the event of its assignment (as defined in
the 1940 Act). For the period December 29, 1997 (commencement of operations)
through March 31, 1998, the Portfolio paid Bear Stearns $3,305, $2,073 and
$1,813 with respect to Class A, B and C shares, respectively, under the Plan. Of
such amounts, the following were paid as indicated for Class A, B and C shares
of the Portfolio:
Class A Class B Class C
------- ------- -------
Payments to Broker or $1,653 ---- ----
Dealers
Payments to Underwriters $1,653 $2,073 $1,813
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the 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.
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
-21-
<PAGE>
officers, directors, employees or holders of 5% or more of the outstanding
voting securities of Bear Stearns, BSAM or their 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, including,
but not limited to, proportionately in relation to the net assets of each
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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PRIOR PERFORMANCE OF RELATED ACCOUNTS
Set forth in the following table is the performance history of a
composite of institutional private accounts with investment objectives,
policies, strategies and risks substantially similar to those of the Portfolio.
The accounts constituting the composite were managed during the periods
indicated by a division of Bear, Stearns & Co. Inc. ("Bear Stearns") which was
then known as Bear Stearns Asset Management (the "Division"). Bear Stearns
recently reorganized its asset management operations so that the Division was
consolidated with the Adviser which then changed its name to Bear Stearns Asset
Management Inc. Prior to such consolidation, the Division rendered advisory
services to separate accounts while the Adviser rendered advisory services to
registered investment companies. During all periods reflected in the table
below, both the Division and the Adviser were commonly managed and shared
portfolio management personnel, including the portfolio managers of the
Portfolio who have been and are responsible for managing the accounts reflected
in the composite. Therefore, the Adviser believes that the performance data
reflected below are illustrative of the past performance of the Adviser in
managing a composite set of accounts substantially similar to the Portfolio. For
that reason, this performance history may be relevant to potential investors in
the Portfolio. Investors should note, however, that prior to January 1, 1997,
the portfolio managers of the Portfolio reported to a Director of Equities who
is no longer an employee of the Adviser or any of its affiliates.
The data does not represent the past performance of the Portfolio and
prospective investors should not consider these performance figures as
indicative of the future performance of the Portfolio or of the Adviser.
-21-
<PAGE>
The composite performance data shown below were calculated in
accordance with the standards of the Association for Investment Management and
Research ("AIMR" (1)), retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses. All
returns reflect the deduction of all fees and expenses paid by the accounts
including, investment advisory fees, brokerage commissions and execution costs
but does not reflect the imposition of federal or state income taxes or
custodial fees, if any. The composite includes all actual, fee-paying,
discretionary accounts managed by the Division that have investment objectives,
policies, strategies and risks substantially similar to those of the Portfolio.
The composite, however, excludes certain accounts with similar investment
objectives which, in the opinion of the Adviser, were not managed in a manner
similar to the manner in which the Portfolio will be managed as a result of
asset size, investment restrictions or other variables. Securities transactions
are accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns.
The institutional private accounts that are included in the composite
are not subject to the same types of expenses to which the Portfolio is subject
nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Portfolio by the Investment Company Act or
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Consequently, the performance results for the composites could have been
adversely affected if the institutional private accounts included in the
composites had been regulated as investment companies under the federal
securities laws.
The investment results of the composites presented below are unaudited
and are not intended to predict or suggest the returns that might be experienced
by the Portfolio or an individual investor investing in the Portfolio. Investors
should also be aware that the use of a methodology different from that used
below to calculate performance could result in different performance data.
The information in the columns below headed "Disperion Max - Min"
reflect the highest and lowest investment performance of the various accounts
which comprise the composite for the relevant period. The information in the
column headed "# of Portfolios" reflects the number of accounts included in the
composite for the relevant period. The information in the column below headed
"Composite Market Value" reflects the total assets in all accounts included in
the composite for the relevant period (expressed in millions). Lastly, the
information in the column below headed "% of total assets" reflects the
proportion of the total assets managed by the Sub-Adviser which are managed in
accounts comprising the Non-U.S. composite.
- ------------------------------
(1) AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable. Note however that the SEC mandated calculation
of performance differs from that mandated by AIMR.
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<PAGE>
BALANCED COMPOSITE PERFORMANCE SUMMARY (2)
NET OF MANAGEMENT FEES
AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
LIPPER ADVISER'S
BALANCED BALANCED MARKET PERCENT OF
TIME FUND FUND NUMBER OF VALUE ADVISER'S
PERIOD INDEX INDEX DISPERSION PORTFOLIOS (MILLIONS) ASSETS
MAX MIN
1/1/97
to
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/97 16.17% 16.66% 20.79% 18.41% 22 $312 3.94%
1996 13.01 12.77 14.36% 11.48% 19 213 2.30
1995 24.89 31.04 32.48% 26.94% 15 166 2.02
1994 -2.05 -0.39 0.71% -1.19% 12 71 1.07
1993 11.95 9.84 10.52% 8.83% 10 52 0.83
1992 7.46 7.81 8.24% 7.36% 6 46 0.82
1991 25.83 22.97 21.85% 24.03% 4 34 0.69
1990(3) 3.07 4.62 6.53 3.29 5 24 0.55
</TABLE>
- ------------------------------
(2) Balanced Account Composite performance represents time-weighted rates of
return inclusive of transaction costs and advisory fees for a dollar-weighted
composite of fully discretionary tax-exempt balanced accounts greater than $2
million in size. Rates of return are calculated by deducting the actual advisory
fees of accounts in the composite. Individual account fees may differ, which
will affect returns. A complete list and description of all the Adviser's
composites is available upon request. Past performance is not an assurance of
future results.
(3) Returns are calculated for a partial year, from the inception of the
Composite (April 1, 1990) through December 31, 1990.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated as of February 22, 1995, as
revised September 8, 1997 which is renewable annually. For the period from
December 29, 1997 (commencement of operations) through March 31, 1998, Bear
Stearns retained $32,306 from the sales loads on Class A and $0 from contingent
deferred sales charges ("CDSC") on Class B and Class C shares. 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 Portfolio's 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 the 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.
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<PAGE>
Net Asset Value per Share $13.40
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.78
Per Share Offering Price to
the Public $14.18
Redemption Commitment. The 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 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. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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, B, C and 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 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
C shares and the dividends payable on Class B and C shares will be reduced by
incremental expenses borne solely by that class, including the asset-based sales
charge to which Class B and 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,
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<PAGE>
(iii) printing and mailing costs of shareholder reports, Prospectuses,
Statements of Additional Information and other materials for current
shareholders, (iv) fees to independent trustees, (v) custodian expenses, (vi)
share issuance costs, (vii) organization and start-up costs, (viii) interest,
taxes and brokerage commissions, and (ix) non-recurring expenses, such as
litigation costs. Other expenses that are directly attributable to a class are
allocated equally to each outstanding share within that class. Such expenses
include (a) Distribution and Shareholder Servicing Plan fees, (b) incremental
transfer and shareholder servicing agent fees and expenses, (c) registration
fees and (d) shareholder meeting expenses, to the extent that such expenses
pertain to a specific class rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Exchange traded Portfolio
securities, including covered call options written by the Portfolio, are valued
at the last sale price on the securities exchange or national securities market
on which such securities primarily are traded. Securities not listed on an
exchange or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available.
Short-term investments are carried at amortized cost, which approximates 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 management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
Substantially all debt securities (including short-term investments
greater than 60 days but less than one year at time of purchase) are valued each
business day by one or more independent pricing services (the "Service")
approved by the Board. Securities valued by the Service that are readily
available and are representative of the bid side of the market are valued at the
mean between the quoted bid prices and asked prices. Short-term investments with
maturities of 60 days or less may be carried at amortized cost, which
approximates value. Other investments valued by the Service are carried at fair
value as determined by the Service, based on methods which include the
consideration of the following: (i) yields or prices of securities of comparable
quality, coupon, maturity and type; (ii) indications as to the values from
dealers; and (iii) general market conditions. Investments 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
markets.
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 Trustees generally will take the
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<PAGE>
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 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 the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolio and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Code. As a regulated investment company, the 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 the 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 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 the 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 the 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
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<PAGE>
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 the 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 the 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 the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the 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, the 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 the 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 the 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 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
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<PAGE>
or loss. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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, the 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 the 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 the 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.
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, the
Portfolio must satisfy an asset diversification test in order to qualify as a
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regulated investment company. Under this test, at the close of each quarter of
the 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 the 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 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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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-
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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 the Portfolio's disposition of domestic "small
business" stock will be subject to tax.
Conversely, if the 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 the 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 the 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 the 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 the 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).
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 the 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.
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Investment income that may be received by the 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 the 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 the Portfolio's assets to be invested in various
countries is not known.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares 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 the 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 the
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.
The 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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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
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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 the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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 the 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 the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
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<PAGE>
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
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.
Such information may be useful to BSAM in serving both the 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 the 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 the Portfolio for transactions in securities of domestic issuers. When
transactions are executed in the over-the-counter market, the Portfolio will
deal with the primary market makers unless a more favorable price or execution
otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
BSAM expects that the turnover on the securities held in the Portfolio generally
will not exceed 30% in any one year. The Portfolio turnover rate for the period
December 29, 1997 (commencement of investment operations) through March 31, 1998
was 12.72.% This portfolio turnover rate is significantly higher than the
portfolio turnover rates of other mutual funds that invest in equity securities.
A higher portfolio turnover rate means that the Portfolio will incur
substantially higher brokerage costs and may realize a greater amount of
short-term capital gains or losses.
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 the
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 adopted by the Securities and Exchange Commission, Bear
Stearns may directly execute such transactions for the Portfolio on the floor of
any national securities exchange, provided (i) on 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 period December 29, 1997 (commencement of operations), through
March 31, 1998, the Portfolio paid total brokerage commissions of $5,528, of
which $2,598 was paid to Bear Stearns. The Portfolio paid 47% of its commissions
to Bear Stearns, and, with respect to all the securities transactions for the
Portfolio, 42.53% of the transactions involved commissions being paid to Bear
Stearns.
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<PAGE>
The Portfolio paid an average commission rate per share of $0.0543. The
percentage of commissions for which it received research services paid by the
Portfolio was ___% of the total brokerage commissions paid by the Portfolio.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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.
The total return for Class A (at maximum offering price) for the period
December 29, 1997 (commencement of investment operations) through March 31, 1998
was 2.09%. Based on net asset value per share, the total return for Class A was
8.04% for this period. The total return for Class B, Class C (including
contingent deferred sales charge) was 2.49% and 6.83%, respectively and Class Y
was 7.80%, for this period.
Total return 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.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
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 being purchased or sold, or being
considered for purchase or sale, by the Portfolio, 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 the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund; and (5) the acceptance
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<PAGE>
of gifts more than a de minimus value from those doing business with or on
behalf of the Portfolio. Certain transactions are exempt from item (1) of the
previous sentence, including: (1) purchases or sales on the accounts of an
access person that are not under the control of or that are non-volitional with
respect to that person; (2) purchases or sales of securities not eligible for
purchase or sale by the Portfolio; (3) purchases or sales relating to rights
issued by an issuer pro rata to all holders of a class of its securities; and
(4) any securities transactions, or series of related transactions, involving
500 or fewer shares of an issuer having a market capitalization greater than $1
billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Adviser to the Portfolio may aggregate or bunch trades with other clients
provided that no client is materially disadvantaged. Access persons are required
by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the Investment Company
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 the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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 March 31, 1998 the following shareholders owned,
directly or indirectly, 5% or more of the indicated class of the Portfolio's
outstanding shares.
Percent of Class A
Name and Address Shares Outstanding
Bear Stearns Securities Corp. 26.3%
FBO 200-61012-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 18.1%
FBO 001-00315-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 20.9%
FBO 051-26132-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
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<PAGE>
Bear Stearns Securities Corp. 7.7%
FBO 050-23391-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class B
Shares Outstanding
Bear Stearns Securities Corp. 65.2%
FBO 001-00315-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class C
Shares Outstanding
Bear Stearns Securities Corp. 81.2%
FBO 001-00315-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class Y
Shares Outstanding
Bear Stearns Securities Corp. 19.1%
FBO 051-37445-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 20.2%
FBO 051-32810-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 16.1%
FBO 049-40526-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 14.7%
FBO 051-37549-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 21.1%
FBO 049-40474-18
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 the Portfolio.
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<PAGE>
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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of .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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
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 issuance of the shares of beneficial interest being sold
pursuant to the Portfolio's 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 Portfolio's Annual Report to Shareholders for the period ended March 31,
1998 is a separate document supplied with this Statement of Additional
Information, and the financial statements and accompanying notes appearing
therein are incorporated by reference into this Statement of Additional
Information.
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<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
July 28, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1997 of S&P STARS Portfolio (the "STARS Portfolio" or
the "Portfolio"), a portfolio of The Bear Stearns Funds (the "Fund"), as each
may be revised from time to time. To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc. ("PFPC"), Attention: S&P STARS 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"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., serves as the investment adviser to the
Portfolio.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............................ B-2
Management of the Fund.................................................. B-7
Management Arrangements................................................. B-10
Purchase and Redemption of Shares....................................... B-14
Determination of Net Asset Value........................................ B-16
Dividends, Distributions and Taxes...................................... B-16
Portfolio Transactions.................................................. B-23
Performance Information................................................. B-25
Code of Ethics.......................................................... B-26
Information About the Fund.............................................. B-27
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors...................................... B-28
Financial Statements.................................................... B-28
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
STARS Portfolio."
Portfolio Securities
Bank Obligations. 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 the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the 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 the 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.
B-2
<PAGE>
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
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.
Repurchase Agreements. The 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, the 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 the 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. The Portfolio will consider on an ongoing basis
the creditworthiness of the institutions with which it enters into repurchase
agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the 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, the
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 the Portfolio may invest in them only if at the
time of an investment the borrower meets the criteria set forth in the
Portfolio's Prospectus for other commercial paper issuers.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Portfolio will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
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 the Portfolio pursuant to Rule 144A under the Securities Act of
1933, as amended, it 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 the 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, the Portfolio's investing in such securities may have
B-3
<PAGE>
the effect of increasing the level of illiquidity in the Portfolio during such
period.
Management Policies
Options Transactions. The Portfolio may engage in options transactions
of the type described in the Portfolio's Prospectus.
The principal reason for writing covered call options, which are call
options with respect to which the Portfolio owns the underlying security or
securities, is to realize, through the receipt of premiums, a greater return
than would be realized on the Portfolio's securities alone. Similarly, the
principal reason for writing covered put options is to realize income in the
form of premiums. 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. The size of the premiums that
the 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 Portfolio 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. The 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 the Portfolio's obligation as the writer of an option
continues, it 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 the Portfolio effects a closing purchase transaction. The 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, the 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, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no
B-4
<PAGE>
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 the 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. The Portfolio may engage in stock index option
transactions of the type described in the Portfolio's Prospectus. 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.
Lending Portfolio Securities. To a limited extent, the 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, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the 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 the Portfolio to be the equivalent of cash.
From time to time, the Portfolio may return to the borrower or a third party
which is unaffiliated with the 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)
the 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) the Portfolio must be
able to terminate the loan at any time; (4) the 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) the 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.
B-5
<PAGE>
Investments in Warrants. The Portfolio does not presently intend to
invest in warrants. However, any future investment in warrants will be
limited to 5% of its net assets.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to the Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the outstanding voting securities of the Portfolio, as the case
may be. Investment restrictions numbered 11 through 14 are not fundamental
policies and may be changed by vote of a majority of the Trustees of the Fund at
any time. The Portfolio may not:
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 in commodities, except that it may purchase and sell options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes.
3. 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 it 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.
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, it 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 Board
of Trustees of the Fund.
6. Act as an underwriter of securities of other issuers, except to the
extent it may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
7. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
8. Purchase securities on margin, but it 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.
9. 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 Portfolio's investments, in all such companies to
exceed 5% of the value of its total assets.
10. Invest in the securities of a company for the purpose of exercising
management or control, but it will vote the securities it owns in its portfolio
as a shareholder in accordance with its views.
B-6
<PAGE>
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 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 Portfolio's 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.
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 POSITION PRINCIPAL OCCUPATION
(AND AGE) 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. Trustee Chairman and Chief Executive
(50) Officer of McKernan
P.O. Box 15213 Enterprises Inc. since January
Portland, ME 04112 1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (56) President and Chief Executive
700 13th St., N.W., Suite 400 Trustee Officer, Association of
Washington, D.C. 20005 American Railroads since June
1997; Vice Chairman of Cassidy
& Associates
B-7
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
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.
Michael Minikes (53) Trustee Chairman Senior Managing
245 Park Avenue Director of Bear Stearns since
New York, NY 10167 September 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 B. Fox (46) Executive Vice Founder, Fox Development
Three First National Plaza President Corp., 1998; Managing Director
Chicago, IL 60602 - 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) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset Management.
Frank J. Maresca (40) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September 1994;
New York, NY 10167 Chief Executive Officer and
President of BSFM since
December 1997; Associate
Director of Bear Stearns from
September 1993 to September
1994; Vice
B-8
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
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.
Ellen T. Arthur (45) 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 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-9
<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>
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 for 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 March 31, 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 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 STARS
Portfolio."
General.
On December 3, 1997, BSFM, the registered investment adviser of the
Portfolio, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Prior to June 25, 1997, the Portfolio invested all of its assets into the S&P
STARS Master Series of S&P STARS Fund (the "Master Series"), rather than
directly in a portfolio of securities in an arrangement typically referred to as
a "master-feeder" structure. Active portfolio management was performed at the
Master Series level and BSFM was retained by the Master Series rather than
B-10
<PAGE>
the Portfolio. At a meeting held on June 18, 1997, a majority of the
shareholders of the Portfolio approved an investment advisory contract between
BSFM and the Portfolio and active management of the Portfolio investments
commenced. Historical information provided below for periods prior to June 25,
1997 pertaining to items such as advisory fees, portfolio turnover, and
brokerage expenses reflects those items as incurred by the Master Series.
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated June 1, 1997, with the Fund. 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 either event the continuance also is approved by a
majority of the Fund's 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 Fund's Board of
Trustees, including a majority of the Trustees who are not "interested persons",
approved the Agreement on April 29, 1997, subject to approval by the
shareholders of the Portfolio. Such shareholder approval was obtained on June
18, 1997 at a meeting of the shareholders of the Portfolio. The Agreement is
terminable, 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. 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 the Portfolio in
accordance with its stated policies, subject to the approval of the Fund's Board
of Trustees. BSAM provides the Portfolio with portfolio managers who are
authorized by the Fund's Board of Trustees to execute purchases and sales of
securities. The portfolio managers are Robert S. Reitzes and Gayle M. Sprute.
All purchases and sales are reported for the Board's review at the meeting
subsequent to such transactions.
As noted above, prior to June 25, 1997, the Portfolio did not retain an
investment adviser. Instead, The Master Series retained BSFM (now, BSAM) to
serve as its investment adviser. For the period from April 3, 1995 (commencement
of operations) through March 31, 1996, the investment advisory fees payable
amounted to $384,779. BSAM waived its advisory fee entirely and reimbursed
$4,424 and $79,750 of the Portfolio's and the Master Series' expenses,
respectively, pursuant to a voluntary undertaking by BSFM. For the fiscal years
ended March 31, 1997 and March 31, 1998, the investment advisory fees payable
amounted to $747,970 and $1,262,953, respectively. BSAM waived $699,997 and
$645,637 of its advisory fee pursuant to a voluntary undertaking, resulting in
net advisory fees of $47,973 and $617,310 paid by the Master Series and the
Portfolio for the fiscal years ended March 31, 1997 and March 31, 1998,
respectively.
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. The Administration Agreement will continue until February 22,
1999 and thereafter will be subject to annual approval by (i) the Fund's Board
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
B-11
<PAGE>
voting on such approval. The Administration Agreement is terminable without
penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a
majority of the Portfolio's shares or upon not less than 90 days' notice by
BSFM. 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 the Portfolio's
average daily net assets. For the period from April 3, 1995 (commencement of
operations) through March 31, 1996, the administration fee accrued amounted to
$78,090 and the amount paid was $74,227. For the fiscal years ended March 31,
1997 and March 31, 1998, the administration fee accrued amounted to $149,100 and
$252,557, respectively and the amount paid was $131,668 and $224,700,
respectively.
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, and February 4, 1998 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.
Under the terms of the Administrative Services Agreement, PFPC is
entitled to receive 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, .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 approximately
$100,000 for the Portfolio.
Prior to June 25, 1997, PFPC Inc. provided administrative services to
the Portfolio. As compensation for PFPC's administrative services, the Fund
agreed to pay PFPC $5,500 per month.
Prior to June 25, 1997, PFPC International Ltd. provided certain
administrative services to the Master Series pursuant to the Administrative
Services Agreement dated February 23, 1995, with the Fund. Under the
Administrative Services Agreement, the Master Series paid PFPC International
Ltd. an annual fee, as a percentage of average daily net assets, equal to .12 of
1% of the first $200 million of average net assets, .09 of 1% of the next $200
million, .075 of 1% of the next $200 million and .05 of 1% of average net assets
in excess of $600 million, subject to a monthly minimum fee of $8,500.
Distribution Plan. 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 the Portfolio and
the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under each Distribution
Plan, 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 Distribution
B-12
<PAGE>
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 Plans. Such approval must be by a "majority" of the
Class A and Class B shares (as defined in the 1940 Act), voting separately by
class. Each Distribution Plan and related 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 January 28, 1997. The Distribution Plan with respect
to the Class B shares was so approved on September 8, 1997. Each Distribution
Plan is terminable at any time, as to each class of the 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 Distribution 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 the 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 the 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 Portfolio paid Bear Stearns $152,980 and $176,445 with
respect to Class A and C shares, respectively, under the Plan. For the fiscal
year ended March 31, 1997, the Portfolio paid Bears Stearns $276,327 and
$324,164 with respect to Class A and C shares, respectively, under the Plan. For
the fiscal year ended March 31, 1998, the Portfolio paid Bear Stearns $443,379,
$7,370 and $520,582 with respect to Class A, B and C shares, respectively, under
the Plan. Of such amounts the following amounts were paid as indicated for Class
A, B and C shares of the Portfolio:
<TABLE>
<CAPTION>
April 3, 1995 - Fiscal Year Ended Fiscal Year Ended
March 31, 1996 March 31, 1997 March 31, 1998
Class A Class C Class A Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Payments to $152,980 ---- $276,327 $156,745 $221,689 ---- $340,935
Brokers and
Dealers
Payments to ---- $176,445 ---- $167,419 ---- $7,370 $179,647
Underwriters
Payments for ---- ---- ---- ---- $221,690 ---- ----
Marketing and
Advertising
</TABLE>
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the Portfolio's Class B 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 B 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.
Expenses. The Fund bears its own operating expenses. Operating expenses
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 fees, 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 existence of the Fund, 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 of the
Fund 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,
including, but not limited to, proportionately in relation to the net assets of
each portfolio.
B-13
<PAGE>
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 the 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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's 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 from April 3, 1995 (commencement of operations) through March 31,
1996, Bear Stearns retained $32,434 from the sales loads on Class A shares and
$25,670 from contingent deferred sales charges ("CDSC") on Class C shares. For
the fiscal years ended March 31, 1997 and March 31, 1998, respectively, Bear
Stearns retained approximately $904,000 and $1,022,000 from the sales loads on
Class A shares and approximately $30,000 and $26,000 from CDSC on Class C
shares. 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 Portfolio's 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 the 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, 1997.
B-14
<PAGE>
Net Asset Value per Share $19.97
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 1.16
Per Share Offering Price to
the Public $21.13
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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 the
Portfolio's 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.
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<PAGE>
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates 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 management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
The 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 the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
B-16
<PAGE>
Qualification as a Regulated Investment Company. The 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, the 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 the 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 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 the 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 the 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 the 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 the Portfolio
has a built-in loss with respect to property that becomes a part of a conversion
transaction.
B-17
<PAGE>
No authority exists that indicates that the converted character of the income
will not be passed through to the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the 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, the 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 the 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 the 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 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. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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, the 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 the 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.
B-18
<PAGE>
Finally, if the 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.
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, the
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
the 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 the 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
B-19
<PAGE>
for such calendar year and 98% of 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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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 the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the 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 the 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 the 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
B-20
<PAGE>
corporations for the taxable year. A dividend received by the 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 the 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).
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 the 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 the 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 the 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 the Portfolio's assets to be invested in various
countries is not known.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares 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 the 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
B-21
<PAGE>
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 the
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.
The 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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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 the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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 the 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
B-22
<PAGE>
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 the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
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 both the
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 the Portfolio. Sales of Portfolio
shares by a broker may be taken into consideration, and brokers also
B-23
<PAGE>
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 the Portfolio for transactions in securities of domestic
issuers. When transactions are executed in the over-the-counter market, the
Portfolio will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
The turnover rate for the Master Series for the period April 3, 1995
(commencement of operations) through March 31, 1996 and the fiscal years ended
March 31, 1997 and March 31, 1998 for the Portfolio was 296% , 220% and 173%,
respectively. The portfolio turnover rate for the period ended March 31, 1997
differed from the anticipated portfolio turnover rate because of market
volatility. BSAM repositioned the Master Series' portfolio by selling some of
its technology stocks and purchasing stocks that were believed to be more
defensive in nature, such as healthcare, consumer non-durables, and growth
stocks. 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 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 the
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 adopted by the Securities and Exchange Commission, Bear
Stearns may directly execute such transactions for the 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 period April 3, 1995 (commencement of operations) through March
31, 1996, the fiscal year ended March 31, 1997 (for the Master Series), and the
fiscal year ended March 31, 1998 (for the Portfolio) total brokerage commissions
paid were $415,246, $474,679, and $521,114, respectively, of which $378,353,
$368,764 and $305,271, respectively, was paid to Bear Stearns. With respect to
such periods, 91.10%, 77.68% and 58.58%, respectively, of its total commissions
were paid to Bear Stearns, and, with respect to all the securities transactions,
90.60%, 76.59% and 52.83%, respectively of the transactions involved commissions
being paid to Bear Stearns.
B-24
<PAGE>
For the fiscal year ended March 31, 1997 (for the Master Series ) and
the fiscal year ended March 31, 1998 (for the Portfolio) the average commission
rate paid per share was $0.0595 and $0.0541, respectively. With respect to such
periods, the percentage of commissions for which research services were received
was 98.6% and ___% of the total brokerage commissions paid , respectively.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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's 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.
The average annual total return for Class A for the fiscal year ended
March 31, 1998 was 26.90% after reflecting the maximum initial sales charge
effective at the beginning of the period of 4.75%. Based on net asset value per
share, the average annual total return for Class A was 28.90% for the same
period. The average annual total return for Class C was 28.31% for this period.
Average annual total return for Class Y for the fiscal year ended March 31, 1998
was 26.06%.
Total return 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 total return for Class A, after reflecting the maximum initial
sales charge effective at the beginning of the period of 4.75%, for the year
ended March 31, 1998 and the period April 5, 1995 (commencement of investment
operations) to March 31, 1998 was 36.75% and 103.95%, respectively. Based on net
asset value per share, the total return for Class A was 43.53% and 114.14%,
respectively, for the same periods. The total return for Class C was 42.80% and
110.82%, respectively, for the periods. The total return for Class Y for the
year ended March 31, 1998 and the period August 7, 1995 (commencement of initial
public offering) to March 31, 1998 was 44.22% and 84.83%, respectively.
B-25
<PAGE>
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Trust must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Trust and BSAM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security for his or her 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 the
Portfolio; and (4) the purchase of any securities in an initial public offering
or private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the 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 an (i) 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 the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Trust who is not an "interested person" (as defined in the 1940 Act) of the
Trust is not required to report a transaction if such person did not know or, in
the ordinary course of his duties as a trustee of the Trust, should have known,
at the time of the transaction, that, within a 15 day period before or after
such transaction, the security that such person purchased or sold was either
purchased or sold, or was being considered for purchase or sale, by the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
B-26
<PAGE>
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "General Information."
Bear Stearns and S&P entered into a License Agreement dated October 1,
1994 that provides for, among other matters: (i) the grant by S&P to Bear
Stearns of the exclusive right until March 31, 2001, and the non-exclusive right
thereafter, to use certain of S&P's proprietary trade names and trademarks for
investment companies based, in whole or in part, on the STARS System, (ii) such
right to become non-exclusive at an earlier date, if the Portfolio and certain
other investment companies which, in the future, may be sponsored by Bear
Stearns fail to reach certain aggregate asset sizes, measured annually
commencing on April 1, 1996, (iii) such right to terminate at S&P's option upon
certain events, such as breach by Bear Stearns of the material terms of the
License Agreement, S&P ceasing to publish STARS, the adoption of adverse
legislation or regulation (none of which currently is foreseen) affecting S&P's
ability to license its trade names or trademarks as contemplated by the License
Agreement, or the existence of certain litigation (none of which is known to
exist or to be threatened), (iv) the payment by Bear Stearns of annual license
fees in amounts equal to a range of .30% to .375% of the net assets of the
Portfolio and other investment companies subject to the License Agreement and
(v) a partial reduction of the license fees to offset certain marketing expenses
incurred by Bear Stearns in connection with the Portfolio. As of January 23,
1998, Bear Stearns and S&P mutually agreed to eliminate the exclusivity
provision of the Agreement dated October 1, 1994.
STARS is the centerpiece of OUTLOOK, S&P's flagship investment
newsletter that has a high net worth readership of 25,000 weekly subscribers.
STARS reaches more than 74,000 brokers and investment professionals on their
desktop computers through MarketScope, S&P's on-line, real-time equity
evaluation service, which is accessed more than one million times daily.
S&P has more than 130 years' experience in providing financial
information and analysis, offers more than 60 products and employs more than 50
experienced equity analysts. These analysts consider fundamental factors that
are expected to impact growth. These factors include company operations and
industry and macroeconomic conditions. Among the fundamental factors are the
company's balance sheet, ability to finance growth, competitive market
advantages, earnings per share growth and strength of management.
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 March 31, 1998 the following shareholders owned, directly or
indirectly, 5% or more of the indicated Class of the Portfolio's outstanding
shares.
Percent of Class Y
Name and Address Shares Outstanding
- ---------------- ------------------
Custodial Trust Company 70.5%
101 Carnegie Center
Princeton, NJ 08540
B-27
<PAGE>
Percent of Class B
Shares Outstanding
------------------
Bear Stearns Securities Corp 7.8%
1 Metrotech Center North
Brooklyn, NY 11201-3857
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the 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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of .01% 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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
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
Portfolio's Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York,
10281, independent auditors, have been selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolio's 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 reports of
independent auditors appearing therein are incorporated by reference into this
Statement of Additional Information.
B-28
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
THE INSIDERS SELECT FUND
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JULY 28, 1998
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1998 of The Insiders Select Fund (the "Portfolio") of
The Bear Stearns Funds (the "Fund"), as each may be revised from time to time.
To obtain a free copy of such prospectus, please write to the Fund at PFPC Inc.
("PFPC"), Attention: The Insiders Select Fund, 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 the
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 Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............................ B-2
Management of the Fund.................................................. B-9
Management Arrangements................................................. B-12
Purchase and Redemption of Shares....................................... B-15
Determination of Net Asset Value........................................ B-17
Dividends, Distributions and Taxes...................................... B-17
Portfolio Transactions.................................................. B-24
Performance Information................................................. B-26
Code of Ethics.......................................................... B-26
Information About the Fund.............................................. B-27
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors...................................... B-28
Financial Statements.................................................... B-28
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
Portfolio Securities
Bank Obligations. 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 the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the 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 the 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
B-2
<PAGE>
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
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.
Repurchase Agreements. The 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, the 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 the 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. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. The Portfolio will consider on an
ongoing basis the credit worthiness of the institutions with which it enters
into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the 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, the
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, the Adviser 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 the Portfolio may invest in them only
if at the time of an investment the borrower meets the criteria set forth in the
Portfolio's Prospectus for other commercial paper issuers.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Portfolio will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
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 the Portfolio pursuant to Rule 144A under the Securities Act of
1933, as amended ("Rule 144A"), the 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
B-3
<PAGE>
Rule 144A will develop, the Fund's Board of Trustees has directed the Adviser to
monitor carefully the 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, the Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in the Portfolio during such period.
Management Policies
The Portfolio engages in the following practices in furtherance of its
objective.
Options Transactions. The Portfolio may engage in options transactions,
such as purchasing or writing covered call or covered put options. The principal
reason for writing covered call options, which are call options with respect to
which the Portfolio owns the underlying security or securities, is to realize,
through the receipt of premiums, a greater return than would be realized on the
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 the 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 Portfolio 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. The Portfolio may write: (a) in-the-money call
options when the Adviser 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 the Adviser 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 the Adviser 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 the Portfolio's obligation as the writer of an option
continues, the 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 the Portfolio effects a closing purchase transaction. The
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
B-4
<PAGE>
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser 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,
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 the 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. The 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: (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. The 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.
Initially, when purchasing or selling futures contracts the 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
B-5
<PAGE>
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 the 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
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 the 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 the 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 the 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, the 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 the Portfolio's net
investment results if market movements are not as anticipated when the hedge is
established.
Upon exercise of an option, 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.
Lending Portfolio Securities. To a limited extent, the 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, the
B-6
<PAGE>
Portfolio can increase its income through the investment of the cash collateral.
For purposes of this policy, the 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 the Portfolio to be the
equivalent of cash. From time to time, the Portfolio may return to the borrower
or a third party which is unaffiliated with the 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)
the 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) the Portfolio must be
able to terminate the loan at any time; (4) the 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) the 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
Portfolio has appointed Custodial Trust Company (CTC), an affiliate of BSAM, as
the Lending Agent.
CTC receives a fee for its services.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 8 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")) of the
Portfolio's outstanding voting shares. Investment restrictions numbered 9
through 14 are not fundamental policies and may be changed by vote of a majority
of the Trustees at any time. The Portfolio may not:
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 instrumentalities.
2. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
3. 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 the 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.
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the 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.
B-7
<PAGE>
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
8. Purchase securities on margin, but the 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.
9. 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 Portfolio's investments in all such companies to
exceed 5% of the value of its total assets.
10. Invest in the securities of a company for the purpose of exercising
management or control, but the Portfolio will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
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 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 Portfolio's 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.
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.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of the Portfolio's shares in certain
states. Should the Fund determine that a commitment is no longer in the best
interest of the Portfolio and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of Fund shares in the state
involved.
B-8
<PAGE>
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 POSITION PRINCIPAL OCCUPATION
(AND AGE) 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 Portland, Officer of McKernan
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.
Michael Minikes (53) Trustee Chairman Senior Managing
245 Park Avenue Director of Bear Stearns since
New York, NY 10167 September 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.
B-9
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter B. Fox (46) Executive Vice Founder, Fox Development
Three First National Plaza President Corp., 1998; Managing Director
Chicago, IL 60602 - 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) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset Management.
Frank J. Maresca (40) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September 1994;
New York, NY 10167 Chief Executive Officer and
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.
Ellen T. Arthur (45) 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 from October
1992 to May 1993.
B-10
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
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
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:
<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>
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 for 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 a 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 March 31, 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
B-11
<PAGE>
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 Portfolio's Prospectus entitled "Management of the
Portfolio."
General. On December 3, 1997, BSFM, the registered investment adviser of
the Portfolio, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 22, 1995, as revised May 4, 1995, with the Fund. 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 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
as to the Portfolio, held on January 28, 1997. The Agreement is terminable, as
to the 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 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.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSAM a monthly fee at the annual rate of 1% of value of the Portfolio's
average daily net assets which will be adjusted monthly ("Monthly Performance
Adjustment") depending on the extent to which the Portfolio's investment
performance exceeded or was exceeded by the percentage change in the investment
record of the S&P MidCap 400 Index. The Monthly Performance Adjustment may
increase or decrease the total advisory fee payable to BSAM by up to 0.50% per
year of the value of the Portfolio's average daily net assets. For the period
from June 16, 1995 (commencement of investment operations) through March 31,
1996, the investment advisory fees payable amounted to $116,606. For the fiscal
year ended March 31, 1997, the investment advisory fees payable amounted to
$182,313. For the fiscal year ended March 31, 1998, the investment advisory fees
payable amounted to $157,031. These amounts were waived pursuant to a voluntary
undertaking by BSAM, resulting in no fees being paid by the Portfolio. In
addition, the Adviser reimbursed $159,169, $243,945 and $164,325 for the period
ended March 31, 1996 and fiscal years ended March 31, 1997 and March 31, 1998,
respectively, in order to maintain the voluntary expense limitation.
The Board of Trustees has approved an amendment to the Investment
Advisory Agreement that would provide for the Monthly Performance Adjustment to
be based on the performance of Portfolio shares compared to the performance of
the S&P MidCap 400 Index, rather than the S&P
B-12
<PAGE>
500 Index. This amendment was approved at a Special Meeting held on January 20,
1998, by the holders of a majority (as defined in the 1940 Act) of the
Portfolio's outstanding voting shares.
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. The Administration Agreement will continue until February 22,
1999 and thereafter will be subject to annual approval by (i) the Fund's Board
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 without penalty, on 60 days
notice, by the Fund's Board or by vote of the holders of a majority of the
Portfolio's shares or upon not less than 90 days notice by BSFM. 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 the Portfolio's
average daily net assets. For the period from June 16, 1995 (commencement of
operations) through March 31, 1996 and the fiscal years ended March 31, 1997 and
March 31 1998, the administration fees accrued amounted to $21,806 , $35,873 and
$35,492 and the amount paid was $18,824 , $32,547 and $30,981, respectively.
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 and February 4, 1998, 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 Portfolio's Prospectus.
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 the 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
B-13
<PAGE>
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 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 the
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 the
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 the Portfolio, in the event
of its assignment (as defined in the 1940 Act).
For the period from June 16, 1995 (commencement of operations) through
March 31, 1996, the Fund paid Bear Stearns $38,956 and $61,049 with respect to
Class A and C shares, respectively, under the Plan. For the fiscal year ended
March 31, 1997, the Fund paid Bear Stearns $65,276 and $94,265 with respect to
Class A and C shares, respectively, under the Plan. For the fiscal year ended
March 31, 1998, the Fund paid Bear Stearns $87,556, $1,976 and $99,650 with
respect to Class A, B and C shares, respectively, under the Plan. Of such
amounts, the following amounts were paid as indicated for Class A, B and C
shares of the Fund:
<TABLE>
<CAPTION>
June 16, 1995 - Fiscal Year Ended Fiscal Year Ended
March 31, 1996 March 31, 1997 March 31, 1998
-------------- -------------- --------------
Class A Class C Class A Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Payments to $38,956 ---- $65,276 $44,129 $43,778 ---- $78,870
Brokers and
Dealers
Payments to ---- $61,049 ---- $50,136 ---- $1,976 $20,780
Underwriters
Payments for ---- ---- ---- ---- $43,778 ---- ----
Marketing and
Advertising
</TABLE>
Shareholder Servicing Plan. The Fund has adopted a shareholder servicing
plan on behalf of the Portfolio's Class B 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 B 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.
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, including, but not limited to,
proportionately in relation to the net assets of each portfolio.
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<PAGE>
Expense Limitation. BSAM has agreed that if, in any fiscal year, the
aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest on
borrowings and (with the 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 the 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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated February 22, 1995, as
revised September 8, 1997, which is renewable annually. For the period from June
16, 1995 (commencement of operations) through March 31, 1996, the fiscal year
ended March 31, 1997, and the fiscal year ended March 31, 1998, Bear Stearns
retained $502,600, $163,000 and $236,026, respectively, from the sales loads on
Class A shares and $14,300 and $2,558, respectively, from contingent deferred
sales charges ("CDSC") on Class C shares. 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 Portfolio's 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 the 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.
B-15
<PAGE>
Net Asset Value per Share $17.88
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 1.04
Per Share Offering Price to
the Public $18.92
Redemption Commitment. The 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 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. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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 the 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 the 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,
B-16
<PAGE>
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, reinvestment,
exchange, or transfer of shares of the 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 Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates 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 management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
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 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 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,
B-17
<PAGE>
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Martin
Luther King Jr. Day, Thanksgiving and Christmas Day.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The 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, the 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 the 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 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 the 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 the 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
B-18
<PAGE>
return realized is attributable to the time value of the 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 the 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 the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the 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, the 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 the 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 the 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 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. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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
B-19
<PAGE>
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, the 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 the 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 the 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.
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, the
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
the 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
B-20
<PAGE>
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 the 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 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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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 the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
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<PAGE>
Conversely, if the 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 the 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 the 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 the 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 the 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).
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 the 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 the 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 the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of
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<PAGE>
foreign tax in advance since the amount of the Portfolio's assets to be invested
in various countries is not known.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares 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 the 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 the
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.
The 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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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.
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<PAGE>
If a shareholder (1) incurs a sales load in acquiring shares of the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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 the 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 the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
Portfolio for the purchase or sale of investment securities. Allocation of
brokerage transactions, including their frequency, is made in BSAM's best
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<PAGE>
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 both the
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 the 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 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 the Portfolio for transactions in securities of domestic issuers. When
transactions are executed in the over-the-counter market, the Portfolio will
deal with the primary market makers unless a more favorable price or execution
otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
The turnover rate for the Portfolio for the period June 16, 1995 (commencement
of investment operations) through March 31, 1997 and the fiscal year ended March
31, 1998 was 128.42% and 116%, respectively. In periods in which extraordinary
market conditions prevail, the Adviser will not be deterred from changing
investment strategy as rapidly as needed, in which case higher turnover rates
can be anticipated which would result in greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by the Adviser 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 the
Portfolio may be executed through Bear Stearns if, in the judgment of BSFM, 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 the
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 period June 16, 1995 (commencement of operations) through March
31, 1996, the Portfolio paid total brokerage commissions of $38,019, of which
$26,339 was paid to Bear Stearns. The Portfolio paid 69.28% of its
B-25
<PAGE>
commissions to Bear Stearns, and, with respect to all the securities
transactions for the Portfolio, 39.40% of the transactions involved commissions
being paid to Bear Stearns.
For the fiscal years ended March 31, 1997 and March 31, 1998, the
Portfolio paid total brokerage commissions of $39,790 and $59,364, of which
$8,925 and $12,445, respectively was paid to Bear Stearns. The Portfolio paid
22.43% and 20.96% of its commissions to Bear Stearns, and, with respect to all
the securities transactions for the Portfolio, 22.18% and 24.45% of the
transactions involved commissions being paid to Bear Stearns. The Portfolio paid
an average commission rate per share of $0.0264 and $0.0389. The percentage of
commissions for which it received research services paid by the Portfolio was 0%
of the total brokerage commissions paid by the Portfolio.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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.
The average annual total return for Class A (at maximum offering price)
for the period June 16, 1995 (commencement of investment operations) through
March 31, 1998 was 26.31%. Based on net asset value per share, the average
annual total return for Class A was 28.54% for this period. The average annual
total return for Class C was 27.86% for this period. The average annual total
return for Class Y for the period June 20, 1995 (commencement of initial public
offering) through March 31, 1998 was 28.76%.
Total return 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 total return for Class A (at maximum offering price) for the period
June 16, 1995 (commencement of investment operations) through March 31, 1998 was
92.09%. Based on net asset value per share, the total return for Class A was
101.69% for this period. The total return for Class C was 98.74% for this
period. The total return for Class Y for the period June 20, 1995
B-26
<PAGE>
(commencement of initial public offering) through March 31, 1998 was 102.11%.
The total return for Class A (at maximum offering price) for the fiscal
year ended March 31, 1998 was 39.06%. Based on net asset value per share, the
total return for Class A was 46.02% for this period. The total return for Class
C was 45.17% for this period. The total return for Class Y for this period was
46.68%.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
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 the Portfolio; and (4) the purchase of any securities in an initial public
offering or private placement transaction eligible for purchase or sale by the
Portfolio without prior approval by the 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 the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
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 the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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.
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<PAGE>
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 March 31, 1998, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of the Portfolio's outstanding
shares.
Percent of Class Y
Name and Address Shares Outstanding
- ---------------- ------------------
Bear Stearns Securities Corp. 5.8%
FBO 722-90359-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Crop. 7.7%
FBO 048-33878-17
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 the 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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives 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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
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
Portfolio's 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 Portfolio's 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.
B-28
<PAGE>
THE BEAR STEARNS FUNDS
FOCUS LIST PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
July 28, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1998 of the Focus List Portfolio (the "Portfolio") of
The Bear Stearns Funds (the "Fund"), as each may be revised from time to time.
To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc.
("PFPC"), Attention: The Focus List 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 the
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 Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies....................... B-2
Management of the Fund............................................. B-9
Management Arrangements............................................ B-13
Purchase and Redemption of Shares.................................. B-16
Determination of Net Asset Value................................... B-18
Dividends, Distributions and Taxes................................. B-18
Portfolio Transactions............................................. B-25
Performance Information............................................ B-27
Code of Ethics..................................................... B-27
Information About the Fund......................................... B-28
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................................. B-30
Financial Statements............................................... B-30
B-1-
<PAGE>
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
THE BEAR STEARNS RESEARCH FOCUS LIST
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of U.S. issuers that, at the time of purchase,
are on the Bear Stearns Research Focus List (the "Focus List"). The Portfolio is
designed for investors seeking to maximize returns on a fully-invested,
all-equity portfolio. The Portfolio is not a market-timing vehicle. Except for
short-term liquidity purposes, cash reserves should rarely exceed 5% of
Portfolio assets.
The Focus List typically consists of 20 selected stocks chosen from those stocks
currently rated as Attractive or as a Buy by a Bear Stearns research analyst.
The stocks are selected for inclusion on the Focus List by a Focus List
Committee (comprised of senior Bear Stearns investment strategists) based upon
the expectation that the selected stocks will outperform the total return
realized on the S&P 500 Index over the next three to six months.
The Bear Stearns Global Research Department has fifty domestic equity analysts
who cover 800 issues. Using a rating system of 1-5, stocks are rated by analysts
with "1" being the highest rating of "buy" and "2" attractive, etc.
Approximately two hundred stocks are rated as Attractive or as a Buy. All rating
changes (other than to 3 - no opinion) are approved by the Stock Selection
Committee at Bear Stearns.
The criteria for an Attractive (2) rating by an analyst is that the stock must
be a good, long-term growth prospect either because of or in comparison to its
industry and that it is undervalued in comparison to the industry. A Buy (1)
rating means that the analyst along with the Stock Selection Committee feel that
the stock, already rated Attractive, will outperform the market over the next
six to twelve months because of a catalyst or near-term event which will trigger
the upside. These catalysts can include change in management, the introduction
of a new product, or a change in the industry outlook.
Stocks are picked by the Focus List Committee whose members are Kathryn Booth,
Director of Global Research of Bear Stearns, and Elizabeth Mackay, Chief
Investment Strategist of Bear Stearns. The Committee maintains twenty stocks on
the list and any new additions are generally accompanied by a comparable number
of deletions. The Committee monitors the list daily and candidates are
considered based on any one or more of the following criteria: market and/or
sector perception, analyst view and relative value.
Stocks that are downgraded below Attractive (2) by an analyst, are automatically
deleted from the Focus List. However, the Focus List Committee may delete stocks
for several other reasons including, but not limited to, achievement of its
target price range, the lack of a catalyst to materialize or have its expected
effect, and/or the appearance of new, more attractive opportunities.
It is possible that the Focus List will include stocks of issuers for which Bear
Stearns or one of its affiliates performs banking services for which it receives
fees, as well as stocks of issuers in which Bear Stearns or one of its
affiliates makes a market and may have a long or short position in the stock.
When Bear Stearns or one of its affiliates is engaged in an underwriting or
other distribution of stock of an issuer, the Adviser may be prohibited from
purchasing the stock of the issuer for the Portfolio. The
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<PAGE>
activities of Bear Stearns or one of its affiliates may, from time to time,
limit the Focus List Committee's ability to include stocks on the Focus List or
the Portfolio's flexibility in purchasing and selling such stocks. In addition,
the Focus List is available to other clients of Bear Stearns and its affiliates,
including the Adviser, as well as the Portfolio.
INVESTMENT STRATEGY
Generally, as soon as practicable after public announcement, the Portfolio
Manager will purchase a security that has been added to the Focus List, and will
sell a security when the security has been removed from the Focus List. The
Portfolio Manager determines what percentage of the Portfolio's total assets are
to be allocated into each Focus List stock and makes changes in allocation
percentages as investment and economic conditions change. Depending upon market
conditions and to the extent the Portfolio needs to hold cash balances to
satisfy shareholder redemption requests, the Portfolio Manager may not
immediately purchase a new Focus List stock and/or may continue to hold one or
more Focus List stocks that have been deleted from the Focus List. The Portfolio
Manager will not have access to the Focus List prior to its becoming publicly
disseminated.
The Portfolio may invest up to 35% of its total assets in securities that are
not on the Focus List, although it currently intends to limit its investment in
non-Focus List Securities to 20% of the Portfolio's total assets, under normal
market conditions.
The Investment Strategy described above will be implemented to the extent it
is consistent with maintaining the Portfolio's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Dividends, Distributions and Taxes."
Portfolio Securities
Equity Securities. Equity securities consist of common stocks,
convertible securities and preferred stocks. Preferred stock generally receives
dividends before distributions are paid on common stock and ordinarily has a
priority claim over common stockholders if the issuer of the stock is
liquidated. Domestic and foreign stocks, and American Depositary Receipts (ADRs)
are eligible for inclusion of the Focus List.
Bank Obligations. 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 the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the 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 the 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
B-3-
<PAGE>
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
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.
Repurchase Agreements. The 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, the 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 the 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. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. The Portfolio will consider on an
ongoing basis the credit worthiness of the institutions with which it enters
into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the 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.
B-4-
<PAGE>
Because these obligations are direct lending arrangements between the lender and
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, the 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, the Adviser 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 the Portfolio may invest in them only if at the time of an investment the
borrower meets the criteria set forth in the Portfolio's Prospectus for other
commercial paper issuers.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Portfolio will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
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 the Portfolio pursuant to Rule 144A under the Securities Act of
1933, as amended, the 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 the Adviser to monitor carefully the 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, the Portfolio's investing in such securities
may have the effect of increasing the level of illiquidity in the Portfolio
during such period.
Management Policies
The Portfolio engages in the following practices in furtherance of its
objective.
Options Transactions. The Portfolio may engage in options transactions,
such as purchasing put or call options or writing covered call options. The
principal reason for writing covered call options, which are call options with
respect to which the Portfolio owns the underlying security or securities, is to
realize, through the receipt of premiums, a greater return than would be
realized on the 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. The size of the premiums that the 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 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. The Portfolio may write
B-5-
<PAGE>
(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.
So long as the Portfolio's obligation as the writer of a call option
continues, the Portfolio may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Portfolio to deliver the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Portfolio effects a closing purchase
transaction. The 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, the 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, 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 the 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.
Futures Contracts and Options on Futures Contracts. The 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.
Initially, when purchasing or selling futures contracts the 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
B-6-
<PAGE>
opposite position, at the then prevailing price, which will operate to terminate
the Portfolio's existing position in the contract.
Although the 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
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 the 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 the 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 indices, the
risk of imperfect correlation increases as the composition of the 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, the 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 the Portfolio's net
investment results if market movements are not as anticipated when the hedge is
established.
Upon exercise of an option, 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.
Lending Portfolio Securities. To a limited extent, the 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, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the Portfolio considers collateral
B-7-
<PAGE>
consisting of U.S. Government securities or irrevocable letters of credit issued
by banks whose securities meet the standards for investment by the Portfolio to
be the equivalent of cash. From time to time, the Portfolio may return to the
borrower or a third party which is unaffiliated with the 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)
the 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) the Portfolio must be
able to terminate the loan at any time; (4) the 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) the 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.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 7 as fundamental policies. These restrictions
cannot be changed, as to the Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting shares. Investment
restrictions numbered 8 through 13 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. The Portfolio may
not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. Government securities or in bank instruments issued by
domestic banks.
3. 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 the 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.
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the Portfolio may
lend its portfolio securities in an amount not to exceed 33-
B-8-
<PAGE>
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.
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indices.
Non-Fundamental Restrictions.
8. Knowingly invest more than 15% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
9. Purchase securities on margin, but the 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.
10. 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 respect
to options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indexes.
11. Make short sales of securities, other than short sales "against the
box."
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
13. Make additional investments when borrowing exceeds 5% of Portfolio
assets.
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.
B-9-
<PAGE>
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.
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.
B-10-
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
William J. Montgoris (51) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer, Bear
New York, NY 10167 Stearns.
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.
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.
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.
B-11-
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
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; student at
Drexel University prior
thereto.
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:
<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>
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 $8,600 for 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 March 31, 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.
B-12-
<PAGE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Management of the
Portfolio."
General. On December 3, 1997, BSFM, the registered investment adviser
of the Portfolio, changed its name to BSAM. On December 4, 1997, BSFM formed a
new corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated as of June 2, 1997, with the Fund. The Agreement will remain
in effect for two years from the date of execution and shall continue from year
to year thereafter if it is approved 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 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
Agreement is terminable, as to the 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. 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.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSAM a monthly fee at the annual rate of 0.65% of value of the Portfolio's
average daily net assets. For the period from December 29, 1997
(commencement of investment operations) through March 31, 1998, the investment
advisory fees amounted to $6,748. For the fiscal year ended March 31, 1998, the
investment advisory fees amounted to $6,748. These amounts were waived pursuant
to a voluntary undertaking by BSAM, resulting in no fees being paid by the
Portfolio. In addition, the Adviser reimbursed $46,255 in order to maintain the
voluntary expense limitation.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated as of June 2, 1997,
as revised September 8, 1997 and February 4, 1998, with the Fund. The
Administration Agreement will continue until May 31, 1999 and thereafter will be
subject to annual approval by (i) the Fund's Board 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 without penalty, on 60 days' notice, by the Fund's Board
or by vote of the holders of a majority of the Portfolio's shares or upon not
less than 90 days' notice by BSFM. 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 the Portfolio's
average daily net assets. For the period from December 29, 1997
B-13-
<PAGE>
(commencement of operations) through March 31, 1998 the administration fees
accrued amounted to $8,238.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated as
of June 2, 1997, as revised September 8, 1997 and February 4, 1998, 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.
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 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 the Portfolio and
the holders of its Class A, B, and 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 Plans. Such approval must be by a "majority" of the Class A and Class
B shares (as defined in the 1940 Act), voting separately by class. Each
Distribution Plan and related 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 C shares was so approved on
February 4, 1998. The Distribution Plan with respect to 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 the 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 the 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
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class' shares. A Plan agreement will terminate automatically, as to the relevant
class of the Portfolio, in the event of its assignment (as defined in the 1940
Act). For the period December 29, 1997 (commencement of operations), through
March 31, 1998, the Portfolio paid Bear Stearns $2,352, $3,037 and $2,640 with
respect to Class A, B and C shares, respectively, under the Plan. Of such
amounts, the following amounts were paid as indicated for Class A, B, and C
shares of the Portfolio:
Class A Class B Class C
------- ------- -------
Payments to Broker or Dealers $1,176 -- --
Payments to Underwriters $1,176 $3,037 $2,640
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the Portfolio's Class B 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 B 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.
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 Bear Stearns, BSAM or their 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, 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 the 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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio
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and/or which engage in and compete for transactions in the same types of
securities, currencies and instruments as the Portfolio. BSAM, Bear Stearns and
its affiliates will not have any obligation to make available any accounts
managed by them, for the benefit of the management of the Portfolio. The results
of the Portfolio's investment activities, therefore, may differ from those of
Bear Stearns and its affiliates and it is possible that the Portfolio could
sustain losses during periods in which BSAM, Bear Stearns and its affiliates and
other accounts achieve significant profits on their trading for proprietary and
other accounts. From time to time, the Portfolio's activities may be limited
because of regulatory restrictions applicable to Bear Stearns and its
affiliates, and/or their internal policies designed to comply with such
restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated as of February 22, 1995, as
revised September 8, 1997 and February 4, 1998, which is renewable annually. For
the period from December 29, 1997 (commencement of operations) through March 31,
1998, Bear Stearns retained $71,580 respectively, from the sales loads on Class
A and $0 from contingent deferred sales charges ("CDSC") on Class C shares. 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 Portfolio's 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 the 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 Class A shares on March 31, 1998.
Net Asset Value per Share $13.40
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.78
Per Share Offering Price to $14.18
the Public
Redemption Commitment. The 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 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. Were
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the Portfolio to redeem securities in kind, it first would seek to distribute
readily marketable securities.
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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, B, C and 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 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
C shares and the dividends payable on Class B and C shares will be reduced by
incremental expenses borne solely by that class, including the asset-based sales
charge to which Class B and 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, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection
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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 Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates 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 management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
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 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 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 the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolio and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
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Qualification as a Regulated Investment Company. The Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Code. As a regulated investment company, the 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 the 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 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 the 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 the 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 a 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 the 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
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where the 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 the Portfolio's
shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the 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 the 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 the 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 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. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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, the 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 the Portfolio makes
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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 the 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.
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, the
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
the 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 the 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.
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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 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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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 the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the 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 the 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.
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Ordinary income dividends paid by the 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 the 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 the 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).
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 the 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 the 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 the 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 the Portfolio's assets to be invested in various
countries is not known.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or
B-23
<PAGE>
reinvested in additional Portfolio shares 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 the 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 the
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.
The 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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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 the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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.
B-24
<PAGE>
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 the 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 the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
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
B-25
<PAGE>
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 both the
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 the 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 the Portfolio for transactions in securities of domestic
issuers. When transactions are executed in the over-the-counter market, the
Portfolio will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as
within a year. BSAM expects that the turnover on the securities held in the
Portfolio will be 250% or greater. The portfolio turnover rate for the period
December 29, 1997 (commencement of investment operations) through March 31, 1998
was 28.91%. This portfolio turnover rate is significantly higher than the
portfolio turnover rates of other mutual funds that invest in equity securities.
A higher portfolio turnover rate means that the Portfolio will incur
substantially higher brokerage costs and may realize a greater amount of
short-term capital gains or losses.
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 the
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 the
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 period December 29, 1997 (commencement of operations), through
March 31, 1998, the Portfolio paid total brokerage commissions of $8,274, of
which $8,238 was paid to Bear Stearns. The Portfolio paid 99.56% of its
commissions to Bear Stearns, and, with respect to all the securities
transactions for the Portfolio, 99.56% of the transactions involved commissions
being paid. The Portfolio paid an average commission rate per share of 0.06. The
percentage of commissions for which it received research services paid by the
Portfolio was 0% of the total brokerage commissions paid by the Portfolio.
B-26-
<PAGE>
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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.
The total return for Class A (at maximum offering price) for the period
December 29, 1997 (commencement of investment operations) through March 31, 1998
was 5.51%. Based on net asset value per share, the total return for Class A and
B was 11.67% and 11.50%, respectively, for this period. The total return for
Class C was 11.50% for this period.
Total return 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.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
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 being purchased or sold, or being
considered for purchase or sale, by the Portfolio, 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 the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund; and (5) the acceptance of gifts more than a
de minimus value from those doing business with or on behalf of the Portfolio.
Certain transactions are exempt from item (1) of the previous sentence,
including: (1) purchases or sales on the accounts of an access person that are
not under the control of or that are non-volitional with respect to that person;
B-27
<PAGE>
(2) purchases or sales of securities not eligible for purchase or sale by the
Portfolio; (3) purchases or sales relating to rights issued by an issuer pro
rata to all holders of a class of its securities; and (4) any securities
transactions, or series of related transactions, involving 500 or fewer shares
of an issuer having a market capitalization greater than $1 billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Adviser to the Portfolio may aggregate or bunch trades with other clients
provided that no client is materially disadvantaged. Access persons are required
by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
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 the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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 March 31, 1998 the following shareholders owned,
directly or indirectly, 5% or more of the indicated class of the Portfolio's
outstanding shares.
Percent of Class A
Name and Address Shares Outstanding
Bear Stearns Securities Corp. 15.3%
FBO 001-00279-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
DLJ Securities Corp. Inc. 5.8%
FBO 3WED23095
Memo AC1198
P.O. Box 2052
Jersey City, NJ 07303-9998
B-28
<PAGE>
Percent of Class B
Name and Address Shares Outstanding
- ---------------- ------------------
Bear Stearns Securities Corp. 20.9%
FBO 001-00279-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 8.0%
FBO 610-49812-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 10.3%
FBO 213-04377-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.9%
FBO 026-88610-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class C
Name and Address Shares Outstanding
Bear Stearns Securities Corp. 29.2%
FBO 001-00279-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.3%
FBO 411-34613-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.3%
FBO 411-34606-22
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.3%
FBO 411-34607-21
1 Metrotech Center North
Brooklyn, NY 11201-3859
A shareholder who beneficially owns, directly or indirectly, mroe than 25% of a
Portfolio's voting securities may be deemed a "control person" (as defined in
the 1940 Act) of the Portfolio.
As of March 31, 1998 the following shareholders owned, directly or indirectly,
5% or more of the indicated class of the Portfolio's outstanding shares.
B-29-
<PAGE>
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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of .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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
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
Portfolio's 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 Portfolio's Annual Report to Shareholders for the period ended
March 31, 1998 is a separate document supplied with this Statement of Additional
Information, and the financial statements and accompanying notes appearing
therein are incorporated by reference into this Statement of Additional
Information.
B-30
<PAGE>
THE BEAR STEARNS FUNDS
HIGH YIELD TOTAL RETURN PORTFOLIO
CLASS A, B, C AND Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
July 28, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 28, 1998 of the High Yield Total Return Portfolio (the
"Portfolio") of The Bear Stearns Funds (the "Fund"), as each may be revised from
time to time. To obtain a free copy of such Prospectus, please write to the Fund
at PFPC Inc. ("PFPC"), Attention: High Yield Total Return 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 the 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 Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies......................... B-2
Management of the Fund............................................... B-24
Management Arrangements.............................................. B-27
Purchase and Redemption of Shares.................................... B-30
Determination of Net Asset Value..................................... B-31
Dividends, Distributions and Taxes................................... B-32
Portfolio Transactions............................................... B-39
Performance Information.............................................. B-41
Code of Ethics....................................................... B-41
Information About the Fund........................................... B-42
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................................... B-43
FINANCIAL STATEMENTS................................................. B-43
B -1-
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
Portfolio Securities
Zero Coupon, Pay-In-Kind Or Deferred Payment Securities. The Portfolio
may invest in zero coupon, pay-in-kind or deferred payment securities. Zero
coupon securities are securities that are sold at a discount to par value and on
which interest payments are not made during the life of the security. Upon
maturity, the holder is entitled to receive the par value of the security. While
interest payments are not made on such securities, holders of such securities
are deemed to have received annually "phantom income." The Portfolio accrues
income with respect to these securities for federal income tax and accounting
purposes prior to the receipt of cash payments. Pay-in-kind securities are
securities that have interest payable by delivery of additional securities. Upon
maturity, the holder is entitled to receive the aggregate par value of the
securities. Deferred payment securities are securities that remain a zero coupon
security until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Zero
coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparable rated securities paying cash interest at regular
intervals.
There are certain risks related to investing in zero coupon,
pay-in-kind and deferred payment securities. These securities generally are more
sensitive to movements in interest rates and are less liquid than comparably
rated securities paying cash interest at regular intervals. Consequently, such
securities may be subject to greater fluctuation in value. During a period of
severe market conditions, the market for such securities may become even less
liquid. In addition, as these securities do not pay cash interest, the
Portfolio's investment exposure to these securities and their risks, including
credit risk, will increase during the time these securities are held in the
Portfolio's portfolio. Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Portfolio is required to distribute
income to its shareholders and, consequently, may have to dispose of its
portfolio securities under disadvantageous circumstances to generate the cash,
or may have to leverage itself by borrowing the cash to satisfy these
distributions, as they relate to the distribution of "phantom income" and the
value of the paid-in-kind interest. The required distributions will result in an
increase in the Portfolio's exposure to such securities.
Securities of Foreign Issuers. The Portfolio may invest up to 25% of
its total assets in equity and fixed-income securities of foreign issuers.
American and global depositary receipts are not included in this 25% limitation.
The Portfolio believes that in many instances such foreign securities
may provide higher yields than securities of domestic issuers which have similar
maturities and quality. Many of these investments currently enjoy increased
liquidity, although, under certain market conditions, such securities may be
less liquid than the securities of United States corporations, and are certainly
less liquid than securities issued or guaranteed by the United States
Government, its instrumentalities or agencies.
Foreign investment involves certain risks, which should be considered
carefully by an investor in the Portfolio. These risks include political or
economic instability in the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities also may be subject to greater fluctuations in price
B -2-
<PAGE>
than securities issued by United States corporations or issued or guaranteed by
the United States Government, its instrumentalities or agencies. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. 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, with respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation or diplomatic developments which could
affect investment in those countries. In the event of a default of any such
foreign debt obligations, it may be more difficult for the Portfolio to obtain
or to enforce a judgment against the issuers of such securities. Foreign
currency denominated securities may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between various currencies. It may not
be possible to hedge against the risks of currency fluctuations.
The Portfolio may invest in emerging market countries. Political and
economic structures in many emerging market countries may be undergoing
significant evolution and rapid development, and emerging market countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain emerging market countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. See "Emerging Market Securities," below.
Emerging Market Securities. The Portfolio may invest in a limited
extent in the securities of issuers located in emerging market countries.
"Emerging market countries" are countries that are considered to be emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations and its authorities. A company is considered to be an emerging
market company if (i) its securities are principally traded in the capital
markets of an emerging market country; (ii) it derives at least 50% of its total
revenue from either goods produced or services rendered in emerging market
countries or from sales made in emerging market countries, regardless of where
the securities of such companies are principally traded; (iii) it maintains 50%
or more of its assets in one or more emerging market countries; or (iv) it is
organized under the laws of, or has a principal office in, an emerging market
country.
The securities markets of certain emerging market countries are marked
by a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging market countries are in the
earliest stages of their development. Even the markets for relatively widely
traded securities in emerging markets may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
emerging markets may also affect the Portfolio's ability to accurately value its
portfolio securities or to acquire or dispose of securities at the price and
time it wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups,
in emerging market countries may be higher than in the United States and other
developed securities markets. In addition, existing laws and regulations are
often inconsistently applied. As legal systems in emerging market countries
develop, foreign investors may be adversely affected by new or amended laws
B -3-
<PAGE>
and regulations. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
Certain emerging market countries require governmental approval prior
to investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. In addition, the
repatriation of both investment income and capital from several of the emerging
market countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Portfolio. The Portfolio may be required to
establish special custodial or other arrangements before investing in certain
emerging market countries.
Emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Portfolio may invest and adversely
affect the value of the Portfolio's assets.
The economies of emerging market countries may differ unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments. Many emerging market countries have experienced in the past, 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. The economies of many emerging market
countries are heavily dependent upon international trade and are accordingly
affected by protective trade barriers and the economic conditions of their
trading partners. In addition, the economies of some emerging market countries
are vulnerable to weakness in world prices for their commodity exports.
The Portfolio's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned on such assets. The inability of the Portfolio to make
intended security purchases or sales due to settlement problems could result
either in losses to the Portfolio due to subsequent declines in value of the
portfolio securities or, if the Portfolio has entered into a contract to sell
the securities, could result in possible liability to the purchaser.
Brady Bonds. The Portfolio is permitted to invest in debt obligations
commonly known as "Brady Bonds" which are created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructurings under a plan introduced by former U.S.
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Secretary of the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have
been issued in connection with the restructuring of the bank loans, for example,
of the governments of Mexico, Venezuela and Argentina.
Brady Bonds have been issued only recently, and, accordingly, do not
have a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Bank Debt. The Portfolio may invest in bank debt which includes
interests in loans to companies or their affiliates undertaken to finance a
capital restructuring or in connection with recapitalizations, acquisitions,
leveraged buyouts, refinancings or other financially leveraged transactions and
may include loans which are designed to provide temporary or "bridge" financing
to a borrower pending the sale of identified assets, the arrangement of
longer-term loans or the issuance and sale of debt obligations. These loans,
which may bear fixed or floating rates, have generally been arranged through
private negotiations between a corporate borrower and one or more financial
institutions ("Lenders"), including banks. The Portfolio's investment may be in
the form of participations in loans ("Participations") or of assignments of all
or a portion of loans from third parties ("Assignments").
Participations differ both from the public and private debt securities
typically held by the Portfolio and from Assignments. In Participations, the
Portfolio has a contractual relationship only with the Lender, not with the
borrower. As a result, the Portfolio has 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, the Portfolio
generally will have no right to enforce compliance by the borrower with the
terms of the loan Agreement relating to the loan, nor any rights of set-off
against the borrower, and the Portfolio may not benefit directly from any
collateral supporting the loan in which it has purchased the Participation.
Thus, the Portfolio assumes the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of
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the Lender, the 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. In
Assignments, by contrast, the Portfolio acquires direct rights against the
borrower, except that under certain circumstances such rights may be more
limited than those held by the assigning Lender.
Investments in Participations and Assignments otherwise bear risks
common to other debt securities, including the risk of nonpayment of principal
and interest by the borrower, the risk that any loan collateral may become
impaired and that the Portfolio may obtain less than the full value for loan
interests sold because they are illiquid. The Portfolio may have difficulty
disposing of Assignments and Participations. Because the market for such
instruments is not highly liquid, the Portfolio anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market may have an adverse impact on the
value of such instruments and will have an adverse impact on the Portfolio's
ability to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower. In addition to the creditworthiness of the borrower, the Portfolio's
ability to receive payment of principal and interest is also dependent on the
creditworthiness of any institution (i.e., the Lender) interposed between the
Portfolio and the borrower.
Securities of Financially and Operationally Troubled Issuers. The
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 BSAM 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").
The securities of financially and operationally troubled issuers may
require active monitoring and at times may require BSAM to participate in
bankruptcy or reorganization proceedings on behalf of the Portfolio. To the
extent BSAM becomes involved in such proceedings, the Portfolio may have a more
active participation in the affairs of the issuer than is generally assumed by
an investor and such participation may subject the Portfolio to the litigation
risks described below. However, the Portfolio does not invest in the securities
of financially or operationally troubled issuers for the purpose of exercising
day-to-day management of any issuer's affairs.
Bankruptcy and Other Proceedings -- Litigation Risks. When a company
seeks relief under the Federal Bankruptcy Code (or has a petition filed against
it), an automatic stay prevents all entities, including creditors, from
foreclosing or taking other actions to enforce claims, perfect liens or reach
collateral securing such claims. Creditors who have claims against the company
prior to the date of the bankruptcy filing must petition the court to permit
them to take any action to protect or enforce their claims or their rights in
any collateral. Such creditors may be prohibited from doing so if the court
concludes that the value of the property in which the creditor has an interest
will be "adequately protected" during the proceedings. If the bankruptcy court's
assessment of adequate protection is inaccurate, a creditor's collateral may be
wasted without the creditor being afforded the opportunity to preserve it. Thus,
even if the Portfolio holds a secured claim, it may be prevented from collecting
the liquidation value of the collateral securing its debt, unless relief from
the automatic stay is granted by the court.
Security interests held by creditors are closely scrutinized and
frequently challenged in bankruptcy proceedings and may be invalidated for a
variety of reasons. For example, security interests may be set aside because, as
a technical matter, they have not been perfected properly under the Uniform
Commercial Code or other applicable law. If a security interest is invalidated,
the secured creditor loses the value of the collateral and
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because loss of the secured status causes the claim to be treated as an
unsecured claim, the holder of such claim will almost certainly experience a
significant loss of its investment. While the Portfolio intends to scrutinize
any security interests that secure the debt it purchases, there can be no
assurance that the security interests will not be challenged vigorously and
found defective in some respect, or that the Portfolio will be able to prevail
against the challenge.
Moreover, debt may be disallowed or subordinated to the claims of other
creditors if the creditor is found guilty of certain inequitable conduct
resulting in harm to other parties with respect to the affairs of a company
filing for protection from creditors under the Federal Bankruptcy Code.
Creditors' claims may be treated as equity if they are deemed to be
contributions to capital, or if a creditor attempts to control the outcome of
the business affairs of a company prior to its filing under the Bankruptcy Code.
If a creditor is found to have interfered with the company's affairs to the
detriment of other creditors or shareholders, the creditor may be held liable
for damages to injured parties. While the Portfolio will attempt to avoid taking
the types of action that would lead to equitable subordination or creditor
liability, there can be no assurance that such claims will not be asserted or
that the Portfolio will be able successfully to defend against them.
While the challenges to liens and debt described above normally occur
in a bankruptcy proceeding, the conditions or conduct that would lead to an
attack in a bankruptcy proceeding could in certain circumstances result in
actions brought by other creditors of the debtor, shareholders of the debtor or
even the debtor itself in other state or federal proceedings. As is the case in
a bankruptcy proceeding, there can be no assurance that such claims will not be
asserted or that the Portfolio will be able successfully to defend against them.
To the extent that the Portfolio assumes an active role in any legal proceeding
involving the debtor, the Portfolio may be prevented from disposing of
securities issued by the debtor due to the Portfolio's possession of material,
non-public information concerning the debtor.
Mortgage-Related Securities
U.S. Government Agency Securities. 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. 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
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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.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities in accordance with its investment objective and policies.
Asset-backed securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among other
things, credit card receivables and automobiles. In general, asset-backed
securities and the collateral supporting them are of shorter maturity than
mortgage loans. As a result, investment in these securities should result in
greater price stability for the Portfolio.
Asset-backed securities are often structured with one or more types of credit
enhancement. The Portfolio will not limit their investments to asset-backed
securities with credit enhancements. Although asset-backed securities are not
generally traded on a national securities exchange, such securities are widely
traded by brokers and dealers, and to such extent will not be considered
illiquid for the purposes of the Portfolio's limitation on investment in
illiquid securities.
U.S. Municipal Securities. In circumstances where the Adviser
determines that investment in U.S. dollar-denominated municipal obligations
would facilitate the Portfolio's ability to accomplish its investment
objectives, the Portfolio may invest in such obligations, including municipal
bonds issued at a discount.
Trade Claims. The Portfolio may invest in trade claims, which are
non-securitized rights of payment arising from obligations other than borrowed
funds. Trade claims typically arise when, in the ordinary course of business,
vendors and suppliers extend credit to a company by offering payment terms.
Generally, when a company files for bankruptcy protection, payments on trade
claims cease and the claims are subject to compromise along with the other debts
of the company. Trade claims typically are bought and sold at a discount
reflecting the degree of uncertainty with respect to the timing and extent of
recovery. In addition to the risks otherwise associated with low-quality
obligations, trade claims have other risks, including (i) the possibility that
the amount of the claim may be disputed by the obligor, (ii) the debtor may have
a variety of defenses to assert against the claim under the bankruptcy code,
(iii) volatile pricing due to a less liquid market, including a small number of
brokers for trade claims and a small universe of potential buyers, (iv) the
possibility that the Portfolio may be obligated to purchase a trade claim larger
than initially anticipated, and (v) the risk of failure of sellers of trade
claims to indemnify the Portfolio against loss due to the bankruptcy or
insolvency of such sellers. The negotiation and enforcement of rights in
connection with trade claims may result in higher legal expenses to the
Portfolio, which may reduce return on such investments. It is not unusual for
trade claims to be priced at a discount to publicly traded securities that have
an equal or lower priority claim. Additionally, trade claims may be treated as
non-securities investments. As a result, any gains may be considered
"non-qualifying" under the Internal Revenue Code of 1986, as amended (the
"Code").
Depository Receipts and Depository Shares. The Portfolio may invest in
American Depository Receipts ("ADRs") or other similar securities, such as
American Depository Shares and Global Depository Shares, convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. Generally, ADRs in registered
form are designed for use in U.S. securities markets. As a result of the absence
of established securities markets and publicly-owned
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corporations in certain foreign countries as well as restrictions on direct
investment by foreign entities, the Portfolio may be able to invest in such
countries solely or primarily through ADRs or similar securities and government
approved investment vehicles. The Adviser expects that the Portfolio, to the
extent of its investment in ADRs, will invest predominantly in ADRs sponsored by
the underlying issuers. The Portfolio, however, may invest in unsponsored ADRs.
Issuers of the stock of unsponsored ADRs are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
Options on Securities. The Portfolio may purchase put and call options
and write covered put and call options on debt and equity securities, financial
indices (including stock indices), U.S. and foreign government debt securities
and foreign currencies. These may include options traded on U.S. or foreign
exchanges and options traded on U.S. or foreign over-the-counter markets ("OTC
options"), including OTC options with primary U.S. government securities dealers
recognized by the Federal Reserve Bank of New York.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
"exercise price" or "strike price"). By writing a call option, the Portfolio
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities or a specified amount of cash to the purchaser
against receipt of the exercise price. When the Portfolio writes a call option,
the Portfolio loses the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
The writer of an option retains the amount of the premium, although
this amount may be offset or exceeded, in the case of a covered call option, by
a decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
The Portfolio may wish to protect certain portfolio securities against
a decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other carefully selected securities, the values of which BSAM
expects will have a high degree of positive correlation to the values of such
portfolio securities. If BSAM's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If BSAM'S judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Portfolio's investments and therefore the put option may not provide complete
protection against a decline in the value of the Portfolio's investments below
the level sought to be protected by the put option.
The Portfolio may similarly wish to hedge against appreciation in the
value of securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other carefully selected securities the values of which BSAM expects
will have a high degree of positive correlation to the values of the securities
that the Portfolio intends to acquire. In such circumstances the Portfolio will
be subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Portfolio is not as
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close as anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Portfolio.
The Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely, by the
premium received.
The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the 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. If the call option is exercised in such a transaction, the
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of the decline will be offset in part, or entirely, by the premium
received.
Prior to being notified of the exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
canceled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
OTC options are contracts between the Portfolio and its contra-party with no
clearing organization guarantee. Thus, when the Portfolio purchases an OTC
option, it relies on the dealer from which it has purchased the OTC option to
make or take delivery of the securities underlying the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Portfolio as
well as the loss of the expected benefit of the transaction.
When the Portfolio writes an OTC option, it generally will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Portfolio originally wrote the
OTC option. While the Portfolio will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate an OTC option at a favorable price at
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any time prior to expiration. Until the Portfolio is able to effect a closing
purchase transaction in a covered OTC call option the Portfolio has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency of
the contra-party, the Portfolio may be unable to liquidate an OTC option. See
"Illiquid Securities" below.
OTC options purchased by the Portfolio will be treated as illiquid
securities subject to any applicable limitation on such securities. Similarly,
the assets used to "cover" OTC options written by the Portfolio will be treated
as illiquid unless the OTC options are sold to qualified dealers who agree that
the Portfolio may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option Agreement. The "cover" for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. See "Illiquid Securities" below.
The Portfolio may write only "covered" options. This means that so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and maintain with its
custodian for the term of the option a segregated account consisting of cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, having a value equal to or greater than the
exercise price of the option. In the case of a straddle written by the
Portfolio, the amount maintained in the segregated account will equal the
amount, if any, by which the put is "in-the-money."
Options on Securities Indices. The Portfolio also may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase. Through the writing or purchase of index options, the
Portfolio can achieve many of the same objectives as through the use of options
on individual securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Portfolio owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Portfolio bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When the Portfolio writes an option on a securities index, it will be
required to deposit with its custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks
relating to transactions in financial futures contracts described below. Also,
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an option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
Risks of Options Transactions. An exchange-traded option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Portfolio will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option at any particular time, and for some
exchange-traded options, no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options, with the result that the Portfolio would have to exercise its
exchange-traded options in order to realize any profit and may incur transaction
costs in connection therewith. If the Portfolio as a covered call option writer
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.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
clearinghouse, such as The Options Clearing Corporation (the "O.C.") to handle
current trading volume; or (f) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the O.C. as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. Similarly,
in the event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by BSAM.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Risks of Options on Foreign Currencies. Options on foreign currencies
involve the currencies of two nations and therefore, developments in either or
both countries affect the values of options on foreign currencies. Risks include
those described in the Prospectus under "Risk Factors -- Foreign Securities,"
including government actions affecting currency valuation and the movements of
currencies from one country to another. The quantity of currency underlying
option contracts represent odd lots in a market dominated by transactions
between banks; this can mean extra transaction costs upon exercise. Option
markets may be closed while round-the-clock interbank currency markets are open,
and this can create price and rate discrepancies.
Futures Contracts and Related Options. The Portfolio may enter into
futures contracts for the purchase or sale of debt securities and financial
indices (collectively, "interest rate futures contracts") and currencies in
accordance with the Portfolio's investment objective. A "purchase" of a
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futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire a specified quantity of the securities
underlying the contract at a specified price at a specified future date. A
"sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver a specified quantity of the
securities underlying the contract at a specified price at a specified future
date. At the time a futures contract is purchased or sold, the Portfolio is
required to deposit cash or securities with a futures commission merchant or in
a segregated custodial account representing between approximately 10% to 5% of
the contract amount, called "initial margin." Thereafter, the futures contract
will be valued daily and the payment in cash of "maintenance" or "variation
margin" may be required, resulting in the Portfolio paying or receiving cash
that reflects any decline or increase in the contract's value, a process known
as "marking-to-market."
Some futures contracts by their terms may call for the actual delivery
or acquisition of the underlying assets and other futures contracts must be
"cash settled." In most cases the contractual obligation is extinguished before
the expiration of the contract by buying (to offset an earlier sale) or selling
(to offset an earlier purchase) an identical futures contract calling for
delivery or acquisition in the same month. The purchase (or sale) of an
offsetting futures contract is referred to as a "closing transaction."
The Portfolio's ability to establish and close out positions in futures
contracts and options on futures contracts would be impacted by the liquidity of
these markets. Although the Portfolio generally would purchase or sell only
those futures contracts and options thereon for which there appeared to be a
liquid market, there is no assurance that a liquid market on an exchange will
exist for any particular futures contract or option at any particular time. In
the event no liquid market exists for a particular futures contract or option
thereon in which the Portfolio maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Portfolio would have to either make or take delivery under the
futures contract or, in the case of a written call option, wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Portfolio had written and which the
Portfolio was unable to close, the Portfolio would be required to maintain
margin deposits on the futures contract or option and to make variation margin
payments until the contract is closed.
Risks inherent in the use of these strategies include (1) dependence on
BSAM's ability to predict correctly movements in the direction of interest
rates, securities prices and markets; (2) imperfect correlation between the
price of futures contracts and options thereon and movement in the prices of the
securities being hedged; (3) the fact that the skills needed to use 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 the
Portfolio to sell a portfolio security at a time that otherwise would be
favorable for it to do so. In the event it did sell the security and eliminated
its "cover," it would have to replace its "cover" with an appropriate futures
contract or option or segregate securities with the required value, as described
below under "Limitations on the Purchase and Sale of Futures Contracts and
Related Options--Segregation Requirements."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when BSAM's expectations are not met, assuming proper
adherence to the segregation requirement, the volatility of the Portfolio as a
whole should be no greater than if the same strategy had been pursued in the
cash market.
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Exchanges on which futures and related options trade may impose limits
on the positions that the Portfolio may take in certain circumstances. In
addition, the hours of trading of financial futures contracts and options
thereon may not conform to the hours during which the Portfolio may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended
(the "Commodity Exchange Act"), all futures contracts and options thereon must
be traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counter party
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Portfolio, as the holder of an option on futures contracts, would
have to exercise the option and comply with the margin requirements for the
underlying futures contract to utilize any profit, and if the Portfolio were the
writer of the option, its obligation would not terminate until the option
expired or the Portfolio was assigned an exercise notice.
Limitations on the Purchase and Sale of Futures Contracts and Related
Options.
CFTC Limits. In accordance with Commodity Futures Trading Commission
(CFTC) regulations, the Portfolio is not permitted to purchase or sell futures
contracts or options thereon for return enhancement or risk management purposes
if immediately thereafter the sum of the amounts of initial margin deposits on
the Portfolio's existing futures and premiums paid for options on futures exceed
5% of the liquidation value of such Portfolio's total assets (the "5% CFTC
limit"). This restriction does not apply to the purchase and sale of futures
contracts and options thereon for bona fide hedging purposes.
Segregation Requirements. To the extent the Portfolio enters into
futures contracts, it is required by the Securities and Exchange Commission to
maintain a segregated asset account with its custodian (or a futures commission
merchant) sufficient to cover the Portfolio's obligations with respect to such
futures contracts, which will consist of cash, U.S. government securities, or
other liquid, unencumbered assets marked-to-market daily, in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Portfolio with
the custodian (or a futures commission merchant) with respect to such futures
contracts. Offsetting the contract by another identical contract eliminates the
segregation requirement.
With respect to options on futures, there are no segregation
requirements for options that are purchased and owned by the Portfolio. However,
written options, since they involve potential obligations of the Portfolio, may
require segregation of Portfolio assets if the options are not "covered" as
described under "Options on Futures Contracts." If the Portfolio writes a call
option that is not "covered," it must segregate and maintain with the custodian
(or a futures commission merchant) for the term of the option cash or liquid
securities equal to the fluctuating value of the optioned futures. If the
Portfolio writes a put option that is not "covered," the segregated amount would
have to be at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Portfolio with the custodian or a futures
commission merchant) with respect to such option.
Uses of Interest Rate Futures Contracts. Futures contracts will be used
for bona fide hedging, risk management and return enhancement purposes.
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Position Hedging. The Portfolio might sell interest rate futures
contracts to protect the Portfolio against a rise in interest rates which would
be expected to decrease the value of debt securities which the Portfolio holds.
This would be considered a bona fide hedge and, therefore, is not subject to the
5% CFTC limit. For example, if interest rates are expected to increase, the
Portfolio might sell futures contracts on debt securities, the values of which
historically have correlated closely or are expected to correlate closely to the
values of the Portfolio's portfolio securities. Such a sale would have an effect
similar to selling an equivalent value of the Portfolio's portfolio securities.
If interest rates increase, the value of the Portfolio's portfolio securities
will decline, but the value of the futures contracts to the Portfolio will
increase at approximately an equivalent rate thereby keeping the net asset value
of the Portfolio from declining as much as it otherwise would have. The
Portfolio could accomplish similar results by selling debt securities with
longer maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a hedging
technique would allow the Portfolio to maintain a defensive position without
having to sell portfolio securities. If in fact interest rates decline rather
than rise, the value of the futures contract will fall but the value of the
bonds should rise and should offset all or part of the loss. If futures
contracts are used to hedge 100% of the bond position and correlate precisely
with the bond position, there should be no loss or gain with a rise (or fall) in
interest rates. However, if only 50% of the bond position is hedged with
futures, then the value of the remaining 50% of the bond position would be
subject to change because of interest rate fluctuations. Whether the bond
positions and futures contracts correlate precisely is a significant risk
factor.
Anticipatory Position Hedging. Similarly, when it is expected that
interest rates may decline and the Portfolio intends to acquire debt securities,
the Portfolio might purchase interest rate futures contracts. The purchase of
futures contracts for this purpose would constitute an anticipatory hedge
against increases in the price of debt securities (caused by declining interest
rates) which the Portfolio subsequently acquires and would normally qualify as a
bona fide hedge not subject to the 5% CFTC limit. Since fluctuations in the
value of appropriately selected futures contracts should approximate that of the
debt securities that would be purchased, the Portfolio could take advantage of
the anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Portfolio could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.
Risk Management and Return Enhancement. The Portfolio might sell
interest rate futures contracts covering bonds. This has the same effect as
selling bonds in the portfolio and holding cash and reduces the duration of the
portfolio. (Duration measures the price sensitivity of the portfolio to interest
rates. The longer the duration, the greater the impact of interest rate changes
on the portfolio's price.) This should lessen the risks associated with a rise
in interest rates. In some circumstances, this may serve as a hedge against a
loss of principal, but is usually referred to as an aspect of risk management.
The Portfolio might buy interest rate futures contracts covering bonds
with a longer maturity than its portfolio average. This would tend to increase
the duration and should increase the gain in the overall portfolio if interest
rates fall. This is often referred to as risk management rather than hedging
but, if it works as intended, has the effect of increasing principal value. If
it does not work as intended because interest rates rise instead of fall, the
loss will be greater than would otherwise have been the case. Futures contracts
used for these purposes are not considered bona fide hedges and, therefore, are
subject to the 5% CFTC limit.
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Options on Futures Contracts. The Portfolio may enter into options on
futures contracts for certain bona fide hedging, risk management and return
enhancement purposes. This includes the ability to purchase put and call options
and write (i.e., sell) "covered" put and call options on futures contracts that
are traded on commodity and futures exchanges.
If the Portfolio purchases an option on a futures contract, it has the
right but not the obligation, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call or a
short position if the option is a put) at a specified exercise price at any time
during the option exercise period.
Unlike purchasing an option, which is similar to purchasing insurance
to protect against a possible rise or fall of security prices or currency
values, the writer or seller of an option undertakes an obligation upon exercise
of the option to either buy or sell the underlying futures contract at the
exercise price. A writer of a call option has the obligation upon exercise to
assume a short futures position and a writer of a put option has the obligation
to assume a long futures position. Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise 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. If
there is no balance in the writer's margin account, the option is "out of the
money" and will not be exercised. The Portfolio, as the writer, has income in
the amount it was paid for the option. If there is a margin balance, the
Portfolio will have a loss in the amount of the balance less the premium it was
paid for writing the option.
When the Portfolio writes a put or call option on futures contracts,
the option must either be "covered" or, to the extent not "covered," will be
subject to segregation requirements. The Portfolio will be considered "covered"
with respect to a call option it writes on a futures contract if the Portfolio
owns the securities or currency which is deliverable under the futures contract
or an option to purchase that futures contract having a strike price equal to or
less than the strike price of the "covered" option. A Portfolio will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option.
To the extent the Portfolio is not "covered" as described above with
respect to written options, it will segregate and maintain with its custodian
for the term of the option cash or liquid securities as described above under
"Limitations of the Purchase and Sale of the Futures Contracts and Related
Options--Segregation Requirements."
Uses of Options on Futures Contracts. Options on futures contracts
would be used for bona fide hedging, risk management and return enhancement
purposes.
Position Hedging. The Portfolio may purchase put options on interest
rate or currency futures contracts to hedge its portfolio against the risk of a
decline in the value of the debt securities it owns as a result of rising
interest rates.
Anticipatory Hedging. The Portfolio may also purchase call options on
futures contracts as a hedge against an increase in the value of securities the
Portfolio might intend to acquire as a result of declining interest rates.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the
Portfolio might intend to acquire. If the futures price at expiration of the
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option is above the exercise price, the Portfolio retains the full amount of the
option premium which provides a partial hedge against any increase that may have
occurred in the price of the debt securities the Portfolio intended to acquire.
If the market price of the underlying futures contract is below the exercise
price when the option is exercised, the Portfolio would incur a loss, which may
be wholly or partially offset by the decrease in the value of the securities the
Portfolio might intend to acquire.
Whether options on futures contracts are subject to or exempt from the
5% CFTC limit depends on whether the purposes of the options constitutes a bona
fide hedge.
Risk Management and Return Enhancement. Writing a put option that does
not relate to securities the Portfolio intends to acquire would be a return
enhancement strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also
a return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call is below the exercise price, the
Portfolio would retain the full amount of the option premium increasing the
income of the Portfolio. If the futures price when the option is exercised is
above the exercise price, however, the Portfolio would sell the underlying
securities which were the "cover" for the contract and incur a gain or loss
depending on the cost basis for the underlying asset.
Writing a covered call option as in any return enhancement strategy can
also be considered a partial hedge against a decrease in the value of a
Portfolio's portfolio securities. The amount of the premium received acts as a
partial hedge against any decline that may have occurred in the Portfolio's debt
securities.
There can be no assurance that the Portfolio's use of futures contracts
and related options will be successful and the Portfolio may incur losses in
connection with its purchase and sale of future contracts and related options.
Risks Related to Forward Foreign Currency Exchange Contracts. The
Portfolio may enter into forward foreign currency exchange contracts in several
circumstances. When the Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Portfolio
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Portfolio may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when BSAM believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Portfolio may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
the Portfolio's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. If the Portfolio enters into a position
hedging transaction, the transaction will be
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covered by the position being hedged or the Portfolio's custodian will place
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets in a segregated account of the Portfolio (less the value of
the "covering" positions, if any) in an amount equal to the value of the
Portfolio's total assets committed to the consummation of the given forward
contract. The assets placed in the segregated account will be marked-to-market
daily, and if the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will, at all times, equal the amount of
the Portfolio's net commitment with respect to the forward contract.
The Portfolio generally will not enter into a forward contract with a
term of greater than one year. At the maturity of a forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of a particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Portfolio is obligated to deliver, then it would be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Portfolio will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. Of course, the
Portfolio is not required to enter into such transactions with regard to its
foreign currency-denominated securities. It also should be recognized that this
method of protecting the value of the Portfolio's portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities which are unrelated to exchange rates.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend physically to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the spread) between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Repurchase Agreements. The Portfolio's repurchase agreements will be
collateralized by U.S. Government securities. The Portfolio will enter into
repurchase transactions only with parties meeting creditworthiness standards
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approved by the Fund's Board of Trustees. BSAM will monitor the creditworthiness
of such parties, under the general supervision of the Board of Trustees. In the
event of a default or bankruptcy by a seller, the Portfolio will promptly seek
to liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Portfolio will suffer a loss.
Reverse Repurchase Agreements. The Portfolio may borrow by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date, price and
interest payment. When effecting reverse repurchase transactions, securities of
a dollar amount equal in value to the securities subject to the agreement will
be maintained in a segregated account with the Portfolio's custodian. A reverse
repurchase agreement involves the risk that the market value of the portfolio
securities sold by the Portfolio may decline below the price of the securities
the Portfolio is obligated to repurchase, which price is fixed at the time the
Portfolio enters into such agreement.
Currency Swaps, Mortgage Swaps, Index Swaps and Interest Rate Swaps,
Caps, Floors and Collars. The Portfolio may, with respect to up to 5% of its net
assets, enter into currency swaps for both hedging purposes and to seek to
increase total return. In addition, the Portfolio may, with respect to 5% of its
net assets, enter into mortgage, index and interest rate swaps and other
interest rate swap arrangements such as rate caps, floors and collars, for
hedging purposes or to seek to increase total return. Currency swaps involve the
exchange by the Portfolio with another party of their respective rights to make
or receive payments in specified currencies. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. Index swaps
involve the exchange by the Portfolio with another party of the respective
amounts payable with respect to a notional principal amount at interest rates
equal to two specified indices. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates.
The Portfolio will enter into interest rate, mortgage and index swaps
only on a net basis, which means that the two payment streams are netted out,
with the Portfolio receiving or paying, as the case may be, only the net amount
of the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable
under an interest rate, index or mortgage swap and the entire amount of the
payment stream
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payable by the Portfolio under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets, BSAM
believes that swaps do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Portfolio's borrowing
restrictions.
The Portfolio will not enter into swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by BSAM.
The use of interest rate, mortgage, index and currency swaps, as well
as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If BSAM is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the Portfolio would be less favorable than it would
have been if this investment technique were not used. The staff of the
Securities and Exchange Commission currently take the position that swaps, caps,
floors and collars are illiquid and thus subject to the Portfolio's 15%
limitation on investments in illiquid securities.
Lending of Securities. Consistent with applicable regulatory
requirements, the Portfolio may lend its portfolio securities to brokers,
dealers and financial institutions, provided that outstanding loans do not
exceed in the aggregate one-third of the value of the Portfolio's total assets
and provided that such loans are callable at any time by the Portfolio and are
at all times secured by cash or equivalent collateral that is equal to at least
the market value, determined daily, of the loaned securities. The advantage of
such loans is that the Portfolio continues to receive payments in lieu of the
interest and dividends of the loaned securities, while at the same time earning
interest either directly from the borrower or on the collateral which will be
invested in short-term obligations.
A loan may be terminated by the borrower on one business days' notice
or by the Portfolio at any time. If the borrower fails to maintain the requisite
amount of collateral, the loan automatically terminates, and the Portfolio could
use the collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
investment adviser to be creditworthy. On termination of the loan, the borrower
is required to return the securities to the Portfolio, and any gain or loss in
the market price during the loan would inure to the Portfolio.
Since voting or consent rights which accompany loaned securities pass
to the borrower, the Portfolio will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights if
the matters involved would have a material effect on the Portfolio's investment
in the securities which are the subject of the loan. The Portfolio will pay
reasonable finders', administrative and custodial fees in connection with a loan
of its securities or may share the interest earned on collateral with the
borrower.
Borrowing. The Portfolio may borrow an amount equal to no more than
one-third of the value of its total assets (calculated at the time of the
borrowing) from banks for temporary, extraordinary or emergency purposes, or for
the clearance of transactions. The Portfolio may pledge up to one-third of its
total assets to secure these borrowings. If the Portfolio's asset coverage for
borrowings falls below 300%, the Portfolio will take prompt action to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage,
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even though it may be disadvantageous from an investment standpoint to sell
securities at that time. Such liquidations could cause the Portfolio to realize
gains on securities held for less than three months.
Illiquid Securities. The Portfolio may hold up to 15% of its net assets
in repurchase agreements that have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market (either within or outside of the
United States) or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. BSAM anticipates that the market for certain
restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. BSAM will monitor the liquidity of
such restricted securities subject to the supervision of the Board of Trustees.
In reaching liquidity decisions, BSAM will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) 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). In addition, in order for commercial
paper that is issued in reliance on Section 4(2) of the Securities Act to be
considered liquid, (i) it must be rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the
B -21-
<PAGE>
view of BSAM; and (ii) it must not be "traded flat" (i.e., without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the Securities and Exchange Commission has taken the
position that purchased over-the-counter (OTC) options and the assets used as
"cover" for written OTC options are illiquid securities unless the Portfolio and
the counterparty have provided for the Portfolio, at the Portfolio's election,
to unwind the OTC option. The exercise of such an option would ordinarily
involve the payment by the Portfolio of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the securities used as "cover" as liquid.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Portfolio may purchase or sell securities on a
when-issued or delayed delivery basis, that is, delivery and payment can take
place a month or more after the date of the transaction. The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The securities so purchased are subject to market fluctuation, and no interest
accrues to the Portfolio until delivery and payment take place. At the time the
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value of such securities in determining its net asset value each day. The
Portfolio will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Portfolio's custodian will
maintain, in a separate account of the Portfolio, cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, having a value equal to or greater than such
commitments. If the Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio security, incur a gain or loss due to market
fluctuations.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 7 as fundamental policies. These restrictions
cannot be changed, as to the Portfolio, without approval by the holders of a
majority (as defined in the 1940 Act of the Portfolio's outstanding voting
shares. Investment restrictions numbered 8 through 12 are not fundamental
policies and may be changed by vote of a majority of the Trustees at any time.
The Portfolio may not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase any securities that would cause 25% or more of the value of
its total assets at the time of such purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to investments
in U.S. Government securities.
3. 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 the 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.
B -22-
<PAGE>
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. The Portfolio, however,
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.
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indices.
Non-Fundamental Restrictions.
8. Knowingly invest more than 15% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
9. Purchase securities on margin, but the 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.
10. 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 respect
to options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indexes.
11. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
12. Make additional investments when borrowing exceeds 5% of Portfolio
assets.
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.
B -23-
<PAGE>
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 POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (64) Trustee President of The Bren
126 East 56th Street Co., since 1969;
New York, NY 10021 President of Koll, Bren
Realty Advisors and
Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (70) Trustee Partner of Bryan Cave, a
7535 Claymont Court law firm in St. Louis
Apt. #2 since January 1993;
Belleville, IL 62223 United States Senator of
Illinois from 1981 to
1993.
John R. McKernan, Jr. (50) Trustee Chairman and Chief
P.O. Box 15213 Portland, Executive Officer of
ME 02110 McKernan Enterprises
since January 1995;
Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (56) Trustee President and Chief
700 13th Street, N.W. Executive Officer,
Suite 400 Association of American
Washington, D.C.20005 Railroads from June 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.
Michael Minikes* (53) Trustee Senior Managing Director
245 Park Avenue Chairman of Bear Stearns since
New York, NY 10167 September 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.
B -24-
<PAGE>
Robert S. Reitzes (54) President President of Mutual
575 Lexington Avenue Funds- Bear Stearns
New York, NY 10022 Asset Management and
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 B. Fox (46) Executive Vice Founder, Fox Development
Three First National Plaza President Corp., 1998; Managing
Chicago, IL 60602 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
245 Park Avenue President and Chief Operating
New York, NY 10167 Officer, Bear Stearns
Stephen A. Bornstein (55) Vice President Managing Director, Legal
575 Lexington Avenue Department; General
New York, NY 10022 Counsel, Bear Stearns
Asset Management.
Frank J. Maresca (39) Vice President Managing Director of
245 Park Avenue New York, and Treasurer Bear Stearns since
NY 10167 September 1994; Chief
Executive Officer and
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
575 Lexington Avenue of Bear Stearns since
New York, NY 10022 March 1996; previously
Vice President, Asset
Management Group,
Goldman Sachs from 1986
to 1996.
Ellen T. Arthur (45) Secretary Associate Director of
575 Lexington Avenue Bear Stearns since
New York, NY 10022 January 1996; Secretary
of BSAM since December
1997; Senior Counsel and
Corporate Vice President
of PaineWebber Incorpora-
ted from April 1989 to
September 1995.
Vincent L. Pereira (33) Assistant Treasurer Associate Director of
245 Park Avenue New York, Bear Stearns since
NY 10167 September 1995;
Treasurer
B -25-
<PAGE>
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 Secretary Legal Assistant for Bear
575 Lexington Avenue 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:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Board Aggregate Pension or Estimated Annual Total
Member Compensation Retirement Benefits Benefits Upon Compensation from
from Fund* Accrued as Part of Retirement Fund and Fund
Fund's Expenses Complex Paid to
Board Members
<S> <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 $8,600 for 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.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plan" 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
B -26-
<PAGE>
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 Portfolio's Prospectus entitled "Management of the
Portfolio."
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated as of September 8, 1997, with the Fund. The Agreement will
remain in effect for two years from the date of execution and shall continue
from year to year thereafter if it is approved 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
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 Agreement is terminable, as to the 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. 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.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSAM a monthly fee at the annual rate of 0.60% of value of the Portfolio's
average daily net assets. For the period from January 2, 1998 (commencement of
investment operations) through March 31, 1998, the investment advisory fees
payable amounted to $28,723. These amounts were waived pursuant to a voluntary
undertaking by BSAM, resulting in no fees being paid by the Portfolio. In
addition, the Adviser reimbursed $41,870 in order to maintain the voluntary
expense limitation.
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. The Administration Agreement will continue until February 22,
1999 and thereafter will be subject to annual approval by (i) the Fund's Board
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 without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
Portfolio's shares or upon not less than 90 days' notice by BSFM. 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 the Portfolio's
average daily net assets. For the period from January 2, 1998.
B -27-
<PAGE>
(commencement of investment operations) through March 31, 1998 the
administration fees payable amounted to $7,181.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated as
of February 22, 1995, as revised, September 8, 1997 and February 4, 1998 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.
Distribution Plan. 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 plan (the "Distribution Plan") with respect to Class A, B
and C shares. The Fund's Board of Trustees believes that there is a reasonable
likelihood that the Distribution Plan will benefit the Portfolio and the holders
of its Class A, B, and C shares.
A quarterly report of the amounts expended under the Distribution Plan,
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the 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 Distribution 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 Distribution 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 the
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 separately by
class. The 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 was approved on September 8, 1997.
The Distribution Plan is terminable at any time, as to each class of the
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 Distribution 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 the 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 the
Portfolio, in the event of its assignment (as defined in the 1940 Act). For
period from January 2, 1998 (commencement of investment operations) through
March 31, 1998, the Portfolio paid Bear Stearns $8,354, $7,019 and $13,194,
respectively, with respect to Class A, B and C shares under the Plan.
B -28-
<PAGE>
Of such amounts, the following amounts were paid as indicated for Class A, B and
C shares of the Portfolio:
Class A Class B Class C
Payments to Brokers or Dealers $5,967 ---- ----
Payments to Underwriters $2,387 $7,019 $13,194
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the 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.
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 Bear Stearns, BSAM or their 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, including,
but not limited to, proportionately in relation to the net assets of each
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
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
B -29-
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated as of February 22, 1995, as
revised September 8, 1997 and February 4, 1998 which is renewable annually. For
the period from December 29, 1997 (commencement of operations) through March 31,
1998, Bear Stearns received $155,705 from the sales loads on Class A shares and
$0 and $0 from contingent deferred sales charges ("CDSC") on Class B and C
shares. 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 Portfolio's 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 the 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.
Net Asset Value per Share $12.73
Per Share Sales Charge - 4.50%
of offering price ($5.81%) of
net asset value per share) 0.60
Per Share Offering Price to $13.33
the Public
Redemption Commitment. The 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 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. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
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 the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the 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, B, C and 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
B -30-
<PAGE>
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 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
C shares and the dividends payable on Class B and C shares will be reduced by
incremental expenses borne solely by that class, including the asset-based sales
charge to which Class B and 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, 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 Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Exchange traded securities,
including covered call options written by the Portfolio, are valued at the last
sale price on the securities exchange or national securities market on which
such securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in
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good faith by the Fund's Board of Trustees. Expenses and fees, including the
management fee and distribution and service fees, are accrued daily and taken
into account for the purpose of determining the net asset value of the
Portfolio's shares. Because of the differences in operating expenses incurred by
each class, the per share net asset value of each class will differ.
Substantially all debt securities (including short-term investments
greater than 60 days but less than one year at time of purchase) are valued each
business day by one or more independent pricing services (the "Service")
approved by the Board. Securities valued by the Service that are readily
available and are representative of the bid side of the market are valued at the
mean between the quoted bid prices and asked prices. Short-term investments with
maturities of 60 days or less may be carried at amortized cost, which
approximates value. Other investments valued by the Service are carried at fair
value as determined by the Service, based on methods which include the
consideration of the following: (i) yields or prices of securities of comparable
quality, coupon, maturity and type; (ii) indications as to the values from
dealers; and (iii) general market conditions. Investments 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
markets.
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 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 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 the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolio and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Code. As a regulated investment company, the Portfolio is not subject to federal
income tax on the portion of its net investment income (i.e.,
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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 the
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 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 the 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 the 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 a 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 the 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 capitalized interest on acquisition
indebtedness under Code section 263(g). Built-in losses will be preserved where
the 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 the Portfolio's
shareholders.
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In general, for purposes of determining whether capital gain or loss
recognized by the 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 the 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 the 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 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. The 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.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the 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, the 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 the 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 the 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
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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.
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, the
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
the 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 the 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
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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).
The 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 the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Portfolio Distributions. The 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.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The 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 the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the 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 the 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 the 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 the 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
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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 the 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).
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 the 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 the 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 the 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 the Portfolio's assets to be invested in various
countries is not known.
Distributions by the 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 the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares 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 the 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.
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Ordinarily, shareholders are required to take distributions by the
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.
The 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 the Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the 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
the 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 gains 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 the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the 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 the 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 the Portfolio,
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capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the 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 the 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, the 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 the
Portfolio, including the applicability of foreign taxes.
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 Portfolio.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
Portfolio for the purchase or sale of investment securities. Purchases and sales
of portfolio securities usually are principal transactions. 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 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. Portfolio transactions are
allocated to various dealers by its portfolio managers in their best judgment.
Portfolio turnover may vary from year to year as well as within a year.
BSAM expects that the turnover on the securities held in the Portfolio generally
will not exceed 150% in any one year. The Portfolio turnover rate for the period
December 29, 1997 (commencement of operations) through March 31, 1998 was
139.61%. This portfolio turnover rate is significantly higher than the portfolio
turnover rates of other mutual funds that invest in equity securities. A higher
portfolio turnover rate means that the Portfolio will incur substantially higher
brokerage costs and may realize a greater amount of short-term capital gains or
losses.
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 the
Portfolio may be executed through Bear Stearns if, in the judgment of BSAM,
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<PAGE>
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 adopted by the Securities and Exchange Commission, Bear
Stearns may directly execute such transactions for the Portfolio on the floor of
any national securities exchange, provided (i) on 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.
B -39-
<PAGE>
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return 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 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.
No Average Annual Returns for this Portfolio. The total return for
Class A (at maximum offering price) for the fiscal year ended March 31, 1998 was
3.39%. Based on net asset value per share, the total return for Class A was
8.30% for this period. The total return for Class B and C was 8.13% and 8.13%,
respectively. (With CDSC, the total return for Class B and C was 3.13% and
7.13%, respectively).
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
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 being purchased or sold, or being
considered for purchase or sale, by the Portfolio, 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 the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund; and (5) the acceptance of gifts more than a
de minimus value from those doing business with or on behalf of the Portfolio.
Certain transactions are exempt from item (1) of the previous sentence,
including: (1) purchases or sales on the accounts of an access person that are
not under the control of or that are non-volitional with respect to that person;
(2) purchases or sales of securities not eligible
B -41-
<PAGE>
for purchase or sale by the Portfolio; (3) purchases or sales relating to rights
issued by an issuer pro rata to all holders of a class of its securities; and
(4) any securities transactions, or series of related transactions, involving
500 or fewer shares of an issuer having a market capitalization greater than $1
billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Adviser to the Portfolio may aggregate or bunch trades with other clients
provided that no client is materially disadvantaged. Access persons are required
by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the Investment Company
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 the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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 March 31, 1998 the following shareholders owned,
directly or indirectly, 5% or more of the indicated class of the Portfolio's
outstanding shares.
Percent of Class A
Name and Address Shares Outstanding
- ---------------- ------------------
Bear Stearns Securities Corp. 17.8%
One Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 7.4%
One Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 6.5%
One Metrotech Center North
Brooklyn, NY 11201-3859
B -42-
<PAGE>
Percent of Class B
Shares Outstanding
Bear Stearns Securities Corp. 7.2%
One Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.1%
One Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Class C
Shares Outstanding
Bear Stearns Securities Corp. 12.4%
One Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.9%
One Metrotech Center North
Brooklyn, NY 11201-3859
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 the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of .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 the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, provided legal advice as to certain legal
matters regarding the shares of beneficial interest being sold pursuant to the
Portfolio's 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 Portfolio's Annual Report to Shareholders for the period ended
March 31, 1998 is a separate document supplied with this Statement of Additional
Information, and the financial statements and accompanying notes appearing
therein are incorporated by reference into this Statement of Additional
Information.
B -43-
<PAGE>
THE BEAR STEARNS FUNDS
PRIME MONEY MARKET PORTFOLIO
CLASS Y
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated July 31, 1998 of the Prime Money Market Portfolio (the
"Portfolio") of The Bear Stearns Funds (the "Fund"), as each may be revised from
time to time. To obtain a free copy of such Prospectus, please write to the Fund
at PFPC Inc. ("PFPC"), Attention: The Prime Money Market 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 Sterns Asset management Inc. ("BSAM"), a wholly-owned subsidiary
of the Bear Stearns Companies Inc., serves as the Portfolio's investment
adviser. BSAM is also referred to herein as the "Adviser." Bear Stearns Funds
Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns
Companies Inc., is the Administrator of the Portfolio. Bear, Stearns & Co. Inc.
("Bear Stearns"), an affiliate of BSAM, serves as the Portfolio's distributor .
Bear Stearns is also referred to herein as the "Distributor."
TABLE OF CONTENTS
Page
Investment Objective and Management Policies........................ B-2
Additional Purchase and Redemption Information...................... B-8
Determination of Net Asset Value.................................... B-9
Management of the Fund.............................................. B-11
Management Arrangements............................................. B-15
Purchase and Redemption of Shares................................... B-17
Dividends, Distributions and Taxes.................................. B-17
Dividends........................................................... B- 23
Additional Yield Information........................................ B- 24
Information About the Fund.......................................... B- 25
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................................. B- 26
Financial Statements................................................ B 26
Appendix............................................................ B- 27
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
As stated in the Portfolio's Prospectus, the investment objective of
the Portfolio is to seek to provide liquidity and current income consistent with
stability of principal. The following policies supplement the description of the
Portfolio's investment objective and policies in the Prospectus.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Fund's Board of Trustees, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Portfolio. The
Adviser purchases portfolio securities for the Portfolio either directly from
the issuer or from dealers who specialize in money market instruments. Such
purchases are usually without brokerage commissions. In making portfolio
investments, the Adviser seeks to obtain the best net price and the most
favorable execution of orders. To the extent that the execution and price
offered by more than one dealer are comparable, the Adviser may, in its
discretion, effect transactions in portfolio securities with dealers who provide
the Fund with research advice or other services.
The Adviser may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from the Portfolio prior to their maturity at their original
costs plus interest (interest may sometimes be adjusted to reflect the actual
maturity of the securities) if the Adviser believes that the Portfolio's
anticipated need for liquidity makes such action desirable. Certain dealers (but
not issuers) have charged and may in the future charge a higher price for
commercial paper where they undertake to repurchase prior to maturity. The
payment of a higher price in order to obtain such an undertaking reduces the
yield which might otherwise be received by the Portfolio on the commercial
paper. The Fund's Board of Trustees has authorized the Adviser to pay a higher
price for commercial paper where it secures such an undertaking if the Adviser
believes that the prepayment privilege is desirable to assure the Portfolio's
liquidity and such an undertaking cannot otherwise be obtained.
Investment decisions for the Portfolio are made independently from
those for another of the Fund's portfolios or other investment company
portfolios or accounts advised by the Adviser. Such other portfolios may also
invest in the same securities as the Portfolio. When purchases or sales of the
same security are made at substantially the same time on behalf of such other
portfolios, transactions are averaged as to price, and available investments
allocated as to amount, in a manner which the Adviser believes to be equitable
to each portfolio, including the Portfolio. In some instances, this investment
procedure may adversely affect the price paid or received by the Portfolio or
the size of the
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<PAGE>
position obtainable for the Portfolio. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Portfolio
with those to be sold or purchased for such other portfolios in order to obtain
best execution.
The Portfolio will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Bear Sterns or the Adviser or any affiliated person
(as such term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of any of them, except to the extent permitted by the Securities
and Exchange Commission (the "SEC"). In addition, with respect to such
transactions, securities, deposits and agreements, the Portfolio will not give
preference to Service Organizations with which the Portfolio enters into
agreements.
The Portfolio may seek profits through short-term trading. The
Portfolio's annual portfolio turnover will be relatively high, but brokerage
commissions are normally not paid on money market instruments and the Portfolio
turnover is not expected to have a material effect on its net income. The
Portfolio's turnover rate is expected to be zero for regulatory reporting
purposes.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
With respect to the variable rate notes and variable rate demand notes
described in the Prospectus, the Adviser will consider the earning power, cash
flows and other liquidity ratios of the issues of such notes and will
continuously monitor their financial ability to meet payment obligations when
due.
The repurchase price under the repurchase agreements described in the
Portfolio's Prospectus generally equals the price paid by the Portfolio plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
The collateral underlying each repurchase agreement entered into by the
Portfolio will consist entirely of direct obligations of the U.S. Government and
obligations issued or guaranteed by U.S. Government agencies or Government
sponsored enterprises. Securities subject to repurchase agreements will be held
by the Fund Custodian, sub-custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by the
Portfolio under the 1940 Act.
As stated in the Portfolio's Prospectus, the Portfolio may purchase
securities on a "when-issued" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When the Portfolio agrees to
purchase when-issued securities, the Custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase
- 3 -
<PAGE>
commitment, and in such a case the Portfolio subsequently may be required to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Portfolio's commitment.
It may be expected that the Portfolio's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Portfolio will set aside
cash or liquid assets to satisfy its purchase commitments in the manner
described, the Portfolio's liquidity and ability to manage its portfolio might
be affected in the event its commitments to purchase when-issued securities ever
exceeded 25% of the value of its assets. When the Portfolio engages in
when-issued transactions, it relies on the seller to consummate the trade.
Failure of the seller to do so may result in the Portfolio's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous. The
Portfolio does not intend to purchase when-issued securities for speculative
purposes but only in furtherance of its investment objective. The Portfolio
reserves the right to sell these securities before the settlement date if it is
deemed advisable.
Examples of the types of U.S. Government obligations that may be held
by the Portfolio include, in addition to U.S. Treasury Bills, the obligations of
the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, Federal Financing
Bank, General Services Administration, Student Loan Marketing Association,
Central Bank for Cooperatives, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Farm Credit Banks, Maritime Administration, Resolution Trust
Corporation, Tennessee Valley Authority, U.S. Postal Service, and Washington
D.C. Armory Board.
For purposes of the Portfolio's investment policies with respect to
obligations of issuers in the banking industry, the assets of a bank or savings
institution will be deemed to include the assets of its domestic and foreign
branches. The Portfolio's investments in the obligations of foreign branches of
U.S. banks and foreign banks and other foreign issues may subject the Portfolio
to investment risks that are different in some respects from those of investment
in obligations of U.S. domestic issuers. Such risks include future political and
economic developments, the possible seizure of nationalization of foreign
deposits, the possible establishment of exchange controls of the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and foreign issuers generally are subject to different accounting,
auditing, reporting and record keeping standards than those applicable to U.S.
issuers. The Portfolio will acquire securities issued by foreign branches of
U.S. banks or
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<PAGE>
foreign issuers only when the Adviser believes that the risks associated with
such instruments are minimal.
Among the bank obligations in which the Portfolio may invest are notes
issued by banks. These notes, which are exempt from registration under federal
securities laws, are not deposits of the banks and are not insured by the
Federal Deposit Insurance Corporation or any other insurer. Holders of notes
rank on a par with other unsecured and unsubordinated creditors of the banks.
Notes may be sold at par or sold on a discount basis and may bear fixed or
floating rates of interest.
The Portfolio may invest in asset-backed and receivable-backed
securities. Several types of asset-backed and receivable-backed securities have
been offered to investors, including interests in pools of credit card
receivables and motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interest on those securities are passed through to certificate holders. In
addition, asset-backed securities often carry credit protection in the form of
extra collateral, subordinate certificates, cash reserve accounts and other
enhancements. An investor's return on these securities may be affected by early
prepayment of principal on the underlying receivables or sales contracts. Any
asset-backed or receivable-backed securities held by the Portfolio must comply
with the portfolio maturity and quality requirements contained in Rule 2a-7
under the 1940 Act. The Portfolio will monitor the performance of these
investments and will not acquire any such securities unless rated in the highest
rating category by at least two nationally-recognized statistical rating
organizations ("NRSROs").
The Portfolio may invest in obligations issued by state and local
governmental entities. Municipal securities are issued by various public
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are considered to be municipal securities and may be purchased by the Portfolio.
Dividends paid by the Portfolio that are derived from interest on such municipal
securities would be taxable to the Portfolio's investors for federal income tax
purposes.
The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), that allows for a broader institutional trading market
for securities otherwise subject to restrictions on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and
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<PAGE>
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of restricted and other illiquid
securities under the supervision of the Board of Trustees. In reaching liquidity
decisions with respect to Rule 144A securities, the Adviser will consider, inter
alia, the following factors: (1) the unregistered nature of a Rule 144A
security, (2) the frequency of trades and quotes for a Rule 144A security, (3)
the number of dealers wishing to purchase or sell the Rule 144A security and the
number of other potential purchasers, (4) dealer undertakings to make a market
in the Rule 144A security, (5) the trading markets for the Rule 144A security,
and (6) the nature of the Rule 144A security and the nature of marketplace
trades (e.g., the time needed to dispose of the Rule 144A security, the method
of soliciting offers, and the mechanics of the transfer).
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by NRSROs for commercial
obligations that may be purchased by the Portfolio.
The Portfolio may invest in mortgage-backed securities issued by U.S.
Government agencies or U.S. Government-sponsored enterprises consisting of
mortgage pass-through securities or collateralized mortgage obligations
("CMO's"). Mortgage pass-through securities in which the Portfolio may invest
represent a partial ownership interest in a pool of residential mortgage loans
and are issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal
Home Loan Mortgage Corporation ("FHLMC"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively referred to as "Mortgage Assets"). CMOs in which the Portfolio may
invest are issued by GNMA, FNMA and FHLMC. In a CMO, a series of bonds or
certificates are usually issued in multiple classes. Each class of CMOs, often
referred to as a "tranche," is issued at a specific fixed or floating coupon
rate and has a state maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly, or semiannual basis. The
Portfolio expects that mortgage-backed securities will only be purchased in
connection with repurchase transactions.
INVESTMENT RESTRICTIONS
The Portfolio's Prospectus summarizes certain investment limitations
that may not be changed without the affirmative vote of the holders of a
majority
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<PAGE>
of the Portfolio's outstanding shares (as defined below under "Miscellaneous").
Investment limitations numbered 1 through 8 may not be changed without such a
vote of shareholders; investment limitations lettered a through f may be changed
by a vote of the Trust's Board of Trustees at any time.
The Portfolio may not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase securities of any one issuer if as a result more than 5% of
the value the Portfolio's assets would be invested in the securities of such
issuer, except that up to 25% of the value of the Portfolio's total assets may
be invested without regard to such 5% limitation and provided that there is no
limitation with respect to investments in U.S. Government securities and
domestic bank instruments.
3. Borrow money, except that the Portfolio may (i) borrow money for
temporary or emergency purposes from banks or, subject to specific authorization
by the SEC, from funds advised by the Adviser to an affiliate of the Adviser,
and (ii) engage in reverse repurchase agreements; provided that (i) and (ii) in
combination do not exceed one-third of the value of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than borrowings).
4. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. Government securities or in bank instruments issued by
domestic banks.
5. Make loans, except that the Portfolio may (i) purchase or hold debt
obligations in accordance with its investment objective and policies, (ii) enter
into repurchase agreements for securities, (iii) subject to specific
authorization by the SEC, lend money to other funds advised by the Adviser or an
affiliate of the Adviser.
6. Act as an underwriter of securities, except insofar as the Portfolio
may be deemed an underwriter under applicable securities laws in selling
portfolio securities.
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<PAGE>
7. Purchase or sell real estate or real estate limited partnerships,
provided that the Portfolio may purchase securities of issuers which invest in
real estate or interests therein.
8. Purchase or sell commodities contracts, or invest in oil, gas or
mineral exploration or development programs or in mineral leases.
The following restrictions are non-fundamental, and may be changed by
the Board of Trustees without the approval of shareholders.
The Portfolio may not:
a. Knowingly invest more than 10% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
b. Purchase securities on margin, make short sales of securities, or
maintain a short position.
c. Write or sell puts, calls, straddles, spreads or combinations
thereof.
d. Purchase securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition, or reorganization.
e. Invest in warrants.
f. Make additional investments when borrowings exceed 5% of Portfolio
assets.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
IN GENERAL
Information on how to purchase and redeem the Portfolio's shares is
included in the Prospectus. The issuance of shares is recorded on the
Portfolio's books, and share certificates are not issued.
The regulations of the Comptroller of the Currency (the "Comptroller")
provide that funds held in a fiduciary capacity by a national bank approved by
the Comptroller to exercise fiduciary powers must be invested in accordance with
the instrument establishing the fiduciary relationship and local law. The Fund
believes that the purchase of Prime Money Market Portfolio shares
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<PAGE>
by such national banks acting on behalf of their fiduciary accounts is not
contrary to applicable regulations if consistent with the particular account and
proper under the law governing the administration of the account.
Under the 1940 Act, the Portfolio may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the New York Stock Exchange ("NYSE") is closed, other than customary
weekend and holiday closings, or during which trading on the NYSE is restricted,
or during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of portfolio securities is not
reasonably practicable, or for such other periods as the SEC may permit. (The
Portfolio may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.) In addition, the
Portfolio may redeem shares involuntarily in certain other instances if the
Board of Trustees determines that failure to redeem may have material, adverse
consequences to the Portfolio's investors in general. The Portfolio is obligated
to redeem shares solely in cash up to $250,000 or 1% of such Fund's net asset
value, whichever is less, for any one investor within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of Trustees
determines that conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable. In such a case, the Portfolio may make
payment wholly or partly in readily marketable securities or other property,
valued in the same way the Portfolio determines net asset value. See "Net Asset
Value" below for an example of when such redemption or form of payment might be
appropriate. Redemption in kind is not as liquid as a cash redemption. Investors
who receive a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a "Master
Account"). Institutions investing in more than one of the Fund's portfolios or
classes of shares must maintain a separate Master Account for each portfolio's
class of shares. Sub-accounts may be established by name or number either when
the Master Account is opened or later.
DETERMINATION OF NET ASSET VALUE
The Portfolio's net asset value per share is calculated separately for
each class by dividing the total value of the assets belonging to the Portfolio
attributable to a class, less the value of any class-specific liabilities
charged to the Portfolio by the total number of the Portfolio's shares of that
class outstanding. "Assets belonging to" the Portfolio consist of the
consideration received upon the issuance of Portfolio shares together with all
income, earnings, profits and
- 9 -
<PAGE>
proceeds derived from the investment thereof, including any proceeds from the
sale of such investments, any funds or payments derived from any reinvestment of
such proceeds and a portion of any general assets of the Fund not belonging to a
particular Portfolio. Assets belonging to the Portfolio are charged with the
direct liabilities of the Portfolio and with a share of the general liabilities
of the Fund allocated on a daily basis in proportion to the relative net assets
of the Portfolio and the Fund's other portfolios. Determinations made in good
faith and in accordance with generally accepted accounting principles by the
Board of Trustees as to the allocation of any assets or liabilities with respect
to the Portfolio are conclusive.
As stated in the Prospectus, in computing the net asset value of its
shares for purposes of sales and redemptions, the Portfolio uses the amortized
cost method of valuation. Under this method, the Portfolio values each of its
portfolio securities at cost on the date of purchase and thereafter assumes a
constant proportionate amortization of any discount or premium until maturity of
the security. As a result, the value of the portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method seems to provide certainty in
portfolio valuation, it may result in valuations of the Portfolio's securities
which are higher or lower than the market value of such securities.
In connection with its use of amortized cost valuation, the Portfolio
limits the dollar-weighted average maturity of its portfolio to not more than 90
days and does not purchase any instrument with a remaining maturity of more than
thirteen months (397 days) (with certain exceptions). The Fund's Board of
Trustees has also established procedures pursuant to rules promulgated by the
SEC that are intended to stabilize the Portfolio's net asset value per share for
purposes of sales and redemptions at $1.00. Such procedures include the
determination, at such intervals as the Board deems appropriate, of the extent,
if any, to which the Portfolio's net asset value per share calculated by using
available market quotations deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1%, the Board will consider promptly what action, if
any, should be initiated. If the Board believes that the amount of any deviation
from the Portfolio's $1.00 amortized cost price per share may result in material
dilution or other unfair results to investors, it will take such steps as it
considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten the Portfolio's average portfolio maturity, redeeming shares in kind,
reducing or withholding dividends, or utilizing a net asset value per share
determined by using available market quotations.
- 10 -
<PAGE>
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.
11
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
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.
12
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
Donalda L. Fordyce (39) Vice President Senior Managing Director of
575 Lexington Avenue Bear Stearns Asset Management
New York, NY 10022 since March, 1996; previously
Vice President, Asset
Management Group, Goldman,
Sachs from 1988 to 1996.
Ellen T. Arthur (48) Secretary Associate Director of Bear
575 Lexington Avenue Stearns since January 1996;
New York, NY 10022 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 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.
13
<PAGE>
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:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total
Pension or Compensation from
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>
Peter M. Bren $8,000 None None $20,000
Alan J. Dixon $8,000 None None $8,000
John R. McKernan, Jr. $8,000 None None $20,000
M.B. Oglesby, Jr. $8,000 None None $20,000
Robert S. Reitzes** None None None None
Michael Minkes** None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $8,600 for Board members of the Fund, as a
group.
** Robert S. Reitzes resigned as a Director to Funds effective September 8,
1997. Michael Minikes was appointed as replacement for Mr. Retizes
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 March 31, 1998.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution and Shareholder Servicing Plan" 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 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.
- 14 -
<PAGE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Management of the
Fund."
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated as of June 2, 1997, with the Fund. The Agreement will remain
in effect for two years from the date of execution and shall continue from year
to year thereafter if it is approved 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 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
Agreement is terminable, as to the 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 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; Frank J. Maresca, Executive Vice
President; Donalda L. Fordyce, Vice President, Chief Operating Officer and
Director; Ellen T. Arthur, Secretary; Warren J. Spector and Robert M. Steinberg,
Directors.
As compensation for BSAM's advisory services, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.20% of value of the Portfolio's
average daily net assets.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated as of June 2, 1997 as
revised September 8, 1997 and February 4, 1998, with the Fund. The
Administration Agreement will continue until June 2, 1999 and thereafter will be
subject to annual approval by (i) the Fund's Board 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 without penalty, on 60 days' notice, by the Fund's Board
or by vote of the
- 15 -
<PAGE>
holders of a majority of the Portfolio's shares or upon not less than 90 days'
notice by BSFM. 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 0.05 of 1% of the Portfolio's
average daily net assets.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated as
of June 2, 1997, as revised September 8, 1997 and February 4, 1998 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 Portfolio's Prospectus.
Expense Limitation. BSFM has voluntarily undertaken to waive its
investment advisory fee and assume certain expenses of the Portfolio,
extraordinary items, interest and taxes to the extent Total Portfolio Operating
Expenses exceed 0.20% of Class Y's average daily net assets. Such waivers and
expense reimbursement may be discontinued at any time upon notice to the
shareholder.
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 Bear Stearns, BSAM or their 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'
- 16 -
<PAGE>
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, including, but not limited to, proportionately in
relation to the net assets of each portfolio.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's distributor on
a best efforts basis pursuant to an agreement dated as of June 2, 1997 which is
renewable annually. 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 Portfolio's 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolio and its investors that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its investors, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The 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, the Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other
- 17 -
<PAGE>
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 investors,
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 the 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 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 the Portfolio on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the 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.
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
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the
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
the 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
- 18 -
<PAGE>
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. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Government National Mortgage Corporation, and
the Student Loan Marketing Association are treated as U.S. government
securities.
If for any taxable year the 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 investors, and such distributions will be taxable to the
investors as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate investors.
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 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).
The 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
- 19 -
<PAGE>
should note that the Portfolio may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Portfolio Distributions. The Portfolio anticipates distributing
substantially all of its investment company taxable income for each taxable
year. Such distributions will be taxable to investors as ordinary income and
treated as dividends for federal income tax purposes, but will qualify for the
70% dividends-received deduction for corporate investors only to the extent
discussed below.
Ordinary income dividends paid by the 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 the 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, or (2) 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
investor may be disallowed or reduced (1) if the corporate investor fails to
satisfy the foregoing requirements with respect to its shares of the Portfolio
or (2) by application of Code section 246(b) which in general limits the
dividends-received deduction to 70% of the investor's taxable income (determined
without regard to the dividends-received deduction and certain other items).
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 investor will generally be required to
take the full amount of
- 20 -
<PAGE>
any dividend received from the 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 the 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 the 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 the Portfolio's assets to be invested in various
countries is not known.
Distributions by the 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 investor's tax basis in his shares; any
excess will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares or shares of another portfolio (or another fund).
Investors 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 an investor purchases shares of the 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 investor in the manner
described above, although they economically constitute a return of capital to
the investor.
Ordinarily, investors are required to take distributions by the
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
investors of record on a specified date in such month will be deemed to have
been received by the investors (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Investors will be advised annually as to the U.S. federal income
tax consequences of distributions made (or deemed made) during the year.
The 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 investor (1)
who has failed to provide a correct taxpayer identification number, (2) who is
subject
- 21 -
<PAGE>
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. The Portfolio seeks to maintain a stable
net asset value of $1.00 per share; however, there can be no assurance that the
Portfolio will do this. If the net asset value varies from $1.00 per share, an
investor will recognize gain or loss on the sale or redemption of shares of the
Portfolio in an amount equal to the difference between the proceeds of the sale
or redemption and the investor's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the investor 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 the 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 investor 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.
Foreign Investors. Taxation of an investor who, as to the United
States, is a nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign investor") depends on whether the
income from the Portfolio is "effectively connected" with a U.S. trade or
business carried on by such investor.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign investor, ordinary income
dividends paid to a foreign investor will be subject to U.S. withholding tax at
the rate of 30% (or lower applicable treaty rate) on the gross amount of the
dividend. Such foreign investor would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of the Portfolio, capital
gain dividends, and amounts retained by the Portfolio that are designated as
undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign investor, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the
- 22 -
<PAGE>
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 investors, the 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 subject to withholding at a
reduced treaty rate) unless such investors furnish the Portfolio with proper
notification of their foreign status.
The tax consequences to a foreign investor entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign investors are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Portfolio, including the applicability of foreign taxes.
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. Investors are urged to
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting investment in the Portfolio.
DIVIDENDS
The Portfolio's net investment income for dividend purposes consists of
(i) interest accrued and original issue discount earned on the Portfolio's
assets, (ii) plus the amortization of market discount and minus the amortization
of market premium on such assets, (iii) less accrued expenses directly
attributable to the Portfolio and the general expenses (e.g. legal, accounting
and trustees' fees) of the Fund prorated to the Portfolio on the basis of its
relative net assets. Any realized short-term capital gains may also be
distributed as dividends to Portfolio investors.
The Fund uses its best efforts to maintain the net asset value per
share of the Portfolio at $1.00. As a result of a significant expense or
realized or unrealized loss incurred by the Portfolio , it is possible that the
Portfolio's net asset value per share may fall below $1.00.
- 23 -
<PAGE>
ADDITIONAL YIELD INFORMATION
The "yields" and "effective yields" are calculated separately for each
class of shares of the Portfolio and in accordance with the formulas prescribed
by the SEC. The seven-day yield for each class of shares in the Portfolio is
calculated by determining the net change in the value of a hypothetical
preexisting account in the Portfolio having a balance of one share of the class
involved at the beginning of the period, dividing the net change by the value of
the account at the beginning of the period to obtain the base period return, and
multiplying the base period return by 365/7. The net change in the value of an
account in the Portfolio includes the value of additional shares purchased with
dividends from the original share and dividends declared on the original share
and any such additional shares, net of all fees charged to all shareholder
accounts in proportion to the length of the base period and the Portfolio's
average account size, but not include gains and losses or realized appreciation
and depreciation. In addition, the effective annualized yield may be computed on
a compounded basis (calculated as described above) with respect to each class of
a Portfolio's shares by adding 1 to the base period return, raising the sum to a
power equal to 365/7, and subtracting 1 from the result. Similarly, based on
calculations described above, 30-day (or one-month) yields and effective yields
may also be calculated.
From time to time, in advertisements or in reports to investors, the
Portfolio's yield may be quoted and compared to that of other money market funds
or accounts with similar investment objectives and to stock or other relevant
indices. For example, the yield of the Portfolio may be compared to the IBC
Money Fund Average, which is an average compiled by IBC MONEY FUND REPORT(R) of
Holliston, MA 01746, a widely-recognized independent publication that monitors
the performance of money market funds, or to the average yields reported by the
Bank Rate Monitor from money market deposit accounts offered by the 50 leading
banks and thrift institutions in the top five standard metropolitan statistical
areas.
The Portfolio's yields will fluctuate, and any quotation of yield
should not be considered as representative of the future performance of the
Portfolio. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in Portfolio shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Investors should remember that
performance and yield are generally functions of the kind and quality of the
investments held in a portfolio, portfolio maturity, operating expenses net of
waivers and expense reimbursements, and market conditions. Any fees charged by
banks with respect to Customer accounts investing in shares of the Portfolio
will not be included in yield calculations; such fees, if charged, would reduce
the actual yield from that quoted.
- 24 -
<PAGE>
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's 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 January 8, 1998 the following shareholders owned,
directly or indirectly, 5% or more of the indicated class of the Portfolio's
outstanding shares.
Percent of Class Y
Name and Address Shares Outstanding
Bear Stearns Securities Corp.
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, New York 11201-3859 13.5%
Custodial Trust Company
FBO Bear Stearns Pension Plan
101 Carnegie Center
Princeton, New Jersey 08540 12.7%
Bear Stearns Securities Corp.
FBO 925-97218-10
1 Metrotech Center North
Brookyln, New York 11201-3859 10.2%
Bear Stearns Securities Corp.
FBO 268-09982-14
1 Metrotech Center North
Brooklyn, New York 11201-3859 16.2%
- 25 -
<PAGE>
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 the 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 the Portfolio's
custodian. Under the custody agreement with the Portfolio, CTC holds the
Portfolio's securities and keeps all necessary accounts and records. For its
services, CTC receives an annual fee of the greater of .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 the Portfolio's transfer agent, dividend
disbursing agent and registrar. Neither CTC nor PFPC has any part in determining
the investment policies of the Portfolio or which securities are to be purchased
or sold by the Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, has rendered its opinion as to certain legal
matters regarding the due authorization and valid issuance of the shares of
beneficial interest being sold pursuant to the Portfolio's 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 Portfolio's Annual Report to Shareholders for the period ended March 31,
1998, is a separate document supplied with this Statement of Additional
Information, and the financial statements and accompanying notes appearing
therein are incorporated by reference into this Statement of Additional
Information.
- 26 -
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
COMMERCIAL PAPER RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, commercial
paper rating is a current assessment of the likelihood of timely payment of debt
considered short-term in the relevant market. The following summarizes the two
highest rating categories used by Standard & Poor's for commercial paper.
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. The following summarizes the two highest rating categories
used by Moody's for commercial paper.
"Prime-1" - Issuer or related supporting institutions which are
considered to have a superior ability for repayment of senior short-term debt
obligations. Principal repayment capacity will normally be evidenced by the
following characteristics: 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 earning 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" - Issuer or related supporting institutions which are
considered to have a strong ability for repayment of senior short-term debt
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.
The two highest rating categories of Duff & Phelps for investment grade
commercial paper are "D-1" and "D-2." Duff & Phelps employs three designations,
"D-1+, " "D-1" and "D-1-," within the highest rating category. The following
summarizes the two highest rating categories used by Duff & Phelps for
commercial paper:
- 27 -
<PAGE>
"D-1+" - Debt possesses 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.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses 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.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The two
highest rating categories of Fitch for short-term obligations are "F-1" and
"F-2." Fitch employs two designations, "F-1+" and "F-1," within the highest
rating category. The following summarizes some of the rating categories used by
Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess 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" - Securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less. The following summarizes the two highest ratings used by Thomson
BankWatch:
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<PAGE>
"TBW-1" - This designation represents Thomson BankWatch;s highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The highest rating category of IBCA for
short-term debt is "A." IBCA employs two designations, "A1+" and "A1," within
the highest rating category. The following summarizes the two highest categories
used by IBCA for short-term ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of "A1+" is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standards & Poor's for
long-term debt:
"AAA" - This designation represents the highest rating assigned by
Standards & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt considered to have a very strong capacity to pay interest
and repay principal and differs from the highest rated issue only in a small
degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues 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
debt in this category than in higher-rated categories.
- 29 -
<PAGE>
"BB," "B," "CCC," "CC," and "C" - Debt that possesses one of these
ratings is regarding as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal. "BB" indicates the
least degree of speculation and "CCC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) or MINUS (-) - The rating of "AA" may be modified by the
addition of a plus or minus sign to show relative standing within this rating
category.
The following summarizes the ratings used by Moody's for long-term
debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds 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 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 considered 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.
- 30 -
<PAGE>
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements, "B" indicates a general lack of
characteristics of desirable investment, "Caa" represents a poor standing, "Ca"
represents obligations which are speculative in a high degree, and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
a default.
Con. (---) - Municipal Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in generic
classification of "Aa" in its corporate bond rating system. The modifier 1
indicates that the company 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 company ranks at the lower end of its generic rating
category.
Those municipal bonds in the "Aa" to "B" groups which Moody's believes
possess the strongest investment attributes are designated by the symbols "Aa1,"
"A1," "Baa1," "Ba1," and "B1."
The following summarizes the ratings used by Duff & Phelps for
long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors, but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
- 31 -
<PAGE>
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest, or preferred dividends. Debt rated "DD"
is a defaulted debt obligations, and the rating "DP" represents preferred stock
with dividend averages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB," and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
The following summarizes the ratings used by Fitch for bonds:
"AAA" - Bonds 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 considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
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 considered to be investment grade and of very 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 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.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment that bonds should be valued on the basis of the ultimate recovery
value in liquidation or reorganization of the obligor.
- 32 -
<PAGE>
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
two highest rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
"A" - The designation indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
PLUS (+) or MINUS (-) - The ratings may include a plus or minus sign
designation which indicates where within the respective category the issue is
placed.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the two highest
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse
- 33 -
<PAGE>
changes in business economic or financial conditions may lead to increased
investment risk.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within these rating categories.
- 34 -
<PAGE>
THE BEAR STEARNS FUNDS
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
(a)......Financial Statements:
Part A (Prospectus):
(1) Financial Highlights for the fiscal year
ended March 31, 1998 (audited).
Part B (Statement of Additional Information):
Financial Statements and the Reports thereon for The Bear
Stearns Funds for the fiscal year ended March 31, 1998,
included in the Annual Report to Shareholders for the
Total Return Bond Portfolio and High Yield Total Return
Portfolio; S&P STARS Portfolio, The Insiders Select Fund,
Large Cap Value Portfolio, Small Cap Value Portfolio,
Focus List Portfolio, Balanced Portfolio and International
Equity Portfolio; and Prime Money Market Portfolio, and
are incorporated herein by reference in the respective
Statements of Additional Information from the Rule 30-D
filings made by the Registrant on May 27, 1998, accession
numbers 001047469-98- 021855, 001047469-98-021871, and
001047469-98-021875, respectively.
(1) Statements of Assets and Liabilities for the period
ended March 31, 1998 (audited).
(2) Statements of Operations for the period ended March 31,
1998 (audited).
(3) Statements of Changes in Net Assets for the period
ended March 31, 1998 (audited).
(4) Notes to Financial Statements dated March 31, 1998
(audited).
(b) Exhibits:
EX-99.B1(a) Agreement and Declaration of Trust
is incorporated by reference to
Exhibit (1)(a) of Post-Effective
Amendment No. 7 to the Registration
Statement on Form N- 1A filed
electronically on November 9, 1995,
accession number 0000950130-95-
002359.
C-1
<PAGE>
EX-99.B1(b) Amendment to Agreement and
Declaration of Trust is
incorporated by reference to
Exhibit (1)(b) of Post-Effective
Amendment No. 7 to the Registration
Statement on Form N-1A filed
electronically on November 9, 1995,
accession number
0000950130-95-002359.
EX-99.B2 By-Laws are incorporated by
reference to Exhibit (2) of
Post-Effective Amendment No. 7 to
the Registration Statement on Form
N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B3 None.
EX-99.B4 None.
EX-99.B5(a) Investment Advisory Agreement
between the Registrant and Bear
Stearns Funds Management Inc.
("BSFM") is incorporated by
reference to Exhibit (5)(a) of
Post- Effective Amendment No. 7 to
the Registration Statement on Form
N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B5(b) Investment Advisory Agreement
between the Registrant and BSFM,
with respect to Prime Money Market
Portfolio, is incorporated by
reference to Exhibit (5)(b) of
Post-Effective Amendment No. 13 to
the Registration Statement on Form
N- 1A filed electronically on July
29, 1997, accession number
0000922423-97-000633.
EX-99.B5(c) Investment Advisory Agreement
between the Registrant and BSFM,
with respect to Balanced Portfolio,
High Yield Total Return Portfolio
and International Equity Portfolio
is filed herewith.
EX-99.B5(d) Sub-Investment Advisory Agreement
between BSFM and Marvin & Palmer
Associates, Inc., with respect to
International Equity Portfolio is
filed herewith.
EX-99.B6(a) Distribution Agreement between the
Registrant and Bear, Stearns & Co.
Inc., with revised Schedule I as
of September 8, 1997, is filed
herewith.
C-2
<PAGE>
EX-99.B6(b) Form of Dealer Agreement is
incorporated by reference to
Exhibit (6)(b) of Post- Effective
Amendment No. 9 to the Registration
Statement on Form N-1A filed
electronically on June 20, 1996,
accession number
0000899681-96-000180.
EX-99.B7 None.
EX-99.B8 Custody Agreements between the
Registrant and Custodial Trust
Company are incorporated by
reference to Exhibit (8) of
Post-Effective Amendment No. 7 to
the Registration Statement on Form
N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B9(a) Administration Agreement between
the Registrant and BSFM is
incorporated by reference to
Exhibit (5)(b) of Post- Effective
Amendment No. 7 to the Registration
Statement on Form N-1A filed
electronically on November 9, 1995,
accession number
0000950130-95-002359.
EX-99.B9(b) Administrative Services Agreement,
as amended, between the Registrant
and PFPC Inc. is incorporated by
reference to Exhibit (5)(c) of
Post-Effective Amendment No. 7 to
the Registration Statement on Form
N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B9(c) Form of Shareholder Servicing
Agreement for Class A, Class B and
Class C shares of S&P STARS
Portfolio, Large Cap Value
Portfolio, Small Cap Value
Portfolio, Total Return Bond
Portfolio, The Insiders Select Fund,
Focus List Portfolio, Balanced
Portfolio, High Yield Total Return
Portfolio and International Equity
Portfolio is filed herewith.
EX-99.B9(d) Shareholder Servicing Plan, dated
September 8, 1997, for Class A,
Class B and Class C shares of S&P
STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value
Portfolio, Total Return Bond
Portfolio, The Insiders Select
Fund, Focus List Portfolio,
Balanced Portfolio, High Yield
Total Return Portfolio and
International Equity Portfolio is
filed herewith.
C-3
<PAGE>
EX-99.B10 Opinion of Kramer, Levin, Naftalis
& Frankel as to the legality of the
securities registered is filed
herewith.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis
& Frankel is filed herewith.
EX-99.B11(b) Consent of Deloitte & Touche LLP is
filed herewith.
EX-99.B12 None.
EX-99.B13 None.
EX-99.B14 None.
EX-99.B15(a) Distribution and Shareholder
Servicing Plan , dated February 22,
1995, for Class A and Class C
shares of S&P STARS Portfolio,
Large Cap Value Portfolio, Small
Cap Value Portfolio, Total Return
Bond Portfolio and The Insiders
Select Fund is filed herewith.
EX-99.B15(b) Distribution Plan , dated September
8, 1997, for Class B shares of S&P
STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value
Portfolio, Total Return Bond
Portfolio and The Insiders Select
Fund, and for Class A, Class B and
Class C shares of Focus List
Portfolio, Balanced Portfolio, High
Yield Total Return Portfolio and
International Equity Portfolio is
filed herewith.
EX-99.B16(a) Schedules of Computation of
Performance Data are incorporated
by reference to Exhibit (16) of
Post Effective Amendment No. 5 to
the Registration Statement on Form
N-1A filed September 1, 1995 and to
Exhibit (16) of Post-Effective
Amendment No. 7 to the Registration
Statement on Form N-1A filed
electronically on November 9, 1995,
accession number
0000950130-95-002359.
EX-99.B16(b) Schedule of Computation of
Performance Data for the Prime
Money Market are incorporated by
reference to Exhibit (16)(b) of
Post-Effective Amendment No. 19 to
the Registration Statement on Form
N-1A filed electronically on
January 14, 1998, accession number
0000922423-98- 000036.
C-4
<PAGE>
EX-99.B17 Financial Data Schedules are filed
herewith as Exhibit 27.
EX-99.B18 Rule 18f-3 Plan, as revised is
incorporated by reference to
Exhibit 18 of Post-Effective
Amendment No. 15 to the
Registration Statement on Form N-1A
filed electronically on October 1,
1997, accession number
0000922423-97-000815.
Other Exhibits:
EX-99.A Certificate of Corporate Secretary
is incorporated by reference to
Other Exhibit (a) of Post-Effective
Amendment No. 7 to the Registration
Statement on Form N-1A filed
electronically on November 9, 1995,
accession number
0000950130-95-002359.
EX-99.B Power of Attorney of Michael
Minikes is incorporated by
reference to Other Exhibit (b) of
Post-Effective Amendment No. 15 to
the Registration Statement on Form
N-1A filed electronically on
October 1, 1997, accession number
0000922423-97- 000815. Powers of
attorney are incorporated by
reference to Other Exhibit (b) of
Post-Effective Amendment No. 7 to
the Registration Statement on Form
N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359 and to Other
Exhibit (b) of Post-Effective
Amendment No. 8 to the Registration
Statement on Form N-1A filed
electronically on April 12, 1996,
accession number
0000950130-96-001230.
Item 25. Persons Controlled by or Under Common Control with
Registrant
Not Applicable
C-5
<PAGE>
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class July 17, 1998
-------------- -------------
Shares of beneficial interest,
$.001 par value per share,
of the following portfolios:
S&P STARS Portfolio--Class A 6,179
S&P STARS Portfolio--Class B 759
S&P STARS Portfolio--Class C 3,835
S&P STARS Portfolio--Class Y 513
Large Cap Value Portfolio--Class A 390
Large Cap Value Portfolio--Class B 59
Large Cap Value Portfolio--Class C 326
Large Cap Value Portfolio--Class Y 123
Small Cap Value Portfolio--Class A 1,308
Small Cap Value Portfolio--Class B 225
Small Cap Value Portfolio--Class C 1,028
Small Cap Value Portfolio--Class Y 334
Total Return Bond Portfolio--Class A 121
Total Return Bond Portfolio--Class B 8
Total Return Bond Portfolio--Class C 105
Total Return Bond Portfolio--Class Y 41
The Insiders Select Fund--Class A 2,042
The Insiders Select Fund--Class B 553
The Insiders Select Fund--Class C 953
The Insiders Select Fund--Class Y 101
Focus List Portfolio--Class A 315
Focus List Portfolio--Class B 209
Focus List Portfolio--Class C 155
Focus List Portfolio--Class Y 0
Prime Money Market Portfolio--Class Y 40
Balanced Portfolio--Class A 81
Balanced Portfolio--Class B 65
Balanced Portfolio--Class C 18
Balanced Portfolio--Class Y 30
High Yield Total Return Portfolio--Class A 670
High Yield Total Return Portfolio--Class B 472
High Yield Total Return Portfolio--Class C 354
High Yield Total Return Portfolio--Class Y 0
International Equity Portfolio--Class A 184
International Equity Portfolio--Class B 53
International Equity Portfolio--Class C 60
International Equity Portfolio--Class Y 0
C-6
<PAGE>
Item 27. Indemnification
Reference is made to Article VIII of the Registrant's Declaration
of Trust (filed as Exhibit 1(a) to Registrant's Post- Effective Amendment No. 7
filed electronically on November 9, 1995, accession number 0000950130-95-002359
and incorporated herein by reference). The application of these provisions is
limited by Article 10 of the Registrant's By-Laws (filed as Exhibit 2 to
Registrant's Post-Effective Amendment No. 7 filed electronically on November 9,
1995, accession number 0000950130- 95-002359 and incorporated herein by
reference) and by the following undertaking set forth in the rules promulgated
by the Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a trustee,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final
adjudication of such issue.
Reference also is made to the Distribution Agreement previously
filed as Exhibit 6(a) to Registrant's Post-Effective Amendment No. 7 filed
electronically on November 9, 1995, accession number 0000950130-95-002359 and
incorporated herein by reference.
Item 28(a). Business and Other Connections of Investment Adviser
Registrant is fulfilling the requirement of this Item 28(a) to
provide a list of the officers and directors of Bear Stearns Funds Management
Inc. ("BSFM"), the investment adviser of the Registrant, together with
information as to any other business, profession, vocation or employment of a
substantial
C-7
<PAGE>
nature engaged in by BSFM or those of its officers and directors during the past
two years, by incorporating by reference the information contained in the Form
ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by BSFM
(SEC File No. 801- 29862).
Item 29. Principal Underwriters
(a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as
principal underwriter or depositor for the following investment
companies:
o Bear Stearns Investment Trust -- Emerging Markets
Debt Portfolio
o Managed Income Securities Plus Fund, Inc.
(b) Set forth below is a list of each executive officer and
director of Bear Stearns. All Directors and Executive Officers are also Senior
Managing Directors. The principal business address of each such person is 245
Park Avenue, New York, New York 10167, except as set forth below.
Positions and Positions and
Offices with Offices with
Name Bear Stearns Registrant
- ---- ------------ ----------
Directors
- ---------
Alan C. Greenberg Chairman of the Board
E. John Rosenwald Jr.
Michael L. Tarnopol
James E. Cayne
Mark E. Lehman
Alan D. Schwartz
Warren J. Spector
Michael Minikes
Samuel L Molinaro Jr.
William J. Montgoris
Denis Bovin
Peter D. Cherasia
Ralph R. Cioffi
Barry J. Cohen
Wendy L. de Monchaux
Bruce E. Geismar
Richard Harriton
Daniel L. Keating
John Knoght
Curtis S. Lan
David A. Liebowitz
Bruce M. Lisman
Roland N. Livney
Jeffrey Mayer
Gary M. McLoughlin
C-8
<PAGE>
Donald R. Mullen Jr.
Fares D. Noujaim
Craig M. Overlander
Stephen E. Raphael
Pierce J. Roberts Jr.
Richard B. Sachs
David M. Solomon
Robert M. Steinberg
Donald W. Tang
Michael J. Urfirer
Eli Wachtel
Miacheal Winchell
Uzi Zucker
John H. Slade Director Emeritus
Positions and Positions and
Offices with Offices with
Name Bear Stearns Registrant
- ---- ------------ ----------
Executive Officers
Alan C. Greenberg Chairman of the Board
James E. Cayne Chief Executive
Officer/President
William J. Montgoris Chief Operating Executive Vice
Officer/Chief Operations
Officer
President
Mark E. Lehman Executive Vice President/
General Counsel/Chief Legal
Officer
Alan D. Schwartz Executive Vice
President
Warren J. Spector Executive Vice
President
Kenneth L. Edlow Secretary
Michael Minikes Treasurer Trustee
Michael J. Abatemarco1 Controller/Assistant
Secretary
Samuel L. Molinaro, Jr. Chief Financial Officer/
Senior Vice President -
Finance
Frederick B. Casey Assistant Treasurer
Lawrence E. Rogers Assistant Controller
Stephen A. Bornstein Assistant Secretary
Marc H. Feuer Assistant Treasurer
Robert J. Schwartz Assistant Treasurer
Cheryl Kallem Assistant Controller
Charles A. Nalbone Chief Compliance Officer
- ---------------
1 Michael J. Abatemarco's principal business address is 1 Metrotech Center
North, Brooklyn, New York 11201-3859.
C-9
<PAGE>
Item 30. Location of Accounts and Records
1. Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
(records relating to operations of the Company)
2. The Bear Stearns Funds
575 Lexington Avenue
New York, New York 10022
(records relating to the Company)
3. Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, New York 10022
(advisory records)
4. Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
(records of the principal underwriter)
5. PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
(certain financial and shareholder records)
6. Marvin & Palmer Associates
1201 North Market Street
Suite 2300
Wilmington, Delaware 19801-2545
(records relating to its function as sub-investment
adviser for the International Equity Portfolio)
Item 31. Management Services
Not Applicable
Item 32. Undertakings
Registrant hereby undertakes
(1) to call a meeting of shareholders for the purpose of voting
upon the question of removal of a trustee or trustees when
requested in writing to do so by the holders of at least 10%
of the Registrant's outstanding shares of beneficial
interest and in connection with such meeting to comply with
the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications; and
(2) to furnish each person to whom a prospectus is delivered
with a copy of its most current annual report to
shareholders, upon request and without charge.
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of the Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York on the 28th day of July, 1998.
THE BEAR STEARNS FUNDS
(Registrant)
By: /s/Robert S. Reitzes
--------------------
Robert S. Reitzes
President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
/s/Robert S. Reitzes President (Principal July 28, 1998
- --------------------- Executive Officer)
Robert S. Reitzes
/s/Frank J. Maresca Vice President and July 28, 1998
- --------------------- Treasurer (Principal
Frank J. Maresca Financial and
Accounting Officer)
* Trustee
- ---------------------
Peter M. Bren
* Trustee
- ---------------------
Alan J. Dixon
* Trustee
- ---------------------
John R. McKernan, Jr.
* Trustee
- ---------------------
M.B. Oglesby, Jr.
* Trustee July 28, 1998
- ---------------------
Michael Minikes
*By: /s/Frank J. Maresca
-------------------
Frank J. Maresca,
Attorney-in-Fact
C-11
<PAGE>
THE BEAR STEARNS FUNDS
INDEX TO EXHIBITS
EX-99.B5(c) Investment Advisory Agreement between the Registrant and
BSFM, with respect to Balanced Portfolio, High Yield Total
Return Portfolio and International Equity Portfolio
EX-99.B5(d) Sub-Investment Advisory Agreement between BSFM and Marvin &
Palmer Associates, Inc., with respect to International Equity
Portfolio
EX-99.B6(a) Distribution Agreement between the Registrant and Bear,
Stearns & Co. Inc., with revised Schedule I as of September
8, 1997
EX-99.B9(c) Form of Shareholder Servicing Agreement for Class A, Class B
and Class C shares of S&P STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value Portfolio, Total Return Bond
Portfolio, The Insiders Select Fund, Focus List Portfolio,
Balanced Portfolio, High Yield Total Return Portfolio and
International Equity Portfolio
EX-99.B9(d) Shareholder Servicing Plan, dated September 8, 1997, for
Class A, Class B and Class C shares of S&P STARS Portfolio,
Large Cap Value Portfolio, Small Cap Value Portfolio, Total
Return Bond Portfolio, The Insiders Select Fund, Focus List
Portfolio, Balanced Portfolio, High Yield Total Return
Portfolio and International Equity Portfolio
EX-99.B10 Opinion of Kramer, Levin, Naftalis & Frankel as to the
legality of the securities registered
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Deloitte & Touche LLP
EX-99.B15(a) Distribution and Shareholder Servicing Plan for Class A and
Class C shares of S&P STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value Portfolio, Total Return Bond
Portfolio and The Insiders Select Fund
EX-99.B15(b) Distribution Plan for Class B shares of S&P STARS Portfolio,
Large Cap Value Portfolio, Small Cap Value Portfolio, Total
Return Bond Portfolio and The Insiders Select Fund, and for
Class A, Class B and Class C shares of Focus List Portfolio,
Balanced Portfolio, High Yield Total Return Portfolio and
International Equity Portfolio
EX-27 Financial Data Schedules
C-12
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
September 8, 1997
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect
to the series named on Schedule 1 hereto, as such Schedule may be revised from
time to time (each, a "Series"), herewith confirms its agreement with you as
follows:
The Fund desires to employ its capital by investing and
reinvesting the same in investments of the type and in accordance with the
limitations specified in its charter documents and in its offering documents
(Part A and Part B) as from time to time in effect, copies of which have been or
will be submitted to you, and in such manner and to such extent as from time to
time may be approved by the Fund's Board. The Fund desires to employ you to act
as its investment adviser.
You may render services through your own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser to the Fund under applicable laws and are under your common
control as long as all such persons are functioning as part of an organized
group of persons, and such organized group of persons, with respect to the
services used by the Fund, is managed at all times by your authorized officers.
You will be as fully responsible to the Fund for the acts and omissions of such
persons as you are for your own acts and omissions.The compensation of such
person or persons shall be paid by you and no obligation may be incurred on the
Fund's behalf in any such respect.
Subject to the supervision and approval of the Fund's Board,
you will provide investment management of each Series' portfolio in accordance
with such Series' investment objectives and policies as stated in the Fund's
offering documents (Part A and Part B) as from time to time in effect. In
connection, therewith, you will obtain and provide investment research and will
supervise each Series' investments and conduct a continuous program of
<PAGE>
investment, evaluation and, if appropriate, sale and reinvestment of such Series
assets. You will furnish to the Fund such statistical information, with respect
to the investments which a Series may hold or contemplate purchasing, as the
Fund may reasonably request. The Fund wishes to be informed of important
developments materially affecting any Series' portfolio and shall expect you, on
your own initiative, to furnish to the Fund from time to time such information
as you may believe appropriate for this purpose.
You shall exercise your best judgment in rendering the
services to be provided to the Fund hereunder, and the Fund agrees as an
inducement to your undertaking the same that you shall not be liable hereunder
for any error of judgment or mistake of law or for any loss suffered by one or
more Series, provided that nothing herein shall be deemed to protect or purport
to protect you against any liability to the Fund or a Series or to its security
holders to which you would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence in the performance of your duties
hereunder or by reason of your reckless disregard of your obligations or duties
hereunder (hereinafter "Disabling Conduct") would otherwise be subject by reason
of Disabling Conduct.
In consideration of services rendered pursuant to this
Agreement, the Fund will pay you on the first business day of each month a fee
at the rate set forth opposite each Series' name on Schedule 1 hereto or will
pay you in accordance with the methodology described on additional Schedules
hereto. Net asset value shall be computed on such days and at such time or times
as described in the Fund's then-current Part A and Part B. The fee for the
period from the date of the commencement of sales of a Series' shares (after any
sales are made to you) to the end of the month during which such sales shall
have been commenced shall be pro-rated according to the proportion which such
period bears to the full monthly period, and upon any termination of this
Agreement before the end of any month, the fee for such part of a month shall be
pro-rated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement.
For the purpose of determining fees payable to you, the value
of each Series' net assets shall be computed in the manner specified in the
Fund's charter documents for the computation of the value of each Series' net
assets.
You will bear all expenses in connection with the performance
of your services under this Agreement. All other expenses to be incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by you. The expenses to be borne by the Fund include,
without limitation, the following: 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, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory,
administration 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 independent
pricing services, costs of maintaining the Series' existence, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of preparing and printing prospectuses and statements of
additional information for regulatory
2
<PAGE>
purposes and for distribution to existing shareholders, costs of shareholders'
reports and meetings, and any extraordinary expenses.
The Fund understands that you now act, and that from time to
time hereafter you may act, as investment adviser to one or more other
investment companies and fiduciary or other managed accounts, and the Fund has
no objection to your so acting, provided that when the purchase or sale of
securities of the same issuer is suitable for the investment objectives of two
or more companies or accounts managed by you which have available funds for
investment, the available securities will be allocated in a manner believed by
you to be equitable to each company or account. It is recognized that in some
cases this procedure may adversely affect the price paid or received by one or
more Series or the size of the position obtainable for or disposed of by one or
more Series.
In addition, it is understood that the persons employed by you
to assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
You shall place all orders for the purchase and sale of
portfolio securities for the Series with brokers or dealers selected by you,
which may include brokers or dealers affiliated with you to the extent permitted
by the 1940 Act and the Fund's policies and procedures applicable to the Series.
You shall use your best efforts to seek to execute portfolio transactions at
prices which, under the circumstances, result in total costs or proceeds being
the most favorable to the Series. In assessing the best overall terms available
for any transaction, you shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, research
services provided to you, and the reasonableness of the commission, if any, both
for the specific transaction and on a continuing basis. In no event shall you be
under any duty to obtain the lowest commission or the best net price for any
Series on any particular transaction, nor shall you be under any duty to execute
any order in a fashion either preferential to any Series relative to other
accounts managed by you or otherwise materially adverse to such other accounts.
In selecting brokers or dealers qualified to execute a
particular transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to you and/or the other accounts over which
you exercise investment discretion. You are authorized to pay a broker or dealer
who provides such brokerage and research services a commission
3
<PAGE>
for executing a portfolio transaction for the Series which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if you determine in good faith that the total commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or your overall responsibilities with respect to accounts over which
you exercise investment discretion. You shall report to the Board of Trustees of
the Fund regarding overall commissions paid by the Series and their
reasonableness in relation to their benefits to the Series. Any transactions for
the Series that are effected through an affiliated broker-dealer on a national
securities exchange of which such broker-dealer is a member will be effected in
accordance with Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder. The Series hereby
authorizes any such broker or dealer to retain commissions for effecting such
transactions and to pay out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
In executing portfolio transactions for the Series, you may,
to the extent permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased with those of
other portfolios or its other clients if, in your reasonable judgment, such
aggregation (i) will result in an overall economic benefit to the Series, taking
into consideration the advantageous selling or purchase price, brokerage
commission and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Fund's registration statement
and the Series's Prospectus and Statement of Additional Information. In such
event, you will allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner, consistent with your
fiduciary obligations to the Series and such other clients.
The Fund will indemnify you, your officers, directors,
employees and agents (each, an "indemnitee") against, and hold each indemnitee
harmless from, any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses) not resulting from Disabling
Conduct by the indemnitee. Indemnification shall be made only following: (i) a
final decision on the merits by a court or other body before whom the proceeding
was brought that the indemnitee was not liable by reason of Disabling Conduct or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of Disabling
Conduct by (a) the vote of a majority of a quorum of Board members who are
neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Board members") or (b) an independent legal counsel in
a written opinion. Each indemnitee shall be entitled to advances from the Fund
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under the New York Business Corporation Law. Each
indemnitee shall provide to the Fund a written affirmation of its good faith
belief that the standard of conduct necessary for indemnification by the Fund
has been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (a)
the indemnitee shall provide security in form and amount acceptable to the Fund
for its undertaking; (b) the Fund is insured against losses arising by reason of
the advance; or (c) a
4
<PAGE>
majority of a quorum of disinterested non-party Board members, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the indemnitee will ultimately be
found to be entitled to indemnification. No provision of this Agreement shall be
construed to protect any Board member or officer of the Fund, or any indemnitee,
from liability in violation of Sections 17(h) and (i) of the Investment Company
Act of 1940, as amended (the "1940 Act").
As to each Series, this Agreement shall continue until the
date set forth opposite such Series' name on Schedule 1 hereto (the "Reapproval
Date") and thereafter shall continue automatically for successive annual periods
ending on the day of each year set forth opposite the Series' name on Schedule 1
hereto (the "Reapproval Day"), provided such continuance is specifically
approved at least annually by (i) the Fund's Board; or (ii) vote of a majority
(as defined in the 1940 Act) of such Series' outstanding voting securities,
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 any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. As to each Series, this
Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board
or by vote of holders of a majority of such Series' shares or, upon not less
than 90 days' notice, by you. This Agreement also will terminate automatically,
as to the relevant Series, in the event of its assignment (as defined in the
1940 Act).
The Fund recognizes that from time to time your directors, officers and
employees may serve as trustees, directors, partners, officers and employees of
other business trusts, corporations, partnerships or other entities (including
other investment companies), and that such other entities may include the name
"Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and property
of the relevant Series and shall not be binding upon any Board member, officer
or shareholder of the Fund individually.
5
<PAGE>
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By: /s/Robert S. Reitzes
---------------------
Chairman
Accepted:
BEAR STEARNS FUNDS MANAGEMENT INC.
By: /s/Frank J. Maresca
--------------------
Executive Vice President
6
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Annual Fee as
a Percentage
of Average
Daily Net
Name of Series Assets Reapproval Date Reapproval Day
- -------------- ------ --------------- --------------
<S> <C> <C> <C>
Balanced Portfolio 0.65 of 1% September 7, 1999 September 7th
High Yield Total Return 0.60 of 1% September 7, 1999 September 7th
Portfolio
International Equity Portfolio 1.00 of 1% September 7, 1999 September 7th
</TABLE>
SUB-INVESTMENT ADVISORY AGREEMENT
BEAR STEARNS FUNDS MANAGEMENT INC.
245 PARK AVENUE
NEW YORK, NEW YORK 10167
September 9, 1997
Marvin & Palmer Associates, Inc.
1201 N. Market Street-Suite 2300
Wilmington, Delaware 19801-1165
Dear Sirs:
As you are aware, each Series of The Bear Stearns Funds (the
"Fund") desires to employ its capital by investing and reinvesting the same in
investments of the type and in accordance with the limitations specified in its
charter documents and in its Prospectus and Statement of Additional Information
as from time to time in effect, copies of which have been or will be submitted
to you, and in which manner and to such extent as from time to time may be
approved by the Fund's Board of Trustees (the "Board"). The Fund intends to
employ us (the "Adviser") to act as its investment adviser pursuant to a written
agreement (the "Investment Advisory Agreement"), a copy of which has been
provided to you. The Adviser desires to employ you to act as the sub-investment
adviser to the International Equity Portfolio (the "Series") starting when the
Series is initially offered to the public, which is expected to occur on or
about January 1, 1998 and you desire to accept such employment.
In this connection, it is understood that from time to time
you will employ or associate with yourself such person or persons as you may
believe to be particularly fitted to assist you in the performance of this
Agreement. Such person or persons shall be officers or employees who are
employed by you or the Fund. The compensation of such person or persons shall be
paid by you and no obligation shall be incurred on the Fund's behalf in any such
respect.
Subject to the supervision and approval of the Adviser, you
will provide investment management of the Series' portfolio in accordance with
the Series' investment objectives and policies as stated in its Prospectus and
Statement of Additional Information as from time to time in effect. In
connection therewith, you
<PAGE>
will supervise the Series' investments and conduct a continuous program of
investment, evaluation and, if appropriate, sales and reinvestment of the
Series' assets. You will furnish to the Adviser or the Fund such statistical
information, with respect to the investments which the Series may hold or
contemplate purchasing, as the Adviser or the Fund may reasonably request. The
Fund and the Adviser wish to be informed of important developments materially
affecting the Series' portfolio and shall expect you, on your own initiative, to
furnish to the Fund or the Adviser from time to time such information as you may
believe appropriate for this purpose.
You shall exercise your best judgment in rendering the
services to be provided hereunder, and, to the extent provided in the Investment
Advisory Agreement, the Fund has agreed as an inducement to your undertaking the
same that you shall not be liable hereunder for any error of judgment or mistake
of law or for any loss suffered by the Fund, provided that nothing herein shall
be deemed to protect or purport to protect you against any liability to the
Adviser, the Fund or the Fund's security holders to which you would otherwise be
subject by reasons of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
In consideration of services rendered pursuant to this
Agreement, the Adviser will pay you, in arrears, by the twentieth day of each
month, a fee calculated as set forth on Schedule 1 hereto.
Net asset value shall be computed on such days and at such
time or times as described in the Series' then-current Prospectus and Statement
of Additional Information. The fee for the period from the date following the
commencement of sales of the Series' shares to the end of the month during which
such sales shall have been commenced shall be pro-rated according to the
proportion which such period bears to the full monthly period, and upon any
termination of this Agreement before the end of any month, the fee for such part
of a month shall be pro-rated according to the proportion which such period
bears to the full monthly period and shall be payable within 10 business days of
the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value
of the Series' net assets shall be computed in the manner specified in the
Fund's charter documents for the computation of the value of the Series' net
assets.
You will bear all of your expenses in connection with the
performance of your services under this Agreement. Except to the extent
specifically assumed by you, all expenses to be incurred in the operation of the
Series (other than those borne by the Adviser) will be borne by the Series,
including, without limitation, the following: organizational costs, taxes,
interest, loan commitment fees, interest and distributions paid on securities
sold short, brokerage fees and commissions, if any, fees and expenses of Board
members, Securities and Exchange Commission and state
2
<PAGE>
Blue Sky qualification fees, advisory, administration, distribution and fund
accounting fees, charges of custodians, transfer and dividend disbursing agents'
fees, fees paid pursuant to a Rule 12b-1 Plan, certain insurance premiums,
industry association fees, outside auditing and legal expenses, costs of
independent pricing services, costs of maintaining the Series' existence, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs or shareholders' reports and meetings, and any
extraordinary expenses.
The Adviser understands that you now act, and that from time
to time hereafter you may act, as investment adviser to one or more other
investment companies and fiduciary or other managed accounts, and the Adviser
has no objection to your so acting and continuing to so act pursuant to your
current agreements, provided that, during the term of this Agreement, (i) if you
charge a management fee to any other investment company with an investment
objective and policies comparable to that of the Series that is less than the
fees as set forth in Schedule 1, you shall notify us and adjust the fees for
managing the Series to reflect such lower fee, and (ii) you shall not enter any
advisory relationship with any other investment company sponsored or managed by
someone other than the Adviser if that investment company has an investment
objective and policies comparable to that of the Series and a lower overall fee
structure.
In addition, it is understood that the persons employed by you
to assist in the performance of your duties hereunder will not devote their full
time to such services and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
You shall place all orders for the purchase and sale of
portfolio securities for the Series with brokers or dealers selected by you,
which may include brokers or dealers affiliated with you or the Adviser to the
extent permitted by the Investment Company Act of 1940, as amended (the "1940
Act") and the Fund's policies and procedures applicable to the Series. You shall
use your best efforts to seek to execute portfolio transactions at prices which,
under the circumstances, result in total costs or proceeds being the most
favorable to the Series. In assessing the best overall terms available for any
transaction, you shall consider all factors you deem relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, research services
provided to you, and the reasonableness of the commission, if any, both for
3
<PAGE>
the specific transaction and on a continuing basis. In no event shall you be
under any duty to obtain the lowest commission or the best net price for any
Series on any particular transaction, nor shall you be under any duty to execute
any order in a fashion either preferential to the Series relative to other
accounts managed by you or otherwise materially adverse to such other accounts.
In arranging for the execution of a particular transaction,
you may select brokers or dealers who also provide brokerage and research
services (as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) to you and/or the other accounts over which you exercise investment
discretion. You are authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Series which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if
you determine in good faith that the total commission is reasonable in relation
to the value of the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or your overall
responsibilities with respect to accounts over which you exercise investment
discretion. You shall report to the Board of Trustees of the Fund regarding
overall commissions paid by the Series and their reasonableness in relation to
their benefits to the Series. Any transactions for the Series that are effected
through a broker-dealer that is affiliated with the Adviser, on a national
securities exchange of which such broker-dealer is a member will be effected in
accordance with Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder. The Series hereby
authorizes any such broker or dealer to retain commissions for effecting such
transactions and to pay out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
In executing portfolio transactions for the Series, you may,
to the extent permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased with those of
other portfolios or your other clients if, in your reasonable judgment, such
aggregation (i) will result in an overall economic benefit to the Series, taking
into consideration the advantageous selling or purchase price, brokerage
commission and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Fund's registration statement
and the Series' Prospectus and Statement of Additional Information. In such
event, you hereby agree to allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in an equitable manner, consistent with
your fiduciary obligations to the Series and such other clients. The Adviser
recognizes that in some cases this procedure may adversely affect the price paid
or received by the Series or the size of the position obtainable for or disposed
of by the Series.
This Agreement shall continue until September 8, 1999, and
thereafter shall continue automatically for successive annual periods ending on
September 8, of each year, provided such continuance is specifically approved at
least annually by (i) the Fund's Board or (ii) the vote of a majority (as
defined in the 1940 Act of the
4
<PAGE>
Fund's outstanding voting securities, 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 said Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable without penalty (i) by the
Adviser upon 60 days' notice to you, (ii) by the Fund's Board or by vote of the
holders of a majority of the Fund's shares upon 60 days' notice to you, or (iii)
by you upon not less than 90 days' notice to the Fund and the Adviser. This
Agreement also will terminate automatically in the event of its assignment (as
defined in said Act). In addition, notwithstanding anything herein to the
contrary, if the Investment Advisory Agreement terminates for any reason, this
Agreement shall terminate effective upon the date the Investment Advisory
Agreement terminates.
All assets of the Fund shall be maintained for safekeeping
with the Fund's custodian (and sub-custodian network) and you shall not have
custody of the assets of the Fund. Each party hereto also represents and
warrants that it is duly authorized to enter this Agreement and has caused this
Agreement to be executed by a duly authorized representative.
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
BEAR STEARNS FUNDS MANAGEMENT INC.
By: /s/ Donalda L. Fordyce
----------------------
Donalda L. Fordyce
Title:____________________________
Accepted:
MARVIN & PALMER ASSOCIATES, INC.
By: /s/ David Palmer
----------------
David Palmer
Title: Chairman
Attest:
By: /s/
----------------
5
<PAGE>
SCHEDULE 1
In consideration of the services rendered pursuant to this
Agreement, the Adviser will pay to Marvin & Palmer Associates, Inc. a monthly
payment calculated on an annual basis as set forth below:
Portfolio's Average Annual Fee as a Percentage
Daily Net Assets at of Total Average Daily
Relevant Month-End Net Assets
------------------ ----------
Up to $25 million 0.00%
More than $25 million up to $50 million 0.20%
More than $50 million up to $65 million 0.45%
More than $65 million 0.60%
DISTRIBUTION AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
February 22, 1995
As Revised April 11, 1995
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the "Fund") has
agreed that you shall be, for the period of this agreement, the distributor of
(a) shares of each Series of the Fund set forth on Schedule 1 hereto, as such
Schedule may be revised from time to time (each, a "Series") or (b) if no Series
are set forth on such Schedule, shares of the Fund. For purposes of this
agreement the term "Shares" shall mean the authorized shares of the relevant
Series, if any, and otherwise shall mean the Fund's authorized shares.
1. Services as Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement and prospectus
then in effect under the Securities Act of 1933, as amended, and will transmit
promptly any orders received by you for purchase or redemption of Shares to the
Transfer and Dividend Disbursing Agent for the Fund of which the Fund has
notified you in writing.
1.2 You agree to use your best efforts to solicit orders for
the sale of Shares. It is contemplated that you will enter into sales or
servicing agreements with securities dealers, financial institutions and other
industry professionals, such as investment advisers, accountants and estate
planning firms, and in so doing you will act only on your own behalf as
principal.
1.3 You shall act as distributor of Shares in compliance with
all applicable laws, rules and regulations, including, without limitation, all
rules and regulations made or adopted pursuant to the Investment Company Act of
1940, as amended, by the Securities and Exchange Commission or any securities
association registered under the Securities Exchange Act of 1934, as amended.
<PAGE>
1.4 Whenever in their judgment such action is warranted by
market, economic or political conditions, or by abnormal circumstances of any
kind, the Fund's officers may decline to accept any orders for, or make any
sales of, any Shares until such time as they deem it advisable to accept such
orders and to make such sales and the Fund shall advise you promptly of such
determination.
1.5 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the Securities Act of 1933, as
amended, and all expenses in connection with maintaining facilities for the
issue and transfer of Shares and for supplying information, prices and other
data to be furnished by the Fund hereunder, and all expenses in connection with
the preparation and printing of the Fund's prospectuses and statements of
additional information for regulatory purposes and for distribution to
shareholders; provided, however, that nothing contained herein shall be deemed
to require the Fund to pay any of the costs of advertising the sale of Shares.
1.6 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take all actions which may be
reasonably necessary in the discretion of the Fund's officers in connection with
the qualification of Shares for sale in such states as you may designate to the
Fund and the Fund may approve, and the Fund agrees to pay all expenses which may
be incurred in connection with such qualification. You shall pay all expenses
connected with your own qualification as a dealer under state or Federal laws
and, except as otherwise specifically provided in this agreement, all other
expenses incurred by you in connection with the sale of Shares as contemplated
in this agreement.
1.7 The Fund shall furnish you from time to time, for use in
connection with the sale of Shares, such information with respect to the Fund or
any relevant Series and the Shares as you reasonably request all of which shall
be signed by one or more of the Fund's duly authorized officers; and the Fund
warrants that the statements contained in any such information so signed by the
Fund's officers, shall be true and correct. The Fund also shall furnish you upon
request with: (a) semi-annual reports and annual audited reports of the Fund's
books and accounts made by independent public accountants regularly retained by
the Fund, (b) quarterly earnings statements prepared by the Fund, (c) a monthly
itemized list of the securities in the Fund's or, if applicable, each Series'
portfolio, (d) monthly balance sheets as soon as practicable after the end of
each month, and (e) from time to time such additional information regarding the
Fund's financial condition as you may reasonably request.
1.8 The Fund represents to you that all registration
statements and prospectuses filed by the Fund with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, with respect to the Shares have been
carefully prepared in conformity with the requirements of said Acts and rules
and regulations of the Securities and Exchange Commission thereunder. As used in
this agreement the terms "registration statement" and "prospectus" shall mean
any registration statement and prospectus, including the statement of additional
information incorporated by reference therein, filed with the Securities and
Exchange Commission and any amendments and supplements thereto which at any time
shall have been filed with said Commission. The Fund represents and warrants to
you that any
- 2 -
<PAGE>
registration statement and prospectus, when such registration statement becomes
effective, will contain all statements required to be stated therein in
conformity with said Acts and the rules and regulations of said Commission; that
all statements of fact contained in any such registration statement and
prospectus will be true and correct when such registration statement becomes
effective; and that neither any registration statement nor any prospectus when
such registration statement becomes effective will include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The Fund may
but shall not be obligated to propose from time to time such amendment or
amendments to any registration statement and such supplement or supplements to
any prospectus as, in the light of future developments, may, in the opinion of
the Fund's counsel, be necessary or advisable. If the Fund shall not propose
such amendment or amendments and/or supplement or supplements within fifteen
days after receipt by the Fund of a written request from you to do so, you may,
at your option, terminate this agreement or decline to make offers of the Fund's
securities until such amendments are made. The Fund shall not file any amendment
to any registration statement or supplement to any prospectus without giving you
reasonable notice thereof in advance; provided, however, that nothing contained
in this agreement shall in any way limit the Fund's right to file at any time
such amendments to any registration statement and/or supplements to any
prospectus, of whatever character, as the Fund may deem advisable, such right
being in all respects absolute and unconditional.
1.9 The Fund authorizes you to use any prospectus in the form
furnished to you from time to time, in connection with the sale of Shares. The
Fund agrees to indemnify, defend and hold you, your several officers and
directors, and any person who controls you within the meaning of Section 15 of
the Securities Act of 1933, as amended, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which you, your officers and directors,
or any such controlling person, may incur under the Securities Act of 1933, as
amended, or under common law or otherwise, arising out of or based upon any
untrue statement, or alleged untrue statement, of a material fact contained in
any registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the Fund's
agreement to indemnify you, your officers or directors, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement or prospectus in reliance
upon and in conformity with written information furnished to the Fund by you
specifically for use in the preparation thereof. The Fund's agreement to
indemnify you, your officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Fund's being notified of any action
brought against you, your officers or directors, or any such controlling person,
such notification to be given by letter or by telegram addressed to the Fund at
its address set forth above within ten days after the summons or other first
legal process shall have been served. The failure so to notify the Fund of any
such action shall not relieve the Fund from any liability which the Fund may
have to the person against whom such action is brought by reason of any such
untrue, or alleged untrue, statement or omission, or alleged omission, otherwise
than on account of the Fund's indemnity agreement contained in this
- 3 -
<PAGE>
paragraph 1.9. The Fund will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Fund and
approved by you. In the event the Fund elects to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Fund does not elect to assume
the defense of any such suit, or in case you do not approve of counsel chosen by
the Fund, the Fund will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by you or them. The Fund's
indemnification agreement contained in this paragraph 1.9 and the Fund's
representations and warranties in this agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
you, your officers and directors, or any controlling person, and shall survive
the delivery of any Shares. This agreement of indemnity will inure exclusively
to your benefit, to the benefit of your several officers and directors, and
their respective estates, and to the benefit of any controlling persons and
their successors. The Fund agrees promptly to notify you of the commencement of
any litigation or proceedings against the Fund or any of its officers or Board
members in connection with the issue and sale of Shares.
1.10 You agree to indemnify, defend and hold the Fund, its
several officers and Board members, and any person who controls the Fund within
the meaning of Section 15 of the Securities Act of 1933, as amended, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Fund, its officers or Board members, or any such controlling person, may incur
under the Securities Act of 1933, as amended, or under common law, or otherwise,
but only to the extent that such liability or expense incurred by the Fund, its
officers or Board members, or such controlling person resulting from such claims
or demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished in writing by
you to the Fund specifically for use in the Fund's registration statement and
used in the answers to any of the items of the registration statement or in the
corresponding statements made in the prospectus, or shall arise out of or be
based upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by you to the Fund and
required to be stated in such answers or necessary to make such information not
misleading. Your agreement to indemnify the Fund, its officers and Board
members, and any such controlling person, as aforesaid, is expressly conditioned
upon your being notified of any action brought against the Fund, its officers or
Board members, or any such controlling person, such notification to be given by
letter or telegram addressed to you at your address set forth above within ten
days after the summons or other first legal process shall have been served. You
shall have the right to control the defense of such action, with counsel of your
own choosing, satisfactory to the Fund, if such action is based solely upon such
alleged misstatement or omission on your part, and in any other event the Fund,
its officers or Board members, or such controlling person shall each have the
right to participate in the defense or preparation of the defense of any such
action. The failure so to notify you of any such action shall not relieve you
from any liability which you may have to the Fund, its officers or Board
members, or to such controlling person by reason of any such untrue, or alleged
untrue, statement or omission, or alleged omission, otherwise than on account of
your indemnity
- 4 -
<PAGE>
agreement contained in this paragraph 1.10. This agreement of indemnity will
inure exclusively to the Fund's benefit, to the benefit of the Fund's officers
and Board members, and their respective estates, and to the benefit of any
controlling persons and their successors. You agree promptly to notify the Fund
of the commencement of any litigation or proceedings against you or any of your
officers or directors in connection with the issue and sale of Shares.
1.11 No Shares shall be offered by either you or the Fund
under any of the provisions of this agreement and no orders for the purchase or
sale of such Shares hereunder shall be accepted by the Fund if and so long as
the effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act of 1933, as amended, or if and so long as a current prospectus as
required by Section 10 of said Act, as amended, is not on file with the
Securities and Exchange Commission; provided, however, that nothing contained in
this paragraph 1.11 shall in any way restrict or have an application to or
bearing upon the Fund's obligation to repurchase any Shares from any shareholder
in accordance with the provisions of the Fund's prospectus or charter documents.
1.12 The Fund agrees to advise you immediately in writing:
(a) of any request by the Securities and Exchange
Commission for amendments to the registration statement or
prospectus then in effect or for additional information;
(b) in the event of the issuance by the Securities and
Exchange Commission of any stop order suspending the
effectiveness of the registration statement or prospectus
then in effect or the initiation of any proceeding for that
purpose;
(c) of the happening of any event which makes untrue
any statement of a material fact made in the registration
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
prospectus in order to make the statements therein not
misleading; and
(d) of all actions of the Securities and Exchange
Commission with respect to any amendments to any
registration statement or prospectus which may from time to
time be filed with the Securities and Exchange Commission.
2. Offering Price
Shares of any class of the Fund offered for sale by you shall
be offered for sale at a price per share (the "offering price") approximately
equal to (a) their net asset value (determined in the manner set forth in the
Fund's charter documents) plus (b) a sales charge, if any and except to those
persons set forth in the then-current prospectus, which shall be the percentage
of the offering price of such Shares as set forth in the Fund's then-current
prospectus. The offering price, if not an exact multiple of one cent, shall be
adjusted to the nearest cent. In addition, Shares of any class of the Fund
offered for sale by you may be subject to a contingent deferred sales charge as
set forth in the Fund's then-current prospectus.
- 5 -
<PAGE>
You shall be entitled to receive any sales charge or contingent deferred sales
charge in respect of the Shares. Any payments to dealers shall be governed by a
separate agreement between you and such dealer and the Fund's then-current
prospectus.
3. Term
Subject to the provisions of Paragraph 1.8 this agreement
shall continue until the date (the "Reapproval Date") set forth on Schedule 1
hereto (and, if the Fund has Series, a separate Reapproval Date shall be
specified on Schedule 1 hereto for each Series), and thereafter shall continue
automatically for successive annual periods ending on the day (the "Reapproval
Day") of each year set forth on Schedule 1 hereto, provided such continuance is
specifically approved at least annually by (i) the Fund's Board or (ii) vote of
a majority (as defined in the Investment Company Act of 1940) of the Shares of
the Fund or the relevant Series, as the case may be, provided that in either
event its continuance also is approved by a majority of the Board members who
are not "interested persons" (as defined in said Act) of any party to this
agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This agreement is terminable without penalty, on 60 days'
notice, by vote of holders of a majority of the Fund's shares, and, as to each
Series, by the Fund's Board of Trustees or by you. This agreement also will
terminate automatically, as to the relevant Series, in the event of its
assignment (as defined in said Act).
4. Miscellaneous
This agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the Fund. The
obligations of this agreement shall only be binding upon the assets and property
of the Fund and shall not be binding upon any Board member, officer or
shareholder of the Fund individually.
Please confirm that the foregoing is in accordance with your
understanding and indicate your acceptance hereof by signing below, whereupon it
shall become a binding agreement between us.
Very truly yours,
THE BEAR STEARNS FUNDS
By: /s/ Frank J. Maresca
--------------------
Accepted:
BEAR, STEARNS & CO. INC.
By: /s/ Robert S. Reitzes
---------------------
<PAGE>
SCHEDULE 1
Name of Series Reapproval Date Reapproval Day
- -------------- --------------- --------------
S&P Stars Portfolio February 22, 1997 February 22nd
Large Cap Value Portfolio February 22, 1997 February 22nd
Small Cap Value Portfolio February 22, 1997 February 22nd
Total Return Bond Portfolio February 22, 1997 February 22nd
The Insiders Select Portfolio February 22, 1997 February 22nd
Prime Money Market Portfolio September 7, 1999 September 7th
Focus List Portfolio September 7, 1999 September 7th
High Yield Total Return Portfolio September 7, 1999 September 7th
International Portfolio September 7, 1999 September 7th
Balanced Portfolio September 7, 1999 September 7th
THE BEAR STEARNS FUNDS
By: /s/ Frank J. Maresca
----------------------
Vice President/Treasurer
Accepted:
BEAR, STEARNS & CO. INC.
By: /s/ Robert S. Reitzes
------------------------
Senior Managing Director
As revised: September 8, 1997
THE BEAR STEARNS FUNDS
FORM OF
SHAREHOLDER SERVICING AGREEMENT
We the Trust wish to enter into this Servicing Agreement with you
concerning the provision of support services to your clients ("Clients") who may
from time to time beneficially own Class A, Class B and/or Class C shares
("Shares") of the Portfolios (the "Portfolios") offered by us as set forth in
Schedule I, as amended from time to time.
The terms and conditions of this Servicing Agreement are as follows:
SECTION 1. You agree to provide personal or account maintenance
services to Clients who may from time to time beneficially own Shares to the
extent permissible under applicable statutes, rules and regulations. Such
services will include some or all of the following: (i) shareholder liaison
services; (ii) providing information periodically to Clients showing their
positions in Shares and integrating such statements with those of other
transactions and balances in Clients' other accounts serviced by you; (iii)
responding to Client inquiries relating to the services performed by you; (iv)
responding to routine inquiries from Clients concerning their investments in
Shares; and (v) providing such other similar services to Clients as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules and regulations.
SECTION 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services and assistance to Clients.
SECTION 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in our then current prospectuses and statement of additional
information, copies of which will be supplied by us to you, or in such
supplemental literature or advertising as may be authorized by us in writing.
SECTION 4. For all purposes of this Agreement you will be deemed to be
an independent contractor, and will have no authority to act as agent for us in
any matter or in any respect. By your written acceptance of this Agreement, you
agree to and do release, indemnify and hold us harmless from and against any and
all direct or indirect liabilities or losses resulting from requests,
directions, actions, or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of Shares (or orders relating to the same) by or on
behalf of Clients. You and your employees will, upon request, be available
during normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
<PAGE>
SECTION 5. In consideration of the services and facilities provided by
you hereunder, we will pay to you, and you will accept as full payment therefor,
a fee at the annual rate of twenty-five one-hundredths of one percent (0.25%) of
the average daily net asset value of the shares beneficially owned by your
Clients for whom you are the dealer of record or holder of record or with whom
you have a servicing relationship (the "Clients' Shares"), which fee will be
computed daily (on the basis of 360-day year) and payable monthly. For purposes
of determining the fees payable under this Section 5, the average daily net
asset value of the Clients' Shares will be computed in the manner specified in
our Registration Statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of Shares for purposes of
purchases and redemptions. By your written acceptance of this Agreement, you
agree to and do waive such portion of any fee payable to you hereunder to the
extent necessary to assure that such fee and other expenses required to be
accrued by us on any day with respect to the Clients' Share in any Fund that
declares its net investment income as a dividend to shareholders on a daily
basis does not exceed the income to be accrued by us to such Shares on that day.
The fee rate stated above may be prospectively increased or decreased by us, in
our sole discretion, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Shares, including
the sale of Shares to you for the account of any Client or Clients.
SECTION 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to our Board of
Trustees, and our Trustees will review, at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures were made.
In addition, you will furnish us or our designees with such information as we or
they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Trustees concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
SECTION 7. We may enter into other similar Servicing Agreements with
any other person or persons without your consent.
SECTION 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) the compensation payable to you in connection with
the investment of your Clients' assets in Shares will be disclosed by you to
your Clients, will be authorized by your Clients and will not be excessive; and
(ii) the series provided by you under this Agreement will in no event be
primarily intended to result in the sale of Shares.
SECTION 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue automatically for successive annual
periods provided such continuance is specifically approved at least annually by
us in the manner described in Section 12. This Agreement is terminable without
penalty at any time by us (which termination may be by a vote of a majority of
the Qualified Trustees as defined in Section 12) or by you upon written notice
to the other party hereto.
2
<PAGE>
SECTION 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunication device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
SECTION 11. This Agreement will be construed in accordance with the
laws of the State of New York and is non-assignable by the parties hereto.
SECTION 12. This Agreement has been approved by vote of a majority of
(i) our Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of us and have no
direct or indirect financial interest in this Agreement ("Qualified Trustees"),
cast in person at a meeting called for the purpose of voting on such approval.
SECTION 13. The names "The Bear Stearns Funds" and the "Board of
Trustees" refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under an Amended
and Restated Declaration of Trust filed at the office of the State Secretary of
The Commonwealth of Massachusetts. The obligations of "The Bear Stearns Funds"
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually but in such capacities, and
are not binding upon any of the Trustees, Shareholders or representatives of the
Trust personally, but bind only the Trust Property (as defined in the
Declaration of Trust), and all persons dealing with any class of Shares of our
must look solely to the Trust Property belonging to such class for the
enforcement of any claims against us.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, at 575 Lexington Avenue, New York, New York 10022.
Very truly yours,
THE BEAR STEARNS FUNDS
Date: ____________________ By: ________________________
(Authorized Officer)
Title: Secretary
Accepted and Agreed to:
Date: ____________________ By: ________________________
(Authorized Officer)
Title: Vice President and Treasurer
3
<PAGE>
SCHEDULE I
This Shareholder Servicing Plan shall be adopted with respect to the
following Portfolios of The Bear Stearns Funds:
FUND CLASS A CLASS B CLASS C
S&P STARS Portfolio N/A .25% N/A
Large Cap Value Portfolio N/A .25% N/A
Small Cap Value Portfolio N/A .25% N/A
Total Return Bond Portfolio N/A .25% .25%
The Insiders Select N/A .25% N/A
Focus List Portfolio .25% .25% .25%
Balanced Portfolio .25% .25% .25%
High Yield Total Return .25% .25% .25%
Portfolio
International Equity Portfolio .25% .25% .25%
THE BEAR STEARNS FUNDS
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted as of September
8, 1997 by The Bear Stearns Funds, a business trust organized under the laws of
The Commonwealth of Massachusetts (the "Fund"), on behalf of the classes of
shares of its Portfolios (the "Portfolios") as set forth in Schedule I, as
amended from time to time, subject to the following terms and conditions:
SECTION 1. SERVICE AGREEMENTS; ANNUAL FEES.
Shareholder Servicing Agreements. The Fund and the Distributor of the
Fund, Bear, Stearns & Co. Inc., (the "Distributor") are each authorized to enter
into Shareholder Servicing Agreements on behalf of the Portfolios (the
"Agreements"), the form of which shall be approved by the Board of Trustees of
the Fund (the "Board"), with financial institutions and other persons who
provide shareholder liaison services ("Service Providers") as set forth in this
Plan.
Shareholder Servicing Fee. Each Portfolio will pay either (i) to the
Distributor, who may, in turn, pay Service Providers or, (ii) directly to
Service Providers, a shareholder servicing fee under the Plan at an annual rate
of up to 0.25% of the average daily net assets of the Portfolio attributable to
the classes of shares as listed on Schedule I (the "Servicing Fee"). Provided,
however, that no Portfolio shall directly or indirectly pay any amounts, whether
Payments (as defined in the Agreements) or otherwise, that exceed any applicable
limits imposed by law or the National Association of Securities Dealers, Inc.
Adjustment to Fees. Each class of any Portfolio may pay a Servicing Fee
to the Distributor at a lesser rate than the fees specified in Section I hereof
as agreed upon by the Board of Trustees and the Distributor and approved in the
manner specified in Section 3 of this Plan.
Payment of Fees. The Servicing Fees will be calculated daily and paid
monthly by each Portfolio with respect to each class of shares at the annual
rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Servicing Fees may be used for payments to Service Providers who
provide personal or account maintenance services to their customers who may from
time to time beneficially own shares to the extent the Distributor or Service
Provider is permitted to do so under applicable statutes, rules and regulations.
Such services may include: (i) shareholder liaison services; (ii) providing
information periodically to their customers showing positions in shares of the
portfolios and integrating such statements with those of other transactions and
balances in such customers' other accounts; (iii) responding to customer
inquiries relating to the services performed by the Service Providers with
respect to the shares, if any; (iv) responding to routine inquiries from their
customers concerning such customers' investments in shares; and (v) providing
such other similar services as the Portfolios may
<PAGE>
reasonably request to the extent the Service Providers are permitted to do so
under applicable statutes, rules and regulations.
SECTION 3. APPROVAL OF TRUSTEES.
As to any Portfolio or Class, neither the Plan nor any related
agreements will take effect until approved by a majority of both (a) the full
Board of Trustees of the Fund and (b) those Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to it (the "Qualified
Trustees"), cast in person at a meeting called for the purpose of voting on the
Plan and the related agreements.
SECTION 4. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until September 7, 1998, and
thereafter for successive twelve-month periods: provided, however, that such
continuance as to any Portfolio or Class is specifically approved at least
annually by the Trustees of the Fund and by a majority of the Qualified
Trustees.
SECTION 5. TERMINATION.
The Plan may be terminated at any time with respect to a Portfolio or
Class (i) by the Portfolio without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of the classes of shares of the
Portfolio listed on Scheduele I or (ii) by a vote of the Qualified Trustees. The
Plan may remain in effect with respect to a Portfolio even if the Plan has been
terminated in accordance with this Section 5 with respect to any other
Portfolio.
SECTION 6. AMENDMENTS.
No material amendment to the Plan may be made unless approved by the
Portfolio's Board of Trustees in the manner described in Section 3 above.
SECTION 7. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Portfolio
pursuant to the Plan or any related agreement will prepare and furnish to the
Board, and the Board will review, at least quarterly, written reports which set
out the amounts expended under the Plan and the purposes for which those
expenditures were made.
SECTION 8. PRESERVATION OF MATERIALS.
The Portfolio will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
-2-
<PAGE>
SECTION 9. LIMIT OF LIABILITY.
The limitation of shareholder liability set forth in the Fund's
Declaration of Trust is hereby acknowledged. The obligations of the Fund under
this Plan, if any, shall not be binding upon the Trustees individually or upon
holders of shares of the Fund individually but shall be binding only upon the
assets and property of the Fund, and upon the Trustees insofar as they hold
title thereto.
SECTION 10. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the Investment Company Act of 1940 by the Securities and
Exchange Commission.
THE BEAR STEARNS FUNDS
By: /s/ Frank J. Maresca
------------------------
Vice President/Treasurer
BEAR, STEARNS & CO. INC.
By: /s/ Robert S. Reitzes
------------------------
Senior Managing Director
-3-
<PAGE>
SCHEDULE I
This Shareholder Servicing Plan shall be adopted with respect to the
following Portfolios of The Bear Stearns Funds:
FUND CLASS A CLASS B CLASS C
- ---- ------- ------- -------
S&P STARS Portfolio N/A .25% N/A
Large Cap Value Portfolio N/A .25% N/A
Small Cap Value Portfolio N/A .25% N/A
Total Return Bond Portfolio N/A .25% .25%
The Insiders Select N/A .25% N/A
Focus List Portfolio .25% .25% .25%
Balanced Portfolio .25% .25% .25%
High Yield Total Return .10% .25% .25%
Portfolio
International Equity Portfolio .25% .25% .25%
-4-
[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]
July 28, 1998
The Bear Stearns Funds
575 Lexington Avenue
New York, New York 10022
Re: The Bear Stearns Funds
----------------------
Ladies and Gentlemen:
We have acted as counsel for The Bear Stearns Funds, a Massachusetts
business trust (the "Trust"), in connection with the issuance of an indefinite
number of Class A, Class B, Class C and Class Y shares of beneficial interest,
all having a par value of $.001, representing interests in the S&P STARS
Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return
Bond Portfolio, The Insiders Select Fund, Focus List Portfolio, Balanced
Portfolio, High Yield Total Return Portfolio and International Equity Portfolio,
and an indefinite number of Class A and Class Y shares of beneficial interest,
all having a par value of $.001, representing interests in the Prime Money
Market Portfolio (collectively, the "Shares"), each a series of the Trust,
pursuant to a registration statement on Form N-1A (File No. 33-84842) (the
"Registration Statement"), filed with the Securities and Exchange Commission
under the Securities Act of 1933, and the Investment Company Act of 1940, as
amended. Currently, Class A shares of the Prime Money Market Portfolio have not
been registered or offered for sale to the public, and Class Y shares of Focus
List Portfolio have not been offered for sale to the public.
We have reviewed the Trust's Agreement and Declaration of Trust and its
ByLaws, resolutions of the Board of Trustees of the Trust, and the Registration
Statement
<PAGE>
KRAMER, LEVIN, NAFTALIS & FRANKEL
The Bear Stearns Funds
July 28, 1998
Page 2
(including all Post-Effective Amendments and exhibits thereto). We have also
made such inquiries and have examined originals, certified copies or copies
otherwise identified to our satisfaction of such documents, records and other
instruments as we have deemed necessary or appropriate for the purposes of this
opinion. For purposes of such examination, we have assumed the genuineness of
all signatures on original documents and the conformity to the original
documents of all copies submitted.
We are members of the Bar of the State of New York and do not hold
ourselves out as experts as to the law of any other state or jurisdiction. As to
matters concerning Massachusetts law, we have received and relied upon an
opinion from Goodwin, Procter & Hoar LLP, special Massachusetts counsel, a copy
of which is attached herewith, concerning the organization of the Trust and the
authorization and issuance of the Shares.
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when sold in accordance with the terms of each Prospectus and Statement
of Additional Information relating to the Shares in effect at the time of sale,
will be legally issued, fully paid and non-assessable by the Trust.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
<PAGE>
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
July 28, 1998
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022-3852
Ladies and Gentlemen:
As special Massachusetts counsel to The Bear Stearns Funds (the
"Trust"), a Massachusetts business trust, we have been asked to render our
opinion in connection with the issuance of an indefinite number of Class A,
Class B, Class C and Class Y shares of beneficial interest, all with $0.001 par
value, representing interests in the S&P STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio, Insiders
Select Fund, Focus List Portfolio, Balanced Portfolio, High Yield Total Return
Portfolio and International Equity Portfolio; and an indefinite number of Class
Y shares of beneficial interest, $0.001 par value, representing interests in the
Prime Money Market Portfolio (collectively, the "Shares"), as more fully
described in the prospectuses (the "Prospectuses") and statement of additional
information (the "Statement of Additional Information") relating to the Shares
contained in Post-Effective Amendment No. 20 (the "Amendment") to the Trust's
Registration Statement on Form N-1A (Registration No. 33-84842) to be filed by
the Trust with the Securities and Exchange Commission.
We have examined the Agreement and Declaration of Trust dated as of
September 29, 1994, as amended, the By-Laws of the Trust, the minutes of certain
meetings of the Trustees, the Prospectuses and Statement of Additional
Information contained in the Amendment, and such other documents, records and
certificates as we have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that the Shares, when
sold in accordance with the terms of the Prospectuses and Statement of
Additional Information in effect at the time of sale, will be legally issued,
fully paid and non-assessable by the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR LLP
GOODWIN, PROCTER & HOAR LLP
[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]
July 28, 1998
The Bear Stearns Funds
245 Park Avenue
New York, New York 10167
Re: The Bear Stearns Funds
Registration No. 33-84842
Post-Effective Amendment
to Registration Statement on Form N-1A
--------------------------------------
Gentlemen:
We consent to the reference to our Firm as counsel in
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 20
to Registration Statement No. 33-84842 of our reports dated May 8, 1998 relating
to the Total Return Bond Portfolio, High Yield Total Return Portfolio, S&P STARS
Portfolio, The Insiders Select Fund, Large Cap Value Portfolio, Small Cap Value
Portfolio, Focus List Portfolio, Balanced Portfolio, International Equity
Portfolio and Prime Money Market Portfolio of the Bear Stearns Funds in the
Statements of Additional Information which are a part of such Registration
Statement and to the references to us under the caption "Financial Highlights"
in the Prospectuses, which also are a part of such Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
July 27, 1998
THE BEAR STEARNS FUNDS
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
WHEREAS, The Bear Stearns Funds (the "Trust") engages in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust is comprised of the series set forth on
Schedule 1, as such schedule is revised from time to time (each, a "Portfolio")
and the Portfolios are divided into such classes as from time to time may be set
forth on such Schedule (each, a "Class"); and
WHEREAS, the Trust desires to adopt this Plan pursuant to Rule
12b-1 under the Act, and the Trust's Board has determined that there is a
reasonable likelihood that adoption of this Plan will benefit the Portfolios and
their shareholders; and
WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the
"Distributor") as Distributor of the Portfolios' shares (the "Shares") pursuant
to a Distribution Agreement dated February 22, 1995.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor
hereby agrees to the terms of, this Plan in accordance with Rule 12b-1 under the
Act on the following terms and conditions:
1. (a) Each Portfolio or Class, as the case may be, shall pay the
Distributor for distributing its Shares and for providing
personal services to, and/or maintaining accounts of, its
shareholders ("Servicing") a fee at the annual rate, based
on its average daily net assets, set forth an Schedule 1.
(b) The Distributor may pay one or more third parties a fee in
respect of any Shares owned by investors with whom the third
party has a Servicing relationship or for whom the third
party is the dealer or holder of record. The Distributor
shall determine the amounts to be paid to such third parties
and the basis on which such payments will be made. Payments
to a third party are subject to compliance by the third
party with the terms of any related Plan agreement between
the third party and the Distributor.
(c) For the purposes of determining the fees payable under this
Plan, the value of each Portfolio's or Class' net assets
shall be computed in the manner specified in the Trust's
charter documents as then in effect for the computation of
the value of such Portfolio's, or Class' net assets.
<PAGE>
2. As respects each Portfolio or Class, as the case may be, this
Plan shall not take affect until it has been approved by a vote
of at least a majority (as defined in the Act) of the outstanding
voting securities of the relevant Portfolio or Class.
3. As respects each Portfolio or Class, as the case may be, this
Plan shall not take effect until it, together with any related
agreement, has been approved by vote of a majority of both (a)
the Trust's Board and (b) those Trustees who are not "interested
persons" of the Trust (as defined by the Act) and who have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees")
cast in person at a meeting (or meetings) called for the purpose
of voting on this Plan and such related Agreements.
4. As respects each Portfolio or Class, as the case may be, this
Plan shall remain in effect until February 22, 1996 and shall
continue in effect thereafter so long as such continuance is
specifically approved at least annually in the manner provided
for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trust's Board and the Board
shall review, at least quarterly, a written report of amounts
paid hereunder and the purposes for which they were made.
6. As respects each Portfolio or Class, as the case may be, this
Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees or by a vote of a majority of its outstanding
voting securities.
7. This Plan may not be amended to increase materially the amount of
compensation payable pursuant to paragraph 1 hereof unless such
amendment is approved in the manner provided for initial approval
in paragraph 2 hereof. No material amendment to the Plan shall be
made unless approved in the manner provided in paragraph 3
hereof.
8. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons (as defined in the Act)
of the Trust shall be committed to the discretion of the Trustees
who are not such interested persons.
9. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 5 hereof,
for a period of not less than six years from the date of this
Plan, any such agreement or any such report, as the case may be,
the first two years in an easily accessible place.
10. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
The name The Bear Stearns Funds is
- 2 -
<PAGE>
the designation of the Trustees for the time being under an
Agreement and Declaration of Trust dated September 29, 1994, as
amended from time to time, and all persons dealing with the Trust
must look solely to the property of the Trust for enforcement of
any claims against the Trust as neither the Trustees, officers,
agents or shareholders assume any personal liability for
obligations entered into on behalf of the Trust.
IN WITNESS WHEREOF, the Trust, on behalf of the Portfolios and
Classes, and the Distributor have executed this Plan as of the date set forth
below.
February 22, 1995
THE BEAR STEARNS FUNDS
By: /s/Frank J. Maresca
-------------------
BEAR, STEARNS & CO. INC.
By: /s/Robert S. Reitzes
--------------------
- 3 -
<PAGE>
SCHEDULE 1
Name of Series Class A* Class C*
S&P STARS Portfolio .50% 1.00%
Large Cap Value Portfolio .50% 1.00%
Small Cap Value Portfolio .50% 1.00%
Total Return Bond Portfolio .35% .75%
The Insiders Select Fund .50% 1.00%
- ------------------------
* Annual Fee as a Percentage of Average Daily Net Assets.
- 4 -
THE BEAR STEARNS FUNDS
DISTRIBUTION PLAN
WHEREAS, The Bear Stearns Funds (the "Trust") engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, shares of the Trust are divided into nine separate portfolios
of investments, each with different investment objectives and policies (each a
"Portfolio") and, in turn each Portfolio is divided into separate classes (each
a "Class");
WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act (the "Rule") with respect to each Class of
each Portfolio listed on Schedule 1 annexed hereto;
WHEREAS, the Trust's Board has determined that there is a reasonable
likelihood that adoption of this Plan will benefit the Portfolios and their
shareholders; and
WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the "Distributor")
as Distributor of the Portfolios' shares (the "Shares") pursuant to a
Distribution Agreement dated February 22, 1995.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Plan in accordance with Rule 12b-1 under the Act on
the following terms and conditions:
1. (a) Each Portfolio or Class, as the case may be, shall pay the Distributor
for distributing its Shares a monthly fee at the annual rate set forth
on Schedule 1.
(b) The Distributor may pay one or more third parties a fee in respect of
any Shares owned by investors for whom the third party is the dealer
or holder of record. The Distributor shall determine the amounts to be
paid to such third parties and the basis on which such payments will
be made. Payments to a third party are subject to compliance by the
third party with the terms of any related Plan agreement between the
third party and the Distributor.
(c) For the purposes of determining the fees payable under this Plan, the
value of each Portfolio's or Class' net assets shall be computed in
the manner specified in the Trust's charter documents as then in
effect for the computation of the value of such Portfolio's, or Class'
net assets.
2. The terms and provisions of this Plan shall be interpreted and defined in a
manner consistent with the provisions and definitions contained in (i) the
1940 Act, (ii) the Rule
<PAGE>
and (iii) Section 2830 of the National Association of Securities Dealers,
Inc. Business Conduct Rules or its successor.
3. As respects each Portfolio or Class, as the case may be, this Plan shall
not take effect until it, together with any related agreement, has been
approved by vote of a majority of both (a) the Trust's Board and (b) those
Trustees who are not "interested persons" of the Trust (as defined by the
Act) and who have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Trustees")
cast in person at a meeting (or meetings) called for the purpose of voting
on this Plan and such related agreements.
4. As respects each Portfolio or Class, as the case may be, this Plan shall
remain in effect for one year from the date on which the Plan was first
executed and shall continue in effect thereafter so long as such
continuance is specifically approved at least annually in the manner
provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trust's Board and the Board shall
review, at least quarterly, a written report of amounts paid hereunder and
the purposes for which they were made.
6. As respects each Portfolio or Class, as the case may be, this Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Trustees or
by a vote of a majority of its outstanding voting securities.
7. This Plan may not be amended to increase materially the amount of
compensation payable pursuant to paragraph 1 hereof unless such amendment
is approved by a vote of at least a majority (as defined in the Act) of the
outstanding voting securities of the relevant Portfolio or Class. No
material amendment to the Plan shall be made unless approved in the manner
provided in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of the Trustees
who are not interested persons (as defined in the Act) of the Trust shall
be committed to the discretion of the Trustees who are not such interested
persons.
9. The Trust shall preserve copies of this Plan and any related agreements and
all reports made pursuant to paragraph 5 hereof, for a period of not less
than six years from the date of this Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible
place.
10. The name The Bear Stearns Funds is the designation of the Trustees for the
time being under an Agreement and Declaration of Trust dated September 29,
1994, as amended from time to time, and all persons dealing with the Trust
must look solely to the property of the Trust for enforcement of any claims
against the Trust as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Trust.
- 2 -
<PAGE>
IN WITNESS WHEREOF, the Trust, on behalf of the Portfolios and Classes,
and the Distributor have executed this Plan as of the date set forth below.
September 8, 1997
THE BEAR STEARNS FUNDS
By: /s/ Frank J. Maresca
------------------------
Vice President/Treasurer
BEAR, STEARNS & CO. INC.
By: /s/ Robert S. Reitzes
-----------------------
Senior Managing Director
- 3 -
<PAGE>
SCHEDULE 1
Name of Series Class A* Class B* Class C*
S&P STARS Portfolio N/A .75% N/A
Large Cap Value Portfolio N/A .75% N/A
Small Cap Value Portfolio N/A .75% N/A
Total Return Bond Portfolio N/A .75% N/A
The Insiders Select Fund N/A .75% N/A
Focus List Portfolio .25% .75% .75%
Balanced Portfolio .25% .75% .75%
High Yield Total Return Portfolio .10% .75% .75%
International Equity Portfolio .25% .75% .75%
- ------------------------
* Annual Fee as a Percentage of Average Daily Net Assets.
- 4 -
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<NAME> THE BEAR STEARNS FUNDS
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS C
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS Y
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS B
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE INSIDERS SELECT FUND - CLASS A
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<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE INSIDERS SELECT FUND - CLASS C
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<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE INSIDERS SELECT FUND - CLASS Y
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<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE BEAR STEARNS FUNDS
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<NAME> S&P STARS PORTFOLIO - CLASS C
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