<PAGE>
The
Bear Stearns
Funds
Prospectus Dated
July 29, 1999
o Prime Money
o Market Portfolio
o
o
o
o
o Class Y Shares
This Prospectus provides important information about the Portfolio that you
should know before investing. Please read it carefully and keep it for future
reference.
The Securities and Exchange Commission has not approved the Portfolio's shares
or determined whether this Prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
[LOGO OF BEAR STEARNS]
The Bear Stearns Funds o 575 Lexington Avenue New York, NY 10022 1-800-447-1139
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Table of Contents
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Risk/Return Summary 1
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Investments 5
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Risk Factors 6
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Management of the Portfolio 8
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How the Portfolio Values Its Shares 8
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Investing in the Portfolio 9
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How to Buy Shares
How to Sell Shares
Dividends, Distributions and Taxes 12
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Additional Information 13
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Financial Highlights 14
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The Portfolio described in this Prospectus is a series of The Bear
Stearns Funds, a registered open-end management investment company
(the "Trust").
It is important to keep in mind that mutual fund shares are:
o not deposits or obligations of any bank;
o not insured by the Federal Deposit Insurance
Corporation;
o subject to investment risk, including possible loss of
the money invested.
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Prime Money Market Portfolio
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RISK/RETURN SUMMARY
Investment Objective
Liquidity and current income consistent with stability of principal.
Principal Strategies
In pursuing its investment objective, the Prime Money Market Portfolio
(the "Portfolio") will invest in a broad range of U.S. dollar-denominated
short-term instruments, including:
o U.S. Government obligations;
o Commercial paper, notes, certificates of deposit, banker's
acceptances;
o Repurchase agreements;
o Floating and variable rate securities;
o Time deposits and instruments issued or backed by U.S. or
foreign banks or savings institutions with total assets of at
least $1 billion at the time of purchase; and
o U.S. dollar-denominated foreign securities.
Quality. The Portfolio will invest in securities rated by at least two
nationally recognized statistical rating organizations ("NRSROs"),
including Standard & Poor's and Moody's, or by one NRSRO if only that
NRSRO has rated the security at the time that the Portfolio acquires it.
For a discussion of the ratings categories of various NRSROs, see the
Appendix to the Statement of Additional Information (the "SAI").
The Portfolio will limit its portfolio investments to:
o securities that are rated at the time of acquisition in one of
an NRSRO's two highest short-term rating categories;
o securities of issuers whose other short-term debt securities
are so rated; and
o unrated securities that are deemed to be of comparable quality
by Bear Stearns Asset Management Inc., the Portfolio's
investment adviser ("BSAM" or the "Adviser").
The Board of Trustees has established policies to ensure that the
Portfolio invests in high-quality, liquid instruments.
Maturity. The Portfolio has a weighted average maturity of 90 days or
less. The Portfolio may acquire individual investments with remaining
maturities ranging from one day to 397 days. Floating and variable rate
instruments are considered to be within the maturity range described above
despite having nominal remaining maturities greater than 397 days, because
of their floating rate or reset features. For a description of floating
and variable rate securities, see "Investments" in this Prospectus.
1
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Principal Risks
The Portfolio is subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Portfolio's net asset value, yield and/or total
return:
o Short-term interest rates may decline, causing the Portfolio
to invest assets at lower rates.
o Rapidly rising short-term interest rates, a drop in the price
of floating or variable rate securities or an issuer's default
may cause the Portfolio's share price to decline below $1.00.
o High-quality, U.S. dollar-denominated foreign money market
instruments may experience more volatility than their domestic
counterparts, in part because of sovereign credit risk or the
risk that a foreign issuer may not be able to obtain U.S.
dollars to repay its obligations.
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
Portfolio seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Portfolio.
Who May Want to Invest in the Portfolio
The Portfolio may be appropriate for investors who:
o want current income;
o are seeking preservation of capital.
The Portfolio may not be appropriate for investors who:
o want potential growth over time;
o are not willing to accept lower potential returns in return
for preservation of capital.
2
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Performance
The bar chart and table below illustrate the risks of investing in the
Portfolio by showing changes in the performance of its Class Y Shares for
various time periods.
Prime Money Market Annual Return (%)(1)
[BAR GRAPH]
1998
----
5.55
Past performance is not necessarily an indication of future results.
1 The Portfolio's year-to-date return as of June 30, 1999 was 2.40%.
During the period shown in the bar chart, the highest quarterly return was
1.39% (for the quarter ended September 30, 1998) and the lowest quarterly
return was 1.30% (for the quarter ended December 31, 1998).
The table shows the Portfolio's average annual total return for one year
and since the date of inception. The figures shown in the table assume
reinvestment of dividends and distributions.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
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Prime Money Market Portfolio - Class Y 5.55% 5.61%
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* Class Y shares commenced operations on July 14, 1997.
The "seven-day yield" is an annualized figure -- the amount you would earn
if you kept your investment in the Portfolio and the Portfolio continued
to earn the same net interest income throughout the year. The Portfolio's
seven-day yield as of December 31, 1998 was 5.07%. For the Portfolio's
current seven-day yield, call 800-766-4111.
The "seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded. The Portfolio's seven-day
effective yield as of December 31, 1998 was 5.20%.
3
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Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
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Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
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Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
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Sales charge imposed on reinvested dividends None
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Redemption fees **
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Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
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Management Fees 0.20%
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Distribution (12b-1) Fees 0.00%
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Other Expenses 0.25%
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Total Annual Portfolio Operating Expenses 0.45%
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Fee Waiver and Expense Reimbursement (0.25)%
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Net Expenses(1) 0.20%
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* A broker or agent may charge additional fees on the purchase
or sale of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption
proceeds.
1 The Adviser has agreed to waive a portion of its fee and
reimburse certain expenses until at least March 31, 2000, so
that the Portfolio's net expenses do not exceed the amount
indicated above.
Example
This Example illustrates the cost of investing in the Portfolio over
various time periods. It is intended to help you compare the cost of
investing in the Portfolio with the cost of investing in other mutual
funds. The Example assumes that:
o you invest $10,000 in the Portfolio;
o your investment returns 5% each year;
o the Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
==============================================================
Class Y $20 $119 $227 $543
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* This Example assumes that net portfolio operating
expenses will equal 0.20% until March 31, 2000 and
thereafter will equal 0.45%.
4
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INVESTMENTS
The Portfolio may invest in the following instruments to achieve its
investment objective.
o Floating and variable rate securities. The interest rate
offered by a floating rate security adjusts whenever a
specified interest rate (such as a bank's prime lending rate)
changes. The interest rate offered by a variable rate security
adjusts (resets) on particular dates (such as the last day of
a month or calendar quarter). Upon adjustment, the market
value of a floating or variable rate security can reasonably
be expected to equal its amortized cost. Some of these
securities may be illiquid.
o Repurchase agreements are a type of secured lending and
typically involve the acquisition of debt securities from a
financial institution, such as a bank, savings and loan
association or broker-dealer, which then agrees to repurchase
the security at a specified resale price on a specified future
date (ordinarily one week or less). The difference between the
purchase and resale prices generally reflects the market
interest rate for the term of the agreement.
o Reverse repurchase agreements. The Portfolio may borrow funds
for temporary purposes by entering into reverse repurchase
agreements in which the Portfolio would sell securities to
financial institutions and agree to repurchase them at an
agreed upon date and price. The Portfolio may enter into
reverse repurchase agreements to avoid selling securities
during unfavorable market conditions. Reverse repurchase
agreements involve the risk that the market value of the
securities that the Portfolio sold may decline below the price
of the securities the Portfolio must repurchase.
o Treasury STRIPS. The principal and interest components of U.S.
Treasury bonds may be separated and traded independently under
the federal Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. The resulting
securities pay no interest and are sold at a discount to face
value. The interest component of STRIPS may be more volatile
than that of U.S. Treasury bills with comparable maturities.
o U.S. Government obligations are bills, notes and bonds issued
or guaranteed by the U.S. Government (including Treasury
STRIPS, described above), its agencies or instrumentalities.
Some are direct obligations of the U.S. Treasury; others are
obligations only of the U.S. agency or instrumentality.
o When-issued securities and forward commitments. When-issued
transactions arise when securities are purchased with payment
and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield. In a
forward commitment transaction, a buyer agrees to purchase
securities for a fixed price at a future date beyond customary
settlement time. A purchaser may enter into offsetting
contracts for the forward sale of other securities that it
owns.
5
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Other Investment Strategies
o Temporary defensive measures. From time to time, during
unfavorable market conditions, the Adviser may invest
"defensively." This means the Portfolio may make temporary
investments that are not consistent with its investment
objective and principal strategies. Engaging in temporary
defensive measures may reduce the benefit from any upswing in
the market and may cause the Portfolio to fail to meet its
investment objective. For temporary defensive purposes, the
Portfolio may hold cash (U.S. dollars).
o Portfolio turnover. The Adviser may trade actively to achieve
the Portfolio's goals. This may result in higher capital gains
distributions, which would increase your tax liability.
Frequent trading may also increase the Portfolio's costs,
lessening its performance over time.
The SAI describes the Portfolio's investment strategies in more detail.
RISK FACTORS
As with all mutual funds, investing in the Portfolio involves certain
risks. There is no guarantee that the Portfolio will meet its investment
objective. There is never any assurance that the Portfolio will perform as
it has in the past.
The Portfolio may use various investment techniques, some of which involve
greater amounts of risk than others. You will find a detailed discussion
of these investment techniques in the SAI. To reduce risk, the Portfolio
is subject to certain limitations and restrictions on its investments,
which are also described in the SAI.
The Portfolio is subject to the following principal risks.
General Risks
o Market risk is the risk that the market value of a security
may go up or down, sometimes rapidly. These fluctuations may
cause the security to be worth less than it was at the time it
was acquired. Market risk may involve a single security or a
particular sector.
o Manager risk is the risk that the portfolio managers'
investment strategy may not produce the intended results.
Manager risk also involves the possibility that the portfolio
managers fail to execute an investment strategy effectively.
o $1.00 Net Asset Value risk. In order to maintain a $1.00
per-share net asset value, the Portfolio could reduce the
number of its outstanding shares. The Portfolio could do this
if there were a default on, or significant decline in value
of, an investment held by the Portfolio. If this happened, you
would own fewer shares.
o Year 2000 risk. Like all mutual funds, the Portfolio could be
adversely affected if the computer systems used by its service
providers, including shareholder servicing agents, are unable
to recognize dates after 1999. The Portfolio's service
providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however,
that these steps will be adequate to avoid a temporary service
disruption or other adverse impact on the Portfolio. In
addition, an issuer's failure to process accurately Year 2000
data may cause that issuer's securities to decline in value or
delay the payment of interest to the Portfolio.
6
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Risks of Debt Securities
o Income risk. Declines in the general level of short-term
interest rates could obligate the Portfolio to make new
investments in securities that offer a lower rate of interest
than older securities.
o Inflation risk is the risk that inflation will erode the
purchasing power of the cash flows generated by the
Portfolio's debt securities. Fixed-rate debt securities are
more susceptible to this risk than floating-rate debt
securities.
o Adjustable rate security risk. The market price of an
adjustable rate security may fall for various reasons,
including the following:
-- The relationship among interest rates across a range of
maturities (often referred to as the "yield curve")
changes.
-- Investors demand higher risk premiums.
-- Investors believe that interest rates will rise.
-- The supply of securities associated with the relevant
benchmark interest rate or index exceeds the demand.
An adjustable rate security's market price will decline if one or
more of these factors causes the interest rate of newly issued
adjustable rate securities to be set at a higher level than that
paid by the older security.
Risks of Foreign Securities
o Foreign issuer risk. Compared to U.S. companies, less
information is generally available to the public about foreign
companies. Foreign brokers and issuers may not be subject to
the uniform accounting, auditing, and financial reporting
standards and practices prevalent in the U.S. In addition,
foreign securities markets may be more volatile and subject to
less governmental supervision than their counterparts in the
U.S. Investments in foreign countries could be affected by
factors not present in the U.S., including expropriation,
confiscation of property, and difficulties in enforcing
contracts. All of these factors can make foreign investments
more volatile than U.S. investments.
7
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MANAGEMENT OF THE PORTFOLIO
Investment Adviser
BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the
investment adviser of the Portfolio. The Adviser was established in 1985
and 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 & Co. Inc.,
is a leading U.S. investment banking, securities trading and brokerage
firm serving U.S. and foreign corporations, governments and institutional
and individual investors. The Adviser is a registered investment adviser
and offers investment advisory and administrative services to open-end
investment funds and other managed accounts with aggregate assets at
June 30, 1999 of over $12.2 billion.
The Adviser supervises and assists in the overall management of the
affairs of the Trust, subject to oversight by the Trust's Board of
Trustees.
For the fiscal year ended March 31, 1999, the Adviser received management
fees based on a percentage of the average daily net assets of the
Portfolio in the amount of 0.016%.
The Adviser and/or an affiliate, at its own expense, and from its own
resources and without reimbursement from the Portfolio, may compensate
certain persons who provide services in connection with the sale or
expected sale of shares of the Portfolio, subject to applicable laws and
regulations.
HOW THE PORTFOLIO VALUES ITS SHARES
The net asset value ("NAV"), multiplied by the number of Portfolio shares
you own, gives you the value of your investment. The Portfolio calculates
its share price, called its NAV, each business day at 3:00 p.m. Eastern
Time. You may buy or sell shares on any business day at a price that is
based on the NAV that is calculated after you place your order. A business
day is a day on which the New York Stock Exchange, Inc. and the Federal
Reserve Bank of New York are open.
Portfolio securities that are listed primarily on foreign exchanges may
trade on weekends or on other days on which the Portfolio does not price
its shares. In this case, the Portfolio's NAV may change on days when you
are not able to buy or sell shares.
The Portfolio seeks to maintain a $1.00 NAV, although there is no
guarantee that it will be able to do so. The Portfolio uses the "Amortized
Cost Method" to value securities. You can read about this method in the
SAI.
8
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INVESTING IN THE PORTFOLIO
This section provides information to assist you in buying and selling
shares of the Portfolio. Please read the entire Prospectus carefully
before buying shares of the Portfolio.
How to Buy Shares
The minimum initial investment is $1,000,000; there is no minimum for
subsequent investments. You may buy Class Y shares of the Portfolio
through your account representative at a broker-dealer with whom the
Distributor has entered into a sales agreement (an "Authorized Dealer") or
the Transfer Agent by wire only.
To buy Class Y shares of the Portfolio by Federal Reserve wire, call the
Transfer Agent at 1-800-447-1139 or call your account representative.
If you do not wire Federal Funds, you must have the wire converted into
Federal Funds, which usually takes one business day after receipt of a
bank wire. The Transfer Agent will not process your investment until it
receives Federal Funds.
The following procedure will help assure prompt receipt of your Federal
Funds wire:
Call the Transfer Agent 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
The Transfer Agent will then provide you with a Portfolio account number.
(If you already have an account, you must also notify the Portfolio before
wiring funds.)
Instruct your bank to wire the specified amount to the Portfolio as
follows:
PNC Bank, N.A.
ABA #031000053
Credit Account Number: #85-5102-0143
From: [your name]
Account Number: [your Portfolio account number]
For Purchase of Prime Money Market Portfolio
Amount: [amount to be invested]
You may open an account when placing an initial order by telephone,
provided you then submit an Account Information Form by mail. The Transfer
Agent will not process your investment until it receives a fully completed
and signed Account Information Form.
The Trust and the Transfer Agent each reserve the right to reject any
purchase order for any reason.
9
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How to Sell Shares
o You may sell shares on any business day through the
Distributor, Authorized Dealers or the Transfer Agent.
o When the Trust receives your redemption requests in proper
form, it will sell your shares at the next determined net
asset value.
o The Trust will send you payment proceeds generally within
seven days after it receives your redemption request.
Redemption Procedures
Redemption Through the Distributor or Authorized Dealers
Method of Redemption Instructions
[GRAPHIC] In person o Visit your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By telephone o Call your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By mail o Mail your redemption request to your
account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By wire o Submit wiring instructions to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
Redemption Through the Transfer Agent
[GRAPHIC] By mail o Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
Prime Money Market Portfolio
P.O. Box 8960
Wilmington, Delaware 19899-8960
[GRAPHIC] By telephone o Call the Transfer Agent at 1-800-447-1139.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
10
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Additional Information About Redemptions
o Wiring redemption proceeds. Upon request, the Trust will wire
your proceeds ($500 minimum) to your brokerage account or a
designated commercial bank account. There is a transaction fee
of $7.50 for this service. Please call your account
representative for information on how to wire funds to your
brokerage account. If you do not have a brokerage account,
call the Transfer Agent to wire funds to your bank account.
o Signature guarantees. If your redemption proceeds exceed
$50,000, or if you instruct the Trust to send the proceeds to
someone other than the record owner at the record address, or
if you are a corporation, partnership, trust or fiduciary,
your signature must be guaranteed by any eligible guarantor
institution. Call the Transfer Agent at 1-800-447-1139 for
information about obtaining a Medallion Program signature
guarantee.
o Telephone policies. You may authorize the Transfer Agent to
accept telephone instructions. If you do, the Transfer Agent
will accept instructions from people who it believes are
authorized to act on your behalf. The Transfer Agent will use
reasonable procedures (such as requesting personal
identification) to ensure that the caller is properly
authorized. Neither the Portfolio nor the Transfer Agent will
be liable for losses for following instructions reasonably
believed to be genuine.
o Redemption by mail may cause a delay. During times of extreme
economic or market conditions, you may experience difficulty
in contacting your account representative by telephone to
request a redemption of shares. If this occurs, please
consider using the other redemption procedures described in
this Prospectus. Alternative procedures may take longer to
sell your shares.
o Automatic redemption; redemption in kind. If the value of your
account falls below $750 (for reasons other than changes in
market conditions), the Trust may automatically liquidate your
account and send you the proceeds. The Trust will send you a
notice at least 60 days before doing this. The Trust also
reserves the right to redeem your shares "in kind." For
example, if you sell a large number of shares and the
Portfolio is unable to sell securities to raise cash, the
Trust may send you a combination of cash and a share of actual
portfolio securities. Call the Transfer Agent for details.
o Suspension of the Right of Redemption. The Portfolio may
suspend your right to redeem your shares under any of the
following circumstances:
-- during non-routine closings of the NYSE;
-- when the Securities and Exchange Commission ("SEC")
determines either that trading on the NYSE is restricted
or that an emergency prevents the sale or valuation of
the Portfolio's securities; or
-- when the SEC orders a suspension to protect the
Portfolio's shareholders.
11
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DIVIDENDS, DISTRIBUTIONS AND TAXES
Distributions
The Portfolio passes along your share of its investment earnings in the
form of dividends. Dividend distributions are the net dividends or
interest earned on investments after expenses. As with any investment, you
should consider the tax consequences of an investment in the Portfolio.
Ordinarily, the Portfolio declares dividends from its net investment
income daily and pays them monthly. The Portfolio will distribute
short-term capital gains, as necessary, and normally will pay any
long-term capital gains once a year.
You can receive dividends or distributions in one of the following ways:
o Reinvestment. You can automatically reinvest your dividends
and distributions in additional shares of the Portfolio. If
you do not indicate another choice on your Account Information
Form, you will receive your distributions this way.
o Cash. The Trust will send you a check no later than seven days
after the payable date.
o Partial reinvestment. The Trust will automatically reinvest
your dividends in additional shares of the Portfolio and pay
your capital gain distributions to you in cash. Or, the Trust
will automatically reinvest your capital gain distributions
and send you your dividends in cash.
o Direct deposit. In most cases, you can automatically transfer
dividends and distributions to your bank checking or savings
account. Under normal circumstances, the Transfer Agent will
transfer the funds within seven days of the payment date. To
receive dividends and distributions this way, the name on your
bank account must be the same as the registration on your
Portfolio account.
You may choose your distribution method on your original Account
Information Form. If you would like to change the option you selected,
please call your account executive or the Transfer Agent at
1-800-447-1139.
Taxes
The Portfolio intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders. It is important for you
to be aware of the following information about the tax treatment of your
investment.
o Ordinary dividends from the Portfolio are taxable as ordinary
income; dividends from the Portfolio's long-term capital gains
are taxable as capital gain.
o Dividends are treated in the same manner for federal income
tax purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
12
<PAGE>
o Dividends from the Portfolio that are attributable to interest
on certain U.S. Government obligations may be exempt from
certain state and local income taxes. The extent to which
ordinary dividends are attributable to these U.S. Government
obligations will be provided on the tax statements you receive
from the Portfolio.
o Certain dividends paid to you in January will be taxable as if
they had been paid to you the previous December.
o The Trust will mail you tax statements every January showing
the amounts and tax status of distributions you received.
o When you sell (redeem) or exchange shares of the Portfolio,
you must recognize any gain or loss. However, as long as the
Portfolio's NAV per share does not deviate from $1.00, there
will be no gain or loss.
o Because your tax treatment depends on your purchase price and
tax position, you should keep your regular account statements
for use in determining your tax.
o You should review the more detailed discussion of federal
income tax considerations in the SAI.
The Trust provides this tax information for your general information. You
should consult your own tax adviser about the tax consequences of
investing in the Portfolio.
ADDITIONAL INFORMATION
Performance
Financial publications, such as Business Week, Forbes, Money or
SmartMoney, may compare the Portfolio's performance to the performance of
various indexes and investments for which reliable performance data is
available. These publications may also compare the Portfolio's performance
to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services, such as IBC Financial Data
Inc. and Lipper Inc.
Shareholder Communications
The Trust may eliminate duplicate mailings of Portfolio materials to
shareholders who reside at the same address.
13
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Financial Highlights -- Prime Money Market Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Portfolio since its inception. This
information reflects financial results for a single share of the
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the Portfolio (assuming
reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the
Portfolio's financial statements, are included in the Portfolio's annual
report, which is available by calling the Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
For the For the Period
fiscal July 14, 1997*
year ended through
March 31, 1999 March 31, 1998
============================================================================================
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------
Net investment income(1) 0.0524 0.0399
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 0.0524 0.0399
- --------------------------------------------------------------------------------------------
Dividends and distributions to
shareholders from net investment income (0.0524) (0.0399)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------
Total investment return(2) 5.37% 5.72%
- --------------------------------------------------------------------------------------------
============================================================================================
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $386,201 $121,460
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(1)(4) 0.20% 0.13%(3)
- --------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets(1) 5.24% 5.58%(3)
- --------------------------------------------------------------------------------------------
Increase/(decrease) reflected in above expense ratio and
net investment income due to waivers and reimbursements 0.25% 0.52%(3)
- --------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of investment operations.
1 Reflects waivers and reimbursement.
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 each period reported and
includes reinvestment of dividends and distributions.
3 Annualized.
4 Without the waiver of advisory fee and without the reimbursement of
certain operating expenses, the ratio of expenses to average net assets
would have been 0.45% for the year ended March 31, 1999 and 0.65%
annualized for the period July 14, 1997 through March 31, 1998.
14
<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.
575 Lexington Avenue
New York, NY 10022
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 LLP
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
15
<PAGE>
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16
<PAGE>
Statement of Additional Information. The Statement of Additional Information
("SAI") provides a more complete discussion of several of the matters contained
in this Prospectus and is incorporated by reference, which means that it is
legally a part of this Prospectus as if it were included here.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about the Portfolio's investments,
including a discussion of the market conditions and investment strategies that
significantly affected the Portfolio's performance during last fiscal year.
o To obtain a free copy of the SAI and the current annual or
semi-annual reports or to make any other inquiries about the
Portfolio, you may call or write:
PFPC Inc.
Attention: The Bear Stearns Funds
P.O. Box 8960
Wilmington, Delaware 19899-8960
Telephone: 1-800-447-1139 or 1-800-766-4111
o You may obtain copies of the SAI or financial reports
o for free by calling or writing broker-dealers or other
financial intermediaries that sell the Portfolio's shares;
o for a fee by writing the Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549-6009;
o for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
o You may review and copy information about the Portfolio (including
the SAI) at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 to obtain information about this service.
You may also obtain a copy of the Portfolio's prospectus from the Bear Stearns
Worldwide Web site at http://www.bearstearns.com.
Investment Company Act File No. 811-8798
BSF-P-011-03
<PAGE>
The
Bear Stearns
Funds
Prospectus Dated
July 29, 1999
Fixed Income Funds
. Income Portfolio
. High Yield Total Return Portfolio
. Emerging Markets Debt Portfolio
. Class A, B and C Shares
This Prospectus provides important information about each Portfolio that you
should know before investing. Please read it carefully and keep it for future
reference.
The Securities and Exchange Commission has not approved any Portfolio's shares
or determined whether this Prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
[LOGO] The Bear Stearns Funds o 575 Lexington Avenue New York, NY 10022
1-800-447-1139
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Risk/Return Summaries 1
--------------------------------------------------------------
Income Portfolio
High Yield Total Return Portfolio
Emerging Markets Debt Portfolio
Investments 19
--------------------------------------------------------------
Risk Factors 21
--------------------------------------------------------------
Management of the Portfolios 24
--------------------------------------------------------------
Investment Adviser
Portfolio Management Team
How the Portfolios Value Their Shares 24
--------------------------------------------------------------
Investing in the Portfolios 25
--------------------------------------------------------------
Investment Requirements
Choosing a Class of Shares
How the Trust Calculates Sales Charges
Sales Charge Reductions and Waivers
Distribution Fees and Shareholder Servicing Fees
How to Buy Shares
How to Sell Shares
Exchanges
Shareholder Services 34
--------------------------------------------------------------
Dividends, Distributions and Taxes 35
--------------------------------------------------------------
Additional Information 37
--------------------------------------------------------------
Financial Highlights 38
--------------------------------------------------------------
Each Portfolio described in this Prospectus is a series
of The Bear Stearns Funds, a registered open-end
management investment company (the "Trust").
It is important to keep in mind that mutual fund shares
are:
o not deposits or obligations of any bank;
o not insured by the Federal Deposit Insurance
Corporation;
o subject to investment risk, including possible
loss of the money invested.
<PAGE>
Income Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
High current income consistent with preservation of capital.
Principal Strategies
Under normal market conditions, the Income Portfolio invests at least 75%
of its total assets in investment-grade, U.S. dollar-denominated fixed
income securities issued by U.S. companies and the U.S. government or its
political subdivisions, agencies or instrumentalities. The Income
Portfolio may invest in:
o Bonds, debentures and notes;
o Mortgage-related securities (including interest-only and
principal-only stripped securities);
o Asset-backed securities;
o Convertible debt obligations; and
o Money market instruments (including bank obligations,
commercial paper, other short-term corporate debt, and
repurchase agreements).
The Income Portfolio seeks to equal or exceed the performance of the
Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG
Index"), a market-capitalization weighted index that includes U.S.
Treasury, Government-sponsored, mortgage and investment-grade corporate
fixed income securities maturing in one year or more issued by entities
having a minimum of $50 million in debt outstanding at the time of
inclusion in the Salomon BIG Index.
Under normal market conditions, the Income Portfolio invests in a
portfolio of securities with a dollar-weighted average maturity ranging
from four to thirteen years and a duration between three and six years.
Duration is a measure of the expected price volatility of a debt security
or portfolio of debt securities. Duration and interest rates are inversely
related. For example, if a bond has an effective duration of three years,
you can expect a 1% increase in general interest rates to cause the bond's
value to decrease about 3%.
The Income Portfolio may invest up to 5% of its total assets in debt
obligations of issuers in emerging countries. "Emerging countries" 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. An issuer is considered to be located
in an emerging country if it:
o derives 50% or more of its total revenues from either goods
produced, sales made or services performed in emerging
countries, or
o is organized under the laws of, and with a principal office
in, an emerging country.
Emerging countries generally include countries in Asia (other than Japan),
Eastern Europe, Latin America and Africa.
Income Portfolio 1
<PAGE>
Quality. The Income Portfolio must invest at least 75% of its net assets
in investment-grade securities, that is, securities rated no lower than
"Baa" by Moody's Investors Service ("Moody's"), "BBB" by Standard & Poor's
("S&P"), the equivalent rating by other nationally recognized statistical
rating organizations ("NRSROs"), or, if unrated, deemed to be of
comparable quality by Bear Stearns Asset Management Inc., the investment
adviser for each Portfolio ("BSAM" or the "Adviser").
The Income Portfolio may invest up to 25% of its net assets in below
investment-grade securities ("junk bonds") that are rated below
investment-grade but no lower than "B" by Moody's or S&P, the equivalent
rating by any other NRSRO, or, if unrated, deemed to be of comparable
quality by the Adviser.
The Income Portfolio may invest in short-term fixed income obligations
that are rated in the two highest rating categories by Moody's, S&P, Fitch
IBCA, Inc. or Duff & Phelps.
For a discussion of the ratings categories of various NRSROs, see Appendix
to the Statement of Additional Information ("SAI").
Principal Risks
You may lose money by investing in the Income Portfolio. The Income
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Income Portfolio's net asset value, yield and/or
total return:
o The rate of inflation may increase, resulting in higher
interest rates, causing the Income Portfolio's securities to
decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o An issuer's credit quality may be downgraded.
o Below-investment-grade securities are riskier than
investment-grade securities and are more likely to decline in
value than investment-grade securities due to defaults or
bankruptcies.
o The Income Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
This may occur, for example, when the average life of a
mortgage-related security is shortened through prepayment.
o The Income Portfolio may not fully recoup its investment in
interest-only stripped mortgage-related securities if the
underlying mortgages are prepaid faster than anticipated.
o The yield on principal-only stripped mortgage-related
securities could decline if the underlying mortgages
experience less-than-anticipated prepayments of principal.
2 Income Portfolio
<PAGE>
o Securities issued in emerging countries may be more volatile
than securities issued in established markets due to less
developed securities markets or political instability.
Inefficient settlement procedures in emerging countries may
lead the Income Portfolio to miss investment opportunities or
be exposed to liability for failure to deliver securities. In
addition, issuers in emerging countries are subject to
less-stringent government regulation and accounting standards
than their counterparts in the United States.
Who May Want to Invest in the Income Portfolio
The Income Portfolio may be appropriate for investors who:
o seek high current income;
o want to diversify their portfolio.
The Income Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Income Portfolio by showing changes in its performance for various time
periods.
The performance information presented below largely reflects management of
the Income Portfolio's investments to maximize total return, rather than
to generate high current income, the Income Portfolio's present investment
objective. The Income Portfolio adopted its current investment objective
on October 16, 1998. The performance information presented below may have
been different if the Income Portfolio's investments had been managed to
realize high current income.
The bar chart shows returns for Class A shares of the Income Portfolio.
The returns for Class B and C shares offered by this Prospectus will
differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
Income Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 1997 1998
---- ---- ----
2.74 7.58 7.29
Past performance is not necessarily an indication of future results.
1 The Income Portfolio's year-to-date return as of June 30, 1999, was
(1.75)%.
During the period shown in the bar chart, the highest quarterly return was
4.63% (for the quarter ended December 31, 1995) and the lowest quarterly
return was (2.17)% (for the quarter ended March 31, 1996).
Income Portfolio 3
<PAGE>
The table shows the average annual total return of Class A and Class C
shares of the Income Portfolio. The table shows how the Income Portfolio's
average annual total return for one year and since the date of inception
compared to the Salomon BIG Index, a broad-based unmanaged index that
represents the general performance of fixed income securities. The figures
shown in the table assume reinvestment of dividends and distributions and
reflect all applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Income Portfolio - Class A** 2.50% 6.27%
--------------------------------------------------------------------------
Income Portfolio - Class C 5.60% 7.10%
--------------------------------------------------------------------------
Salomon BIG Index 8.71% 9.14%
--------------------------------------------------------------------------
* Class A and C shares commenced operations on April 5, 1995. Class B
shares commenced operations on February 2, 1998. Returns for Class B
shares are not included in this table because these shares did not
have a full year of operations as of December 31, 1998.
** Total return figures for Class A shares reflect the current maximum
sales load of 4.50%. Prior to December 24, 1997, the maximum sales
load was 3.75%.
4 Income Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Income Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
===========================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.50% None None
------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
------------------------------------------------------------------------------------------
Redemption fees *** *** ***
------------------------------------------------------------------------------------------
Exchange fees None None None
------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==========================================================================================
Management Fees 0.45% 0.45% 0.45%
------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 3.23% 3.06% 3.43%
----- ----- -----
------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.78% 4.26% 4.63%
------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.98)% (2.81)% (3.18)%
------- ------- ------
------------------------------------------------------------------------------------------
Net Expenses(2) 0.80% 1.45% 1.45%
----- ----- -----
------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a contingent deferred sales charge ("CDSC") of 1% of
the lesser of purchase or sale price of your Class A shares if you
sell them up to one year after the date of purchase if you purchased
them at net asset value because (a) you purchased $1 million or more
of Class A shares or (b) you purchased them within 60 days of
selling shares of a mutual fund that charges a sales load or is
subject to a CDSC and not distributed by Bear Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the Income
Portfolio's net expenses do not exceed the amounts indicated above.
Income Portfolio 5
<PAGE>
Example
This Example illustrates the cost of investing in the Income Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Income Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Income Portfolio;
o your investment returns 5% each year;
o the Income Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
====================================================================
Class A $528 $1,290 $2,070 $4,105
--------------------------------------------------------------------
Class B $648 $1,336 $2,138 $4,151**
--------------------------------------------------------------------
Class C $248 $1,110 $2,080 $4,535
--------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
====================================================================
Class B $148 $1,036 $1,938 $4,151**
--------------------------------------------------------------------
Class C $148 $1,110 $2,080 $4,535
--------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 0.80% for Class A and 1.45% for both Class B and C
shares until March 31, 2000 and thereafter will equal 3.78%
for Class A, 4.26% for Class B and 4.63% for Class C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
6 Income Portfolio
<PAGE>
High Yield Total Return Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Total return through high current income and capital appreciation.
Principal Strategies
Under normal market conditions, the High Yield Total Return Portfolio (the
"High Yield Portfolio") will invest 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.
Within this 80% category, the High Yield Portfolio may invest in the
following securities (up to the stated percentage of its total assets):
o 25% in foreign securities;
o 25% in zero-coupon securities, pay-in-kind bonds or discount
obligations;
o 20% in distressed securities;
o 20% in mortgage-related securities;
o 15% in loans and participations; and
o 10% in convertible securities.
Generally, the High Yield Portfolio's average weighted maturity will range
from three to twelve years.
The High Yield Portfolio invests in high yield securities of issuers that
the Adviser believes to be positioned for gradual or substantial credit
improvement through a process that:
o uses Bear Stearns' "High Yield Query System" to screen more
than 2,000 issuers to select companies that meet initial
investment criteria;
o identifies positive catalysts affecting the issuer's financial
condition that may lead to price appreciation;
o includes communicating with senior management to assess its
commitment to improving credit quality; and
o identifies securities whose issuers have above-average
prospects for superior returns.
Quality. "High yield fixed income securities" ("junk bonds") are those
securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P,
comparably rated by any other NRSRO or unrated securities that the Adviser
determines to be of comparable quality.
The High Yield 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 S&P and
comparable unrated bonds.
For a discussion of the ratings categories of various NRSROs, see the
Appendix to the SAI.
High Yield Portfolio 7
<PAGE>
Principal Risks
You may lose money by investing in the High Yield Portfolio. The High
Yield Portfolio is also subject to the following principal risks, more
fully described in "Risk Factors" in this Prospectus. Some or all of these
risks may adversely affect the High Yield Portfolio's net asset value,
yield and/or total return:
o High yield securities are riskier than investment-grade
securities and are more likely to decline in value than
investment-grade securities due to defaults or bankruptcies.
o Portfolio investments that are already in default when
acquired may experience further market value declines or
become worthless.
o The rate of inflation may increase, resulting in higher
interest rates, causing the High Yield Portfolio's securities
to decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o An issuer's credit quality may be downgraded.
o The High Yield Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
This may occur, for example, when the average life of a
mortgage-related security is shortened.
o A financial intermediary involved in a loan participation may
become insolvent or the High Yield Portfolio, as holder of the
loan, may be compelled to participate in restructuring the
underlying loan.
o Foreign securities are more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
Who May Want to Invest in the High Yield Portfolio
The High Yield Portfolio may be appropriate for investors who:
o seek high current income coupled with asset growth potential.
The High Yield Portfolio may not be appropriate for investors who:
o are not willing to accept the greater risks associated with
high yield issues when compared to higher-rated corporate and
U.S. Government bonds;
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
8 High Yield Portfolio
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in the
High Yield Portfolio by showing its performance since inception.
The bar chart shows returns of Class A shares of the High Yield Portfolio.
The returns for Class B and C shares offered by this Prospectus will
differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
High Yield Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1998
----
4.28
Past performance is not necessarily an indication of future results.
1 The High Yield Portfolio's year-to-date return as of June 30, 1999,
was 2.10%.
During the period shown in the bar chart, the highest quarterly return was
8.30% (for the quarter ended March 31, 1998) and the lowest quarterly
return was (6.75)% (for the quarter ended September 30, 1998).
The table shows the average annual total return of Class A, B and C shares
of the High Yield Portfolio. The table shows how the High Yield
Portfolio's average annual total return since the date of inception
compared to the Credit Suisse First Boston Global High Yield Index, a
broad-based unmanaged index that represents the general performance of
high yield fixed income securities. The table also compares the High Yield
Portfolio's performance to that of the Lipper High Yield Bond Fund Index,
a measure of the performance of high yield fixed income mutual funds. The
figures shown in the table assume reinvestment of dividends and
distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the period ended December 31, 1998) Since Inception*
=======================================================================
High Yield Portfolio - Class A (0.45)%
-----------------------------------------------------------------------
High Yield Portfolio - Class B 2.66%
-----------------------------------------------------------------------
High Yield Portfolio - Class C (1.13)%
-----------------------------------------------------------------------
Credit Suisse First Boston Global High Yield Index 0.58%
-----------------------------------------------------------------------
Lipper High Yield Bond Fund Index (0.07)%
-----------------------------------------------------------------------
* Class A, B and C shares commenced operations on January 2, 1998.
High Yield Portfolio 9
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the High Yield Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
=============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.50% None None
---------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
---------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
---------------------------------------------------------------------------------------------
Redemption fees *** *** ***
---------------------------------------------------------------------------------------------
Exchange fees None None None
---------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=============================================================================================
Management Fees 0.60% 0.60% 0.60%
---------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
---------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 1.04% 1.03% 1.03%
----- ----- -----
---------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.74% 2.38% 2.38%
---------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (0.74)% (0.73)% (0.73)%
------- ------- -------
---------------------------------------------------------------------------------------------
Net Expenses(2) 1.00% 1.65% 1.65%
----- ----- -----
---------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the High
Yield Portfolio's net expenses do not exceed the amounts indicated
above.
10 High Yield Portfolio
<PAGE>
Example
This Example illustrates the cost of investing in the High Yield Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the High Yield Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the High Yield Portfolio;
o your investment returns 5% each year;
o the High Yield Portfolio's operating expenses remain the
same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
====================================================================
Class A $547 $904 $1,285 $2,351
--------------------------------------------------------------------
Class B $668 $973 $1,404 $2,501**
--------------------------------------------------------------------
Class C $268 $673 $1,204 $2,661
--------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
====================================================================
Class B $168 $673 $1,204 $2,501**
--------------------------------------------------------------------
Class C $168 $673 $1,204 $2,661
--------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.00% for Class A and 1.65% for both Class B and C
shares until March 31, 2000, and thereafter will equal 1.74%
for Class A and 2.38% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
High Yield Portfolio 11
<PAGE>
Emerging Markets Debt Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
High current income by investing primarily in debt obligations of issuers
located in emerging countries with a secondary objective of capital
appreciation.
Principal Strategies
Under normal market conditions, the Emerging Markets Debt Portfolio ("EMD
Portfolio") will invest at least 80% of its total assets in debt
obligations of issuers in emerging countries. "Debt obligations" include
fixed or floating rate bonds, notes, debentures, commercial paper, loans,
Brady bonds, 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. Debt obligations also include
preferred stock and convertible securities, which have characteristics of
both debt and equity investments. Under normal market conditions, the EMD
Portfolio may invest up to 10% of its total assets in convertible
securities.
The EMD Portfolio's investments in debt obligations may have stated
maturities ranging from overnight to 30 years.
"Emerging countries" 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. An issuer
is considered to be located in an emerging country if it (i) derives 50%
or more of its total revenues from either goods produced, sales made or
services performed in emerging countries, or (ii) is organized under the
laws of, and with a principal office in, an emerging country. The EMD
Portfolio intends to focus its investments in Asia, Eastern Europe, Latin
America and Africa. Countries that are not considered emerging countries
include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Spain, Sweden, Switzerland, the United Kingdom and the United States.
In selecting investments for the EMD Portfolio, the Adviser will emphasize
investments in countries that are making the most progress toward
sustainable economic growth with lower inflation. The EMD Portfolio will
apply the percentage limits described in this Risk/Return Summary at the
time of purchase.
The EMD Portfolio
o will invest at least 70% of its total assets in at least three
emerging countries;
o may invest up to 40% of its total assets in any one country;
o may invest up to 20% of its total assets in loans and
participations; and
o will invest at least 30% of its total assets in Latin America.
12 EMD Portfolio
<PAGE>
The EMD Portfolio seeks capital appreciation by investing in securities
that it expects will benefit from declines in long-term interest rates or
improvements in an issuer's credit quality.
Currency. The EMD Portfolio primarily invests in a combination of
high-yield U.S. dollar-denominated instruments and local currency
instruments in emerging countries where the relationship between interest
rates and anticipated foreign exchange movements relative to the U.S.
dollar are expected to result in a high dollar rate of return. In addition
to current income, the EMD Portfolio also seeks capital appreciation from
interest-rate and currency exchange fluctuations and improving credit
quality.
The EMD Portfolio will invest at least 70% of its total assets in U.S.
dollar-denominated instruments. The EMD Portfolio may invest up to 30% of
its assets in debt obligations denominated in local currencies, although
the EMD Portfolio expects that it will not invest more than 20% of its
assets in debt obligations denominated in the currency of any one country.
Quality. The EMD Portfolio may invest in debt obligations that the Adviser
determines to be suitable investments notwithstanding any credit ratings
that may be assigned to such securities. All of the EMD Portfolio's assets
may be invested in debt obligations that are unrated or below investment
grade. The EMD Portfolio may purchase non-performing securities and some
of these securities may be comparable to securities rated as low as the
lowest credit ratings of an NRSRO. For a discussion of the ratings
categories of various NRSROs, see the Appendix to the SAI.
Principal Risks
You may lose money by investing in the EMD Portfolio. The EMD Portfolio is
also subject to the following principal risks, more fully described in
"Risk Factors" in this Prospectus. Some or all of these risks may
adversely affect the EMD Portfolio's net asset value, yield and/or total
return:
o Foreign securities issued in emerging countries are generally
more volatile because the securities markets in these
countries have comparatively less trading volume and fewer
participants.
o Inefficient settlement procedures in emerging countries may
cause the EMD Portfolio to miss investment opportunities or be
exposed to liability for failure to deliver securities.
o Issuers in emerging countries are subject to less government
regulation than their counterparts in the United States.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
fluctuations in currency exchange rates, and the risks that a
foreign government may confiscate assets, restrict the ability
to exchange currency or restrict the delivery of securities.
o The rate of inflation may increase, resulting in higher
interest rates, causing the EMD Portfolio's securities to
decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
EMD Portfolio 13
<PAGE>
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o An issuer's credit quality may be downgraded.
o Below investment-grade securities are riskier than
investment-grade securities and are more likely to decline in
value than investment-grade securities due to defaults or
bankruptcies.
o A financial intermediary involved in a loan participation may
become insolvent or the EMD Portfolio, as holder of the loan,
may be compelled to participate in restructuring the
underlying loan.
o The EMD Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
o Computer systems in emerging countries may experience greater
difficulty in processing Year 2000 data than systems in other
countries, resulting in delays in the payment of interest or
principal.
The EMD Portfolio is a non-diversified mutual fund, which means that it
may devote a larger portion of its assets to the securities of a single
issuer than if it were diversified. This could make the EMD Portfolio more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in the EMD Portfolio
The EMD Portfolio may be appropriate for investors who:
o seek high current income;
o want to add an emerging markets fixed income component to an
existing portfolio;
o are willing to accept the relatively greater price volatility
of investments in emerging markets compared to other fixed
income investments.
The EMD Portfolio may not be appropriate for investors who:
o are not willing to accept the risks associated with foreign
securities markets or currency fluctuation;
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
14 EMD Portfolio
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in the EMD
Portfolio by showing changes in its performance for various time periods.
Each of the Portfolios is a series of the Trust, a series-type registered
investment company. Prior to July 29, 1999, the EMD Portfolio was a series
of Bear Stearns Investment Trust, another registered investment company
advised by BSAM. The performance information below reflects the
performance of the EMD Portfolio during the time that it was a series of
Bear Stearns Investment Trust and BSAM served as its investment adviser.
The bar chart shows returns for Class A shares of the EMD Portfolio. The
returns for Class B and C shares offered by this Prospectus will differ
from the return for the Class A shares shown on the bar chart, depending
on the expenses of each class. The bar chart does not reflect any sales
charges that you may be required to pay when you buy or sell your shares.
If sales charges were reflected, returns would be lower than those shown.
EMD Portfolio Annual Return (%)(1)
[BAR GRAPH]
1996 1997 1998
---- ---- ----
40.80(2) 14.61 -10.76
Past performance is not necessarily an indication of future results.
1 The EMD Portfolio's year-to-date return as of June 30, 1999, was
(3.96)%.
2 The EMD Portfolio's performance prior to January 1, 1996, is not
shown because it was managed by an investment adviser other than
BSAM, its current investment adviser, for the period from inception
(May 3, 1993) to May 3, 1995.
During the period shown in the bar chart, the highest quarterly return was
17.69% (for the quarter ended June 30, 1995) and the lowest quarterly
return was (18.67)% (for the quarter ended September 30, 1998).
EMD Portfolio 15
<PAGE>
The table shows the average annual total return of Class A and C shares of
the EMD Portfolio. The table shows how the EMD Portfolio's average annual
total return for one year and since the date of inception compared to the
Salomon Smith Barney Emerging Markets Debt Mutual Fund Index (the "EMMF
Index"). The EMMF Index is a broad-based unmanaged index that represents
the general performance of Brady bonds and assets of two non-Brady
countries, Morocco and Russia. The EMMF Index is designed for use by
mutual funds, whose tax diversification requirements preclude use of a
Brady bond index, which is heavily weighted among a few issuers. The
figures shown in the table assume reinvestment of dividends and
distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
=======================================================================
EMD Portfolio - Class A (14.78)% 15.52%**
-----------------------------------------------------------------------
EMD Portfolio - Class C (11.29)% 16.06%***
-----------------------------------------------------------------------
EMMF Index (9.57)% 18.88%
-----------------------------------------------------------------------
* Class B shares commenced operations on January 12, 1998.
Returns for Class B shares are not included in this table
because these shares did not have a full year of operations as
of December 31, 1998.
** The Adviser began managing Class A shares on May 4, 1995.
Total return figures for Class A shares reflect the current
maximum sales load of 4.50%. Prior to December 24, 1997, the
maximum sales load was 3.75%.
*** Class C shares commenced operations on July 26, 1995.
16 EMD Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the EMD Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.50% None None
--------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
--------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
--------------------------------------------------------------------------------------------
Redemption fees *** *** ***
--------------------------------------------------------------------------------------------
Exchange fees None None None
--------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
============================================================================================
Management Fees(2) 1.00% 1.00% 1.00%
--------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
--------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 1.93% 2.08% 1.81%
----- ----- -----
--------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.03% 3.83% 3.56%
--------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (1.28)% (1.43)% (1.16)%
------- ------- -------
--------------------------------------------------------------------------------------------
Net Expenses(3) 1.75% 2.40% 2.40%
----- ----- -----
--------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 Management fees are based on the EMD Portfolio's average daily net
assets at an annual rate of 1.00% charged on assets up to $50
million, 0.85% charged on assets between $50 million and $100
million and 0.55% charged on assets above $100 million.
3 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the EMD
Portfolio's net expenses do not exceed the amounts indicated above.
EMD Portfolio 17
<PAGE>
Example
This Example illustrates the cost of investing in the EMD Portfolio over
various time periods. It is intended to help you compare the cost of
investing in the EMD Portfolio with the cost of investing in other mutual
funds. The Example assumes that:
o you invest $10,000 in the EMD Portfolio;
o your investment returns 5% each year;
o the EMD Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
====================================================================
Class A $620 $1,229 $1,863 $3,559
--------------------------------------------------------------------
Class B $743 $1,338 $2,052 $3,797**
--------------------------------------------------------------------
Class C $343 $984 $1,747 $3,751
--------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
====================================================================
Class B $243 $1,038 $1,852 $3,797**
--------------------------------------------------------------------
Class C $243 $984 $1,747 $3,751
--------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.75% for Class A and 2.40% for both Class B and C
shares until March 31, 2000, and thereafter will equal 3.03%
for Class A, 3.83% for Class B and 3.56% for Class C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
18 EMD Portfolio
<PAGE>
INVESTMENTS
Principal Investment Strategies -- Additional Information
Income Portfolio
The Income Portfolio seeks to identify and respond to phases in the
business cycle --expansion, topping out, recession and downturn --
and to shift among market sectors, maturities and relative credit
quality to achieve its objective, taking into account the volatility
and risk associated with investing in longer term fixed income
securities and, to a lesser extent, with investing in below
investment-grade securities.
The Income Portfolio evaluates a security's duration and maturity.
Duration measures a security's sensitivity to interest rate changes
and takes into account its cash flows over time, including the
effect of prepayments and interest rate changes. Maturity measures
only the time until final payment is due. The Adviser may, for
example, increase the average duration of the Income Portfolio's
holdings when interest rates are declining and decrease the average
duration when interest rates are increasing.
The Income Portfolio seeks to equal or exceed the performance of the
Salomon BIG Index. As of March 31, 1999, the weighted average
maturity of securities in the Salomon BIG Index was approximately
eight and one-half years with an average duration of approximately
four and one-half years.
High Yield Portfolio
Securities offering high current yield are generally issued by
rapidly growing companies incurring debt to fund plant expansion or
pay for acquisitions and large, well-known, highly leveraged
companies. These securities are also generally rated in the
medium-to-lower quality categories by the NRSROs. The Adviser
evaluates an issuer's financial history and condition, prospects and
management and will not rely principally on the ratings assigned by
NRSROs, although the Adviser does consider such ratings.
The High Yield Portfolio seeks capital appreciation by investing in
securities that it expects will benefit from declines in long-term
interest rates or improvements in an issuer's business or prospects.
EMD Portfolio
The EMD Portfolio seeks to identify investment opportunities in
emerging countries that are positioning themselves for sustainable
economic growth with low inflation. These countries typically show
signs of improving economic and political fundamentals, such as the
appointment or election of reform-minded governments, tighter
monetary and fiscal policies, privatization of state-controlled
industries, and reform of social security and civil service systems.
The EMD Portfolio will attempt to maximize returns by adjusting the
portfolio in response to numerous factors affecting debt
obligations, including political and economic developments and
changes in credit quality and exchange rates. Investing in floating
rate and short-to-intermediate term securities may enable the EMD
Portfolio to maximize returns in different interest rate
environments. In addition, the ability to invest in fixed-rate
securities with maturities of up to 30 years may allow the EMD
Portfolio to take advantage of changes in prevailing interest rates.
19
<PAGE>
Investments
This table summarizes some of the principal investments and techniques,
described below, that each Portfolio may use to achieve its investment
objectives.
<TABLE>
<CAPTION>
Income Portfolio High Yield Portfolio EMD Portfolio
=======================================================================================
<S> <C> <C> <C>
Asset-backed securities X
---------------------------------------------------------------------------------------
Brady bonds X
---------------------------------------------------------------------------------------
Convertible securities X X X
---------------------------------------------------------------------------------------
Discount securities X X X
---------------------------------------------------------------------------------------
Distressed securities X X X
---------------------------------------------------------------------------------------
Indexed securities X X
---------------------------------------------------------------------------------------
Loans X X
---------------------------------------------------------------------------------------
Mortgage-related securities X
---------------------------------------------------------------------------------------
</TABLE>
o Asset-backed securities have a structure that is similar to
mortgage-related securities (see below). The collateral for
these securities includes home equity loans, automobile and
credit card receivables, boat loans, computer leases, airplane
leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
o Brady bonds are debt securities issued in exchange for
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.
Treasury Secretary Nicholas Brady.
o Convertible securities are bonds, debentures, notes, preferred
stocks or other securities that may be converted into or
exchanged for common stock. Convertible securities are
characterized by higher yields than common stocks, but lower
yields than comparable non-convertible securities, less price
fluctuation than the underlying common stock since they have
fixed income characteristics, and potential for capital
appreciation if the market price of the underlying common
stock increases.
o Discount securities. Zero-coupon securities, which pay no cash
income, are fixed income securities that are sold at
substantial discounts from their face value. They include
pay-in-kind bonds, which pay all or a portion of their
interest in the form of debt or equity securities. 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.
o Distressed securities are debt or equity securities of
financially troubled or bankrupt companies that the Adviser
believes to be undervalued relative to their long-term
potential for growth.
o Indexed securities are investments whose value is indexed to
that of other securities, securities indices, currencies,
precious metals or other commodities, or other financial
indicators. Indexed securities typically are debt securities
or deposits whose face value or coupon rate is determined by
reference to a specific instrument or statistic.
o Loans are arranged through private negotiations between a
foreign entity and one or more financial institutions. A
Portfolio will usually invest in loans through participations,
in which the lending institution sells its right to receive
principal and interest payments that it receives from the
borrower.
20
<PAGE>
o Mortgage-related securities represent interests in pools of
mortgage loans made by lenders like savings and loan
institutions, mortgage bankers, commercial banks and others.
Other Investment Strategies
o Temporary defensive measures. From time to time, during
unfavorable market conditions, the Adviser may invest
"defensively." This means a Portfolio may make temporary
investments that are not consistent with its investment
objective and principal strategies. Engaging in temporary
defensive measures may reduce the benefit from any upswing in
the market and may cause a Portfolio to fail to meet its
investment objective.
For temporary defensive purposes, each Portfolio may hold cash
(U.S. dollars) and may invest all of its assets in
high-quality fixed-income securities, repurchase agreements or
U.S. or foreign money market instruments.
For temporary defensive purposes, the EMD Portfolio may hold
foreign currencies or multinational currency units.
o Portfolio turnover. The Adviser may trade actively to achieve
a Portfolio's goals. High yield and emerging country markets
are especially volatile and may result in more frequent
trading. This may result in higher capital gains
distributions, which would increase your tax liability.
Frequent trading may also increase a Portfolio's costs,
lessening its performance over time.
The SAI describes each Portfolio's investment strategies in more detail.
RISK FACTORS
As with all mutual funds, investing in the Portfolios involves certain
risks. There is no guarantee that a Portfolio will meet its investment
objective. You can lose money by investing in a Portfolio if you sell your
shares after it declines in value below your original cost. There is never
any assurance that a Portfolio will perform as it has in the past.
The Portfolios may use various investment techniques, some of which
involve greater amounts of risk than others. You will find a detailed
discussion of these investment techniques in the SAI. To reduce risk, the
Portfolios are subject to certain limitations and restrictions on their
investments, which are also described in the SAI.
Each Portfolio is subject to the following principal risks, except as
noted.
General Risks
o Market risk is the risk that the market value of a security
may go up or down, sometimes rapidly. These fluctuations may
cause the security to be worth less than it was at the time it
was acquired. Market risk may involve a single security or a
particular sector.
o Manager risk is the risk that the portfolio managers'
investment strategy may not produce the intended results.
Manager risk also involves the possibility that the portfolio
managers fail to execute an investment strategy effectively.
o Year 2000 risk. Like all mutual funds, a Portfolio could be
adversely affected if the computer systems used by its service
providers, including shareholder servicing agents,
21
<PAGE>
are unable to recognize dates after 1999. Each Portfolio's
service providers have been actively updating their systems to
be able to process Year 2000 data. There can be no assurance,
however, that these steps will be adequate to avoid a
temporary service disruption or other adverse impact on the
Portfolios. In addition, an issuer's failure to process
accurately Year 2000 data may cause that issuer's securities
to decline in value or delay the payment of interest to a
Portfolio. The risk of computer failure may be greater with
respect to investments in foreign countries, which may lack
the expertise or resources to adequately address those issues.
Risks of Debt Securities
o Interest rate risk. The value of a debt security typically
changes in the opposite direction from a change in interest
rates. When interest rates go up, the value of a debt security
typically goes down. When interest rates go down, the value of
a debt security typically goes up. Generally, the longer the
maturity of a security, the more sensitive it is to changes in
interest rates.
o Inflation risk is the risk that inflation will erode the
purchasing power of the cash flows generated by debt
securities. Fixed-rate debt securities are more susceptible to
this risk than floating-rate debt securities.
o Reinvestment risk is the risk that when interest rates are
declining, a Portfolio will have to reinvest interest income
or prepayments from a security at lower interest rates. In a
declining interest rate environment, lower reinvestment rates
and price gains resulting from lower interest rates will
offset each other to some extent.
o Credit (or default) risk is the risk that the issuer of a debt
security will be unable to make timely payments of interest or
principal. Credit risk is measured by NRSROs such as S&P,
Fitch IBCA, or Moody's.
o Below investment-grade securities ("junk bonds") may be less
liquid, more susceptible to real or perceived adverse economic
conditions and more difficult to evaluate than higher-rated
securities. The market for these securities has relatively few
participants, mostly institutional investors, and low trading
volume. At times, a Portfolio may have difficulty selling
particular high yield securities at a fair price and obtaining
accurate valuations in order to calculate its net asset value.
Securities that are rated "Ba" or lower by Moody's, "BB" or
lower by S&P or comparably rated by any other NRSRO, or
unrated securities that the Adviser determines to be of
comparable quality may be considered speculative and subject
to higher risk of default than investment-grade securities.
High yield securities rated below "Caa" by Moody's or "CCC" by
S&P and comparable unrated bonds are highly speculative and
may be in default of principal and/or interest payments at the
time of purchase.
Risks of Foreign Securities
o Foreign issuer risk. Compared to U.S. companies, less
information is generally available to the public about foreign
companies. Foreign brokers and issuers may not be subject to
the uniform accounting, auditing, and financial reporting
standards and practices prevalent in the U.S. In addition,
foreign stock exchanges and other securities markets may be
more volatile and subject to less governmental supervision
than their counterparts in the U.S. Investments in foreign
countries could be affected by factors not present in the
U.S.,
22
<PAGE>
including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can
make foreign investments, especially those in emerging
countries, more volatile than U.S. investments.
o Currency risk. Fluctuations in exchange rates between the U.S.
dollar and foreign currencies may negatively affect an
investment. Adverse changes in exchange rates may erode or
reverse any gains produced by foreign currency-denominated
investments and may widen any losses. On January 1, 1999,
participating nations in the European Economic and Monetary
Union introduced a single currency, the euro. This action may
present unique uncertainties for securities denominated in
currencies that are components of the euro. Political and
economic risks, along with other factors, could adversely
affect the value of a Portfolio's securities.
o Emerging markets risk. Emerging country economies often
compare unfavorably with the United States economy in growth
of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of
payments position. Certain emerging countries have experienced
and continue to experience high rates of inflation, sharply
eroding the value of their financial assets. An emergency may
arise where trading of emerging country securities may cease
or may be severely limited or where an emerging country
governmental or corporate issuer defaults on its obligations.
The governments of certain emerging countries impose
restrictions or controls that may limit or preclude a
Portfolio's investment in certain securities. A Portfolio may
need governmental approval for the repatriation of investment
income, capital or sales proceeds. An emerging country
government may also impose temporary restrictions on the
disposition of portfolio securities.
Risks of Mortgage-Related Securities (Income Portfolio only)
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of
mortgage-related securities. The level of interest rates and
other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the
prepayment rate tends to decrease, lengthening the average
life of a pool of mortgage-related securities. In periods of
falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a
Portfolio may have to reinvest the proceeds from prepayments
at lower interest rates.
o Extension risk is the risk that the rate of anticipated
prepayments of principal may not occur, typically because of a
rise in interest rates, and the expected maturity of the
security will increase. During periods of rapidly rising
interest rates, the weighted average maturity of a security
may be extended past what was anticipated. The market value of
securities with longer maturities tends to be more volatile.
Risks of Distressed Securities
o Distressed securities include securities of companies involved
in bankruptcy proceedings, reorganizations and financial
restructurings. Securities of financially troubled issuers are
less liquid and more volatile than securities of companies not
experiencing financial difficulties. A Portfolio may own a
significant portion of a company's distressed securities. As a
result, the Portfolio may participate actively in the affairs
of the company, which may subject the Portfolio to litigation
risks or prevent the Portfolio from selling the securities.
23
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the
investment adviser of the Portfolios. The Adviser was established in 1985
and 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 & Co. Inc.,
is a leading U.S. investment banking, securities trading and brokerage
firm serving U.S. and foreign corporations, governments and institutional
and individual investors. The Adviser is a registered investment adviser
and offers investment advisory and administrative services to open-end
investment funds and other managed accounts with aggregate assets at June
30, 1999 of over $12.2 billion.
The Adviser supervises and assists in the overall management of the
affairs of the Trust, subject to oversight by the Trust's Board of
Trustees.
For the fiscal year ended March 31, 1999, the Adviser received management
fees based on a percentage of the average daily net assets of each
Portfolio, after waivers, as shown in the following table.
Income Portfolio 0.00%
-------------------------------------------------------
High Yield Portfolio 0.03%
-------------------------------------------------------
EMD Portfolio 0.24%
-------------------------------------------------------
Portfolio Management Team
The Adviser uses a team approach to manage each Portfolio. The members of
each team together are primarily responsible for the day-to-day management
of each Portfolio's investments. No single individual is responsible for
managing a Portfolio. Each team consists of senior portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to
manage the assets of each Portfolio.
HOW THE PORTFOLIOS VALUE THEIR SHARES
The net asset value ("NAV"), multiplied by the number of Portfolio shares
you own, gives you the value of your investment. Each Portfolio calculates
its share price, called its NAV, each business day as of the close of the
New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m.
Eastern Time. You may buy, sell or exchange shares on any business day at
a price that is based on the NAV that is calculated after you place your
order. A business day is a day on which the NYSE is open for trading or
any day in which enough trading has occurred in the securities held by a
Portfolio to affect the NAV materially.
Portfolio securities that are listed primarily on foreign exchanges may
trade on weekends or on other days on which the Portfolios do not price
their shares. In this case, the NAV of a Portfolio's shares may change on
days when you are not able to buy or sell shares.
The Portfolios value their investments based on market value or, where
market quotations are not readily available, based on fair value as
determined in good faith by the Trust's Board of Trustees. The NAV for
each class is calculated by adding up the total value of the relevant
24
<PAGE>
Portfolio's investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the
class.
NAV = Total Assets Less Liabilities
-----------------------------
Number of Shares Outstanding
You can request each Portfolio's current NAV by calling 1-800-447-1139.
INVESTING IN THE PORTFOLIOS
This section provides information to assist you in purchasing shares of
the Portfolios. It describes the minimum investment requirements for the
Portfolios, the expenses and sales charges applicable to each Class of
shares and the procedures to follow if you decide to buy shares. Please
read the entire Prospectus carefully before buying shares of a Portfolio.
Investment Requirements
Minimum Initial Investment:
o Non-Retirement Account: $1,000
o Retirement Account: $500
Minimum Subsequent Investment:
o Non-Retirement Account: $50
o Retirement Account: $25
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, B and 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 representative can help you choose the class of shares
that best suits your investment needs.
o Class A shares have a front-end sales charge, which is added
to the Class A NAV to determine the offering price per share.
o Class B 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 and C shares have a
contingent deferred sales charge ("CDSC") that you must pay if
you sell your shares within a specified period of time. In
addition, the annual expenses of Class B and C shares are
higher than the annual expenses of Class A shares.
In deciding which class is best, you may consider, among other things:
o how much you intend to invest;
o the length of time you expect to hold your investment.
25
<PAGE>
Relative Advantages of Each Share Class
Investor Characteristics Advantages
- --------------------------------------------------------------------------------
Class A o Long-term investment horizon o Lower expense structure and the
and/or qualify for waiver or amount of the initial sales charge
reduction of sales charge decreases as you invest more money
- --------------------------------------------------------------------------------
Class B o Long-term investment horizon o No front-end sales charge so the
full amount of your investment is
put to work right away; converts
to Class A shares after eight
years
- --------------------------------------------------------------------------------
Class C o Short-term investment horizon o No front-end sales charge so the
full amount of your investment is
put to work right away and the
CDSC is lower than that of Class B
shares, declining to zero after
one year
- --------------------------------------------------------------------------------
You should consult your financial adviser or account representative before
investing in a Portfolio.
You may be eligible to use the Right of Accumulation or Letter of Intent
privileges to reduce your Class A sales charges. See "Reduction of Class A
Sales Charges" below.
The following table summarizes the differences in the expense structures
of the three classes of shares:
Class A Class B Class C
--------------------------------------------------------------------------
Front End 4.50% None None
Sales Charge*
--------------------------------------------------------------------------
CDSC None** 5% to 0%, declining 1%, if you sell
the longer you hold shares within
your shares one year of
purchase
--------------------------------------------------------------------------
Annual Lower than Class B Higher than Class A Higher than
Expenses and C shares shares (Note: Class A shares;
Class B shares same as Class B
convert to Class A shares
shares 8 years after
purchase)***
--------------------------------------------------------------------------
* There are several ways that you can reduce these charges, as
described under "Sales Charge Reductions and Waivers."
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** Class B shares will not convert to Class A shares if the Adviser
believes that the Internal Revenue Service will consider the
conversion to be a taxable event. If Class B shares do not convert
to Class A shares, they will continue to be subject to higher
expenses than Class A shares indefinitely.
26
<PAGE>
How the Trust Calculates Sales Charges
Class A Shares
The public offering price for Class A shares is the NAV that the Trust
calculates after you place your order plus the applicable sales load, as
determined in the following table.
Total Sales Load
Amount As a % of offering
of Investment price per share As a % of NAV
--------------------------------------------------------------------------
Less than $50,000 4.50 4.71
$50,000 or more but less than $100,000 4.25 4.44
$100,000 or more but less than $250,000 3.25 3.36
$250,000 or more but less than $500,000 2.50 2.56
$500,000 or more but less than $1,000,000 2.00 2.04
$1,000,000 and above 0.00* 0.00
--------------------------------------------------------------------------
* You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
Class B Shares
The public offering price for Class B shares is the NAV that the Trust
calculates after you place your order. You pay no initial sales charge on
Class B shares, but you will pay a CDSC if you sell your shares within six
years of purchase. The amount of the CDSC, if any, will vary depending on
the number of years from the time you buy until the time you sell your
Class B shares. Class B shares have higher annual expenses than Class A
shares.
For the purpose of determining the number of years from the time of any
purchase, the Trust will aggregate all payments during a month and
consider them made on the first day of that month.
CDSC as a % of Dollar
Year Since Purchase Amount Subject to CDSC
---------------------------------------------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
---------------------------------------------------------------------
* 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 will convert into Class
A shares of the new Portfolio based on the date of the initial
purchase of the shares of the exchanged Portfolio. Class B shares
acquired through reinvestment of distributions will convert into
Class A shares based on the date of the initial purchase of the
underlying shares, on a pro rata basis. The Trust does not consider
conversion to Class A shares to be a purchase or sale for federal
income tax purposes. You should consult with your own tax adviser.
27
<PAGE>
Class C Shares
The public offering price for Class C shares is the NAV that the Trust
calculates after you place your order. You pay no initial sales charge at
the time of purchase. You will pay a CDSC of 1%, however, if you sell
Class C shares within the first year of purchase.
The Trust will calculate the CDSC on Class B and C shares in a manner that
results in the lowest possible charge. The Portfolios will apply the CDSC
to the lower of the purchase price of the shares, or the current market
value of the shares being sold. You will pay no CDSC when you sell shares
you have acquired through reinvestment of dividends or capital gain
distributions.
Sales Charge Reductions and Waivers
Waiver of Class A Sales Charges
The following categories of investors may buy Class A shares without a
front-end sales charge:
o Bear Stearns, its affiliates and their officers, directors or
employees (including retired employees); any partnership of
which Bear Stearns is a general partner, any Trustee or
officer of the Trust and certain family members of any of the
these individuals.
o Employees or registered representatives of any broker-dealers
with whom the Distributor has entered into sales agreements
("Authorized Dealers") and their spouses and minor children.
o Qualified retirement plans of Bear Stearns.
o Trustees or directors of investment companies for which BSAM
or an affiliate acts as sponsor.
o Any state, county or city, or any instrumentality, department,
authority or agency that is prohibited by law from paying a
sales load or commission in connection with the purchase of
shares of a Portfolio.
o Institutional investment clients, including
corporate-sponsored pension and profit-sharing plans, other
benefit plans and insurance companies.
o Pension funds, state and municipal governments or funds,
Taft-Hartley plans and qualified non-profit organizations,
foundations and endowments.
o Trust institutions (including bank trust departments)
investing on their own behalf or on behalf of their clients.
o Service providers to the Portfolios.
o Accounts for which an Authorized Dealer or investment adviser
charges an asset management fee (including "wrap" fees).
o Current shareholders of other mutual funds not distributed by
Bear, Stearns & Co. Inc., the Portfolios' distributor, that
have paid a front end sales charge or were subject to a CDSC,
and that buy shares of a Portfolio within 60 days of selling
shares of the other mutual fund. To qualify for this waiver,
you or your Authorized Dealer must notify Bear Stearns in
writing. However, if you sell your Portfolio shares up to one
year after the date of purchase, the Portfolio will impose a
CDSC on 1% of the lesser of purchase or sale price.
28
<PAGE>
To take advantage of the sales charge waiver, you must indicate your
eligibility on your Account Information Form. If you think you may be
eligible for a sales charge waiver, please contact your account
representative or call PFPC Inc., the Portfolios' Transfer Agent, at
1-800-447-1139.
Reduction of Class A Sales Charges
You may reduce your Class A sales charge by taking advantage of the
following privileges:
o Right of Accumulation. Lets you add the value of all Class A
shares of the Portfolios that you currently own for purposes
of calculating the sales charge on future purchases of Class A
shares. You may count share purchases made by the following
investors to calculate the reduced sales charge: you, your
spouse and your children under the age of 21 (including shares
in certain retirement accounts), and a company that you, your
spouse or your children control; a trustee or other fiduciary
account (including an employee benefit plan); a trustee or
other fiduciary that buys shares concurrently for two or more
employee benefit plans of a single employer or of affiliated
employers.
o Letter of Intent. Lets you buy Class A shares of any Portfolio
over a 13-month period at the same sales charge as if all
shares had been bought at once. You are not obligated to buy
the full amount of the shares. However, you must complete the
intended purchase to obtain the reduced sales load. To qualify
for this plan, check the "Letter of Intent" box on the Account
Information Form at the time you buy shares of any Portfolio.
Waiver of CDSC
The Trust will waive the CDSC of Class A, B and C shares under the
following circumstances:
o redemptions made within one year after the death or disability
of a shareholder;
o redemptions by employees participating in eligible benefit
plans, including separation of service;
o redemptions as a result of a combination of any investment
company with a Portfolio by merger, acquisition of assets or
otherwise;
o a mandatory distribution under a tax-deferred retirement plan;
o redemptions made through 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 you establish
the automatic withdrawal feature.
If you believe you may qualify for a waiver of the CDSC, please contact
your account representative or the Transfer Agent.
29
<PAGE>
Distribution Fees and Shareholder Servicing Fees
Distribution Fees. The Trust has adopted a distribution plan in accordance
with Rule 12b-1 under the Investment Company Act of 1940 for each
Portfolio's Class A, B and C shares. Under the distribution plan, each
Portfolio pays the Distributor a fee for the sale and distribution of its
shares. The plan provides that each Portfolio's Class A shares pays 0.10%
of its average daily net assets and each Portfolio's Class B and C shares
each pay 0.75% of its average daily net assets.
Keep in mind that:
o Each Portfolio pays distribution fees on an ongoing basis.
Over time, these fees will increase the cost of your
investment and may cost you more than paying higher front-end
or back-end sales charges.
o The Distributor will waive its distribution fees to the extent
that a Portfolio would exceed the limitations imposed by the
National Association of Securities Dealers on asset-based
sales charges.
Shareholder Servicing Fees. The Trust has adopted a shareholder servicing
plan for the Class A, B and C shares of each Portfolio. The shareholder
servicing plan allows the Portfolios or the Distributor to pay shareholder
servicing agents up to 0.25% of the average annual daily net assets of
each of these classes of shares for personal shareholder services and for
maintaining shareholder accounts. Shareholder servicing agents are
financial institutions that may include Authorized Dealers, fiduciaries,
and financial institutions that sponsor "mutual fund supermarkets,"
"no-transaction fee" programs or similar programs.
When you buy shares, you must specify the class of shares. Otherwise, the
Trust will assume that you wish to buy Class A shares.
30
<PAGE>
How to Buy Shares
You may buy shares of the Portfolios through your account representative
by check or by wire or through the Transfer Agent. If you place your order
before the close of regular trading on the NYSE (usually 4:00 p.m.,
Eastern time), you will receive the NAV that the Trust calculates that
day. Orders placed after the close of trading on the NYSE will be priced
at the next business day's NAV.
Purchase Procedures
Purchase Through the Distributor or Authorized Dealers
Method of Purchase Instructions
[GRAPHIC] In person o Visit your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By telephone o Call your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By mail o Mail your purchase request to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By wire o Submit wiring instructions to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
Purchase Through the Transfer Agent
[GRAPHIC] By mail o Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[name of Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
[GRAPHIC] By telephone o Call the Transfer Agent at 1-800-447-1139.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
How to Sell Shares
o You may sell shares on any business day through the Distributor,
Authorized Dealers or the Transfer Agent. Please refer to the
instructions under "How to Buy Shares" for information on selling
your shares in person, by telephone, by mail or by wire.
o When the Trust receives your redemption requests in proper form, it
will sell your shares at the next determined net asset value.
o The Trust will send you payment proceeds generally within seven days
after it receives your redemption request.
31
<PAGE>
Additional Information About Redemptions
o Waiting period. If you buy shares by check, the Trust will wait for
your check to clear (up to 15 days) before it accepts your request
to sell those shares.
o Wiring redemption proceeds. Upon request, the Trust will wire your
proceeds ($500 minimum) to your brokerage account or a designated
commercial bank account. There is a transaction fee of $7.50 for
this service. Please call your account representative for
information on how to wire funds to your brokerage account. If you
do not have a brokerage account, call the Transfer Agent to wire
funds to your bank account.
o Signature guarantees. If your redemption proceeds exceed $50,000, or
if you instruct the Trust to send the proceeds to someone other than
the record owner at the record address, or if you are a corporation,
partnership, trust or fiduciary, your signature must be guaranteed
by any eligible guarantor institution. Call the Transfer Agent at
1-800-447-1139 for information about obtaining a Medallion Program
signature guarantee.
o Telephone policies. You may authorize the Transfer Agent to accept
telephone instructions. If you do, the Transfer Agent will accept
instructions from people who it believes are authorized to act on
your behalf. The Transfer Agent will use reasonable procedures (such
as requesting personal identification) to ensure that the caller is
properly authorized. Neither the Portfolio nor the Transfer Agent
will be liable for losses for following instructions reasonably
believed to be genuine.
o Redemption by mail may cause a delay. During times of extreme
economic or market conditions, you may experience difficulty in
contacting your account representative by telephone to request a
redemption of shares. If this occurs, please consider using the
other redemption procedures described in this Prospectus.
Alternative procedures may take longer to sell your shares.
o Automatic redemption; redemption in kind. If the value of your
account falls below $750 (for reasons other than changes in market
conditions), the Trust may automatically liquidate your account and
send you the proceeds. The Trust will send you a notice at least 60
days before doing this. The Trust also reserves the right to redeem
your shares "in kind." For example, if you sell a large number of
shares and the Portfolio is unable to sell securities to raise cash,
the Trust may send you a combination of cash and a share of actual
portfolio securities. Call the Transfer Agent for details.
o Suspension of the Right of Redemption. A Portfolio may suspend your
right to redeem your shares under any of the following
circumstances:
-- during non-routine closings of the NYSE;
-- when the Securities and Exchange Commission ("SEC") determines
either that trading on the NYSE is restricted or that an
emergency prevents the sale or valuation of the Portfolio's
securities; or
-- when the SEC orders a suspension to protect the Portfolio's
shareholders.
32
<PAGE>
Exchanges
You may exchange shares of one Portfolio for shares of the same class of
another Portfolio described in this Prospectus or the same class of
another Portfolio of the Trust, usually without paying any additional
sales charges. (You may obtain more information about other Portfolios of
the Trust by calling the Transfer Agent at 1-800-447-1139.) You may pay a
sales charge if the Portfolio you are exchanging did not impose an initial
sales charge. You will not have to pay an additional sales charge if the
Portfolio you are exchanging was acquired in any of the following ways:
o by a previous exchange from shares bought with a sales charge;
o through reinvestment of dividends and distributions paid with
respect to these shares.
The Trust does not currently charge a fee for exchanges, although it may
change this policy in the future.
Exchange procedures. To exchange your shares, you must give exchange
instructions to your account representative or the Transfer Agent in
writing or by telephone.
Exchange policies. When exchanging your shares, please keep in mind:
o An exchange of shares may create tax liability for you. You
may have a gain or loss on the transaction, since the shares
you are exchanging will be treated like a sale.
o When the market is very active, telephone exchanges may be
difficult to complete. You may have to submit exchange
requests to your account representative or the Transfer Agent
in writing, which will cause a delay.
o The shares you exchange must have a value of at least $250
(except in the case of certain retirement plans). If you are
establishing a new account, you must exchange the minimum
dollar amount needed to open that account.
o Before you exchange your shares, you must review a copy of the
current prospectus of the Portfolio that you would like to
buy.
o You may qualify for a reduced sales charge. See the SAI for
details, or call your account representative.
o The Trust may reject your exchange request. The Trust may
modify or terminate the exchange option at any time.
33
<PAGE>
SHAREHOLDER SERVICES
The Trust offers several additional shareholder services. If you would
like to take advantage of any of these services, please call your account
representative or the Transfer Agent at 1-800-447-1139 to obtain the
appropriate forms. These services may be changed or terminated at any time
with 60 days' notice.
o Automatic investment plan. You may buy shares of a Portfolio
at regular intervals by direct transfer of funds from your
bank. You may invest a set amount ($250 for the initial
purchase; minimum subsequent investments of $50 or $25 for
retirement accounts) monthly, bi-monthly, quarterly or
annually and you can terminate the program at any time.
o Directed distribution option. You may automatically reinvest
your dividends and capital gain distributions in the same
class of shares of another Portfolio or the Money Market
Portfolio of The RBB Fund, Inc. You may buy Class A shares
without a sales charge at the current NAV. However, if you buy
Class B or C shares, they may be subject to a CDSC when you
sell them. You may not use this service to establish a new
account.
o Systematic withdrawal plan. You may withdraw a set amount ($25
minimum) monthly, bi-monthly, quarterly or annually, as long
as you have a beginning account balance of at least $5,000.
You or the Transfer Agent may terminate the arrangement at any
time. If you plan to buy new shares when you participate in a
systematic plan, you may have to pay an additional sales
charge.
o Reinstatement privilege. If you sell your Class A shares, you
may repurchase them (or Class A shares of any other Portfolio)
within 60 days without paying an additional sales charge.
34
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
If you buy shares of a Portfolio shortly before it declares a dividend or
a distribution, a portion of your investment in the Portfolio may be
returned to you in the form of a taxable distribution.
Distributions
The Portfolios pass along your share of their investment earnings in the
form of dividends. Dividend distributions are the net dividends or
interest earned on investments after expenses. As with any investment, you
should consider the tax consequences of an investment in a Portfolio.
Ordinarily, each Portfolio declares and pays dividends from its net
investment income monthly. The Portfolios will distribute short-term
capital gains, as necessary, and normally will pay any long-term capital
gains once a year.
You can receive dividends or distributions in one of the following ways:
o Reinvestment. You can automatically reinvest your dividends
and distributions in additional shares of your Portfolio. If
you do not indicate another choice on your Account Information
Form, you will receive your distributions this way.
o Cash. The Trust will send you a check no later than seven days
after the payable date.
o Partial reinvestment. The Trust will automatically reinvest
your dividends in additional shares of your Portfolio and pay
your capital gain distributions to you in cash. Or, the Trust
will automatically reinvest your capital gain distributions
and send you your dividends in cash.
o Directed dividends. You can automatically reinvest your
dividends and distributions in the same class of shares of
another Portfolio. See the description of this option in the
"Shareholder Services" section above.
o Direct deposit. In most cases, you can automatically transfer
dividends and distributions to your bank checking or savings
account. Under normal circumstances, the Transfer Agent will
transfer the funds within seven days of the payment date. To
receive dividends and distributions this way, the name on your
bank account must be the same as the registration on your
Portfolio account.
You may choose your distribution method on your original Account
Information Form. If you would like to change the option you selected,
please call your account executive or the Transfer Agent at
1-800-447-1139.
35
<PAGE>
Taxes
Each Portfolio intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders. It is important for you
to be aware of the following information about the tax treatment of your
investment.
o Ordinary dividends from a Portfolio are taxable as ordinary
income; dividends from a Portfolio's long-term capital gains
are taxable as capital gain.
o Dividends are treated in the same manner for federal income
tax purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
o Dividends from the Portfolios that are attributable to
interest on certain U.S. Government obligations may be exempt
from certain state and local income taxes. The extent to which
ordinary dividends are attributable to these U.S. Government
obligations will be provided on the tax statements you receive
from a Portfolio.
o Certain dividends paid to you in January will be taxable as if
they had been paid to you the previous December.
o The Trust will mail you tax statements every January showing
the amounts and tax status of distributions you received.
o When you sell (redeem) or exchange shares of a Portfolio, you
must recognize any gain or loss.
o Because your tax treatment depends on your purchase price and
tax position, you should keep your regular account statements
for use in determining your tax.
o You should review the more detailed discussion of federal
income tax considerations in the SAI.
The Trust provides this tax information for your general information. You
should consult your own tax adviser about the tax consequences of
investing in a Portfolio.
36
<PAGE>
ADDITIONAL INFORMATION
Performance
Financial publications, such as Business Week, Forbes, Money or
SmartMoney, may compare a Portfolio's performance to the performance of
various indexes and investments for which reliable performance data is
available. These publications may also compare a Portfolio's performance
to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services, such as Lipper Inc.
Shareholder Communications
The Trust may eliminate duplicate mailings of Portfolio materials to
shareholders who reside at the same address.
37
<PAGE>
Financial Highlights -- Income Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Income Portfolio since its inception. This
information reflects financial results for a single share of the Income
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the Income
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Income Portfolio's financial statements, are included in the
Income Portfolio's annual report, which is available by calling the Trust
at 1-800-447-1139.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends From Net
Value, Net And Unrealized From Net Realized
Beginning Investment Gain/(Loss) On Investment Capital
Of Period Income*(1) Investments*(2) Income Gains
============================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $12.37 $0.74 $(0.03) $(0.74) $(0.19)
- ------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 12.03 0.76 0.36 (0.76) (0.02)
- ------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 12.26 0.73 (0.20) (0.73) (0.03)
- ------------------------------------------------------------------------------------------------------------
For the period April 5, 1995**
through March 31, 1996 12.00 0.71 0.30 (0.71) (0.04)
- ------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 12.37 0.65 (0.03) (0.65) (0.19)
- ------------------------------------------------------------------------------------------------------------
For the period February 2, 1998***
through March 31, 1998 12.47 0.10 (0.10) (0.10) --
- ------------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 12.37 0.65 (0.03) (0.65) (0.19)
- ------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 12.03 0.70 0.36 (0.70) (0.02)
- ------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 12.26 0.68 (0.20) (0.68) (0.03)
- ------------------------------------------------------------------------------------------------------------
For the period April 5, 1995**
through March 31, 1996 12.00 0.67 0.30 (0.67) (0.04)
- ------------------------------------------------------------------------------------------------------------
</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.
** Commencement of investment operations.
*** Commencement of initial public offering.
1 Reflects waivers and related 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.
38
<PAGE>
Financial Highlights -- Income Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Net Ratio of Reflected in
Asset Net Assets, Ratio of Investment Expense Ratios and
Value, Total End of Expenses to Income Net Investment Income
End of Investment Period Average Net To Average Due to Waivers and Portfolio
Period Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Class A
$12.15 5.77% $4,775 0.80% 5.83% 2.98% 107.21%
- -------------------------------------------------------------------------------------------------------
12.37 9.43 2,926 0.80 6.13 1.86 244.78
- -------------------------------------------------------------------------------------------------------
13.03 4.40 3,367 0.80 5.99 1.73 262.95
- -------------------------------------------------------------------------------------------------------
12.26 8.54 4,467 0.80(5) 5.76(5) 2.87(5) 107.35
- -------------------------------------------------------------------------------------------------------
Class B
12.15 5.09 1,121 1.45 5.16 2.81 107.21
- -------------------------------------------------------------------------------------------------------
12.37 (0.04)(4) 18 1.45(5) 5.22(4)(5) 0.48(4)(5) 244.78
- -------------------------------------------------------------------------------------------------------
Class C
12.15 5.08 2,067 1.45 5.28 3.18 107.21
- -------------------------------------------------------------------------------------------------------
12.37 8.92 1,403 1.28 5.60 1.80 244.78
- -------------------------------------------------------------------------------------------------------
12.03 3.99 1,018 1.20 5.57 1.74 262.95
- -------------------------------------------------------------------------------------------------------
12.26 8.13 1,775 1.25(5) 5.38(5) 2.95(5) 107.35
- -------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
39
<PAGE>
Financial Highlights -- High Yield Portfolio
The financial highlights table is intended to help you understand the
financial performance of the High Yield Portfolio since its inception.
This information reflects financial results for a single share of the High
Yield Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the High Yield
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the High Yield Portfolio's financial statements, are included in the
High Yield Portfolio's annual report, which is available by calling the
Trust at 1-800-447-1139.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends From Net
Value, Net And Unrealized From Net Realized
Beginning Investment Gain/(Loss) On Investment Capital
Of Period Income*(1) Investments*(2) Income Gains
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $12.73 $1.11 $ (1.32) $(1.11) $(0.05)
- -----------------------------------------------------------------------------------------------------------
For the period January 2, 1998**
through March 31, 1998 12.00 0.26 0.73 (0.26) --
- -----------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 12.73 1.04 (1.32) (1.04) (0.05)
- -----------------------------------------------------------------------------------------------------------
For the period January 2, 1998**
through March 31, 1998 12.00 0.24 0.73 (0.24) --
- -----------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 12.73 1.04 (1.32) (1.04) (0.05)
- -----------------------------------------------------------------------------------------------------------
For the period January 2, 1995**
through March 31, 1998 12.00 0.24 0.73 (0.24) --
- -----------------------------------------------------------------------------------------------------------
</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.
** Commencement of investment operations.
1 Reflects waivers and related 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.
40
<PAGE>
Financial Highlights -- High Yield Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Net Ratio of Reflected in
Asset Net Assets, Ratio of Investment Expense Ratios and
Value, Total End of Expenses to Income Net Investment Income
End of Investment Period Average Net To Average Due to Waivers and Portfolio
Period Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
$11.36 (1.57)% $55,367 1.00% 9.37% 0.74% 101.75%
- --------------------------------------------------------------------------------------------------------
12.73 8.30 18,301 1.00(4) 9.14(4) 1.67(4) 139.61
- --------------------------------------------------------------------------------------------------------
Class B
11.36 (2.21) 23,395 1.65 8.76 0.73 101.75
- --------------------------------------------------------------------------------------------------------
12.73 8.13 6,013 1.65(4) 8.46(4) 1.68(4) 139.61
- --------------------------------------------------------------------------------------------------------
Class C
11.36 (2.21) 26,064 1.65 8.73 0.73 101.75
- --------------------------------------------------------------------------------------------------------
12.73 (8.13) 11,298 1.65(4) 8.46(4) 1.67(4) 139.61
- --------------------------------------------------------------------------------------------------------
</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.
41
<PAGE>
Financial Highlights -- EMD Portfolio
The financial highlights table is intended to help you understand the
financial performance of the EMD Portfolio since its inception. This
information reflects financial results for a single share of the EMD
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the EMD Portfolio
(assuming reinvestment of all dividends and distributions).
The financial highlights below reflect the historical information of the
Emerging Markets Debt Portfolio, a series of Bear Stearns Investment
Trust, the predecessor to the current EMD Portfolio. On July 29, 1999, the
predecessor fund was reorganized as a series of the Trust and the EMD
Portfolio assumed the financial history of the predecessor fund. This
information has been audited by Deloitte & Touche LLP, whose report, along
with the EMD Portfolio's financial statements, are included in the EMD
Portfolio's annual report, which is available by calling the Trust at
1-800-447-1139.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends From Net
Value, Net And Unrealized From Net Realized
Beginning Investment Gain/ (Loss) On Investment Capital
Of Period Income*(1) Investments*(2) Income Gains
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $12.00 $1.05 $ (2.60) $(1.01) $(0.17)
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 11.14 0.91 1.17 (0.92) (0.30)
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 9.02 0.85 2.10 (0.83) --
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1996 6.90 0.91 2.13 (0.92) --
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1995 8.98 0.79 (1.85) (0.77) (0.25)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 11.95 0.98 (2.60) (0.97) (0.17)
- --------------------------------------------------------------------------------------------------------------
For the period January 12, 1998**
through March 31, 1998 11.33 0.21 0.61 (0.20) --
- --------------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 11.95 0.98 (2.59) (0.97) (0.17)
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 11.14 0.97 1.04 (0.90) (0.30)
- --------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 9.04 0.84 2.07 (0.81) --
- --------------------------------------------------------------------------------------------------------------
For the period July 26, 1995**
through March 31, 1996 7.81 0.59 1.32 (0.68) --
- --------------------------------------------------------------------------------------------------------------
</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.
** Commencement of initial public offering.
1 Reflects waivers and related 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 value during the respective periods. For EMD Portfolio, net
realized and unrealized gain/(loss) on investments include forward foreign
currency exchange contracts and translation of foreign currency related
transactions.
42
<PAGE>
Financial Highlights -- EMD Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Net Ratio of Reflected in
Asset Net Assets, Ratio of Investment Expense Ratios and
Value, Total End of Expenses to Income Net Investment Income
End of Investment Period Average Net To Average Due to Waivers and Portfolio
Period Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
$ 9.27 (12.40)% $29,526 1.75% 10.38% 1.28% 82.47%
- ----------------------------------------------------------------------------------------------------------
12.00 19.31 33,448 1.75 7.70 1.01 128.91
- ----------------------------------------------------------------------------------------------------------
11.14 33.48 33,185 2.00 7.95 0.80 223.41
- ----------------------------------------------------------------------------------------------------------
9.02 46.13 28,860 2.00 10.64 1.18 266.46
- ----------------------------------------------------------------------------------------------------------
6.90 (13.07) 28,049 2.00 8.86 0.53 35.01
- ----------------------------------------------------------------------------------------------------------
Class B
9.19 (13.08) 1,459 2.40 9.73 1.43 82.47
- ----------------------------------------------------------------------------------------------------------
11.95 7.29(4) 566 2.40(5) 7.13(4)(5) 2.25(4)(5) 128.91
- ----------------------------------------------------------------------------------------------------------
Class C
9.20 (12.99) 2,165 2.40 9.73 1.16 82.47
- ----------------------------------------------------------------------------------------------------------
11.95 18.66 4,317 2.40 7.31 1.05 128.91
- ----------------------------------------------------------------------------------------------------------
11.14 32.97 2,583 2.40 7.59 0.64 223.41
- ----------------------------------------------------------------------------------------------------------
9.04 25.45(4) 202 2.40(5) 8.72(4)(5) 3.42(4)(5) 266.46
- ----------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
43
<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.
575 Lexington Avenue
New York, NY 10022
CUSTODIANS
Income and High Yield Portfolios:
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
EMD 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 LLP
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
44
<PAGE>
Statement of Additional Information. The Statement of Additional
Information ("SAI") provides a more complete discussion of several of the
matters contained in this Prospectus and is incorporated by reference,
which means that it is legally a part of this Prospectus as if it were
included here.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about each Portfolio's
investments, including a discussion of the market conditions and
investment strategies that significantly affected a Portfolio's
performance during its last fiscal year.
o To obtain a free copy of the SAI and the current annual or
semi-annual reports or to make any other inquiries about a
Portfolio, you may call or write:
PFPC Inc.
Attention: The Bear Stearns Funds
P.O. Box 8960
Wilmington, Delaware 19899-8960
Telephone: 1-800-447-1139 or 1-800-766-4111
o You may obtain copies of the SAI or financial reports
o for free by calling or writing broker-dealers or other
financial intermediaries that sell a Portfolio's shares;
o for a fee by writing the Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-6009;
o for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
o You may review and copy information about the Portfolios
(including the SAI) at the SEC's Public Reference Room in
Washington, D.C. Call 1-800-SEC-0330 to obtain information
about this service.
You may also obtain a copy of a Portfolio's prospectus from the Bear
Stearns Worldwide Web site at http://www.bearstearns.com.
Investment Company Act File No. 811-8798
BSF-P-016-03
<PAGE>
The
Bear Stearns
Funds
Prospectus Dated
July 29, 1999
Fixed Income Funds
. Income Portfolio
. High Yield Total Return Portfolio
. Emerging Markets Debt Portfolio
. Class Y Shares
This Prospectus provides important information about each Portfolio that you
should know before investing. Please read it carefully and keep it for future
reference.
The Securities and Exchange Commission has not approved the Portfolio's shares
or determined whether this Prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
BEAR
STEARNS
The Bear Stearns Funds o 575 Lexington Avenue New York, NY 10022 1-800-447-1139
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Risk/Return Summaries 1
---------------------------------------------------
Income Portfolio
High Yield Total Return Portfolio
Emerging Markets Debt Portfolio
Investments 15
---------------------------------------------------
Risk Factors 17
---------------------------------------------------
Management of the Portfolios 20
---------------------------------------------------
Investment Adviser
Portfolio Management Team
How the Portfolios Value Their Shares 20
---------------------------------------------------
Investing in the Portfolios 21
---------------------------------------------------
How to Buy Shares
How to Sell Shares
Exchanges
Dividends, Distributions and Taxes 24
---------------------------------------------------
Additional Information 26
---------------------------------------------------
Financial Highlights 28
---------------------------------------------------
Each Portfolio described in this Prospectus is a series of The
Bear Stearns Funds, a registered open-end management
investment company (the "Trust"). It is important to keep in
mind that mutual fund shares are:
o not deposits or obligations of any bank;
o not insured by the Federal Deposit Insurance
Corporation;
o subject to investment risk, including possible
loss of the money invested.
<PAGE>
Income Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
High current income consistent with preservation of capital.
Principal Strategies
Under normal market conditions, the Income Portfolio invests at least 75%
of its total assets in investment-grade, U.S. dollar-denominated fixed
income securities issued by U.S. companies and the U.S. government or its
political subdivisions, agencies or instrumentalities. The Income
Portfolio may invest in:
o Bonds, debentures and notes;
o Mortgage-related securities (including interest-only and
principal-only stripped securities);
o Asset-backed securities;
o Convertible debt obligations; and
o Money market instruments (including bank obligations,
commercial paper, other short-term corporate debt, and
repurchase agreements).
The Income Portfolio seeks to equal or exceed the performance of the
Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG
Index"), a market-capitalization weighted index that includes U.S.
Treasury, Government-sponsored, mortgage and investment-grade corporate
fixed income securities maturing in one year or more issued by entities
having a minimum of $50 million in debt outstanding at the time of
inclusion in the Salomon BIG Index.
Under normal market conditions, the Income Portfolio invests in a
portfolio of securities with a dollar-weighted average maturity ranging
from four to thirteen years and a duration between three and six years.
Duration is a measure of the expected price volatility of a debt security
or portfolio of debt securities. Duration and interest rates are inversely
related. For example, if a bond has an effective duration of three years,
you can expect a 1% increase in general interest rates to cause the bond's
value to decrease about 3%.
The Income Portfolio may invest up to 5% of its total assets in debt
obligations of issuers in emerging countries. "Emerging countries" 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. An issuer is considered to be located
in an emerging country if it
o derives 50% or more of its total revenues from either goods
produced, sales made or services performed in emerging
countries, or
o is organized under the laws of, and with a principal office
in, an emerging country.
Emerging countries generally include countries in Asia (other than Japan),
Eastern Europe, Latin America and Africa.
Income Portfolio 1
<PAGE>
Quality. The Income Portfolio must invest at least 75% of its net assets
in investment-grade securities, that is, securities rated no lower than
"Baa" by Moody's Investors Service ("Moody's"), "BBB" by Standard & Poor's
("S&P"), the equivalent rating by other nationally recognized statistical
rating organizations ("NRSROs"), or, if unrated, deemed to be of
comparable quality by Bear Stearns Asset Management Inc., the investment
adviser for each Portfolio ("BSAM" or the "Adviser").
The Income Portfolio may invest up to 25% of its net assets in securities
that are rated below investment-grade but no lower than "B" by Moody's or
S&P, the equivalent rating by any other NRSRO, or, if unrated, deemed to
be of comparable quality by the Adviser.
The Income Portfolio may invest in short-term fixed income obligations
that are rated in the two highest rating categories by Moody's, S&P, Fitch
IBCA, Inc. or Duff & Phelps.
For a discussion of the rating categories of various NRSROs, see the
Appendix to the Statement of Additional Information ("SAI").
Principal Risks
You may lose money by investing in the Income Portfolio. The Income
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Income Portfolio's net asset value, yield and/or
total return:
o The rate of inflation may increase, resulting in higher
interest rates, causing the Income Portfolio's securities to
decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o An issuer's credit quality may be downgraded.
o Below-investment-grade securities are riskier than
investment-grade securities and are more likely to decline in
value than investment-grade securities due to defaults or
bankruptcies.
o The Income Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
This may occur, for example, when the average life of a
mortgage-related security is shortened through prepayment.
o The Income Portfolio may not fully recoup its investment in
interest-only stripped mortgage-related securities if the
underlying mortgages are prepaid faster than anticipated.
o The yield on principal-only stripped mortgage-related
securities could decline if the underlying mortgages
experience less-than-anticipated prepayments of principal.
2 Income Portfolio
<PAGE>
o Securities issued in emerging countries may be more volatile
than securities issued in established markets due to less
developed securities markets or political instability.
Inefficient settlement procedures in emerging countries may
lead the Income Portfolio to miss investment opportunities or
be exposed to liability for failure to deliver securities. In
addition, issuers in emerging countries are subject to
less-stringent government regulation and accounting standards
than their counterparts in the United States.
Who May Want to Invest in the Income Portfolio
The Income Portfolio may be appropriate for investors who:
o seek high current income;
o want to diversify their portfolio.
The Income Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Income Portfolio by showing changes in the performance of its Class Y
shares over various time periods.
The performance information presented below largely reflects management of
the Income Portfolio's investments to maximize total return, rather than
to generate high current income, the Income Portfolio's present investment
objective. The Income Portfolio adopted its current investment objective
on October 16, 1998. The performance information presented below may have
been different if the Income Portfolio's investments had been managed to
realize high current income.
Income Portfolio 3
<PAGE>
Income Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 3.10
1997 7.95
1998 7.66
Past performance is not necessarily an indication of future results.
1 The Income Portfolio's year-to-date return as of June 30, 1999, was
(1.58)%.
During the period shown in the bar chart, the highest quarterly return was
4.73% (for the quarter ended December 31, 1995) and the lowest quarterly
return was (2.09)% (for the quarter ended March 31, 1996).
The table shows how the Income Portfolio's average annual total return for
one year and since the date of inception compared to the Salomon BIG
Index, a broad-based unmanaged index that represents the general
performance of fixed income securities. The figures shown in the table
assume reinvestment of dividends and distributions.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
================================================================================
Income Portfolio - Class Y 7.66% 7.20%
- --------------------------------------------------------------------------------
Salomon BIG Index 8.71% 8.12%
- --------------------------------------------------------------------------------
* Class Y shares commenced operations on September 8, 1995.
4 Income Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Income Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
================================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
- --------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fees **
- --------------------------------------------------------------------------------
Exchange fees None
- --------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
================================================================================
Management Fees 0.45%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
- --------------------------------------------------------------------------------
Other Expenses 3.23%
-----
- --------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.68%
- --------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (3.23)%
-----
- --------------------------------------------------------------------------------
Net Expenses(1) 0.45%
-----
- --------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Income Portfolio's net
expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the Income Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Income Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Income Portfolio;
o your investment returns 5% each year;
o the Income Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
===================================================
Class Y $46 $826 $1,626 $3,721
---------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 0.45% until March 31, 2000 and thereafter will
equal 3.68%.
Income Portfolio 5
<PAGE>
High Yield Total Return Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Total return through high current income and capital appreciation.
Principal Strategies
Under normal market conditions, the High Yield Total Return Portfolio (the
"High Yield Portfolio") will invest 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.
Within this 80% category, the High Yield Portfolio may invest in the
following securities (up to the stated percentage of its total assets):
o 25% in foreign securities;
o 25% in zero-coupon securities, pay-in-kind bonds or discount
obligations;
o 20% in distressed securities;
o 20% in mortgage-related securities;
o 15% in loans and participations; and
o 10% in convertible securities.
Generally, the High Yield Portfolio's average weighted maturity will range
from three to twelve years.
The High Yield Portfolio invests in high yield securities of issuers that
the Adviser believes to be positioned for gradual or substantial credit
improvement through a process that:
o uses Bear Stearns' "High Yield Query System" to screen more
than 2,000 issuers to select companies that meet initial
investment criteria;
o identifies positive catalysts affecting the issuer's financial
condition that may lead to price appreciation;
o includes communicating with senior management to assess its
commitment to improving credit quality; and
o identifies securities whose issuers have above-average
prospects for superior returns.
Quality. "High yield fixed income securities" ("junk bonds") are those
securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P,
comparably rated by any other NRSRO or unrated securities that the Adviser
determines to be of comparable quality.
6 High Yield Portfolio
<PAGE>
The High Yield 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 S&P and
comparable unrated bonds.
For a discussion of the ratings categories of various NRSROs, see the
Appendix to the SAI.
Principal Risks
You may lose money by investing in the High Yield Portfolio. The High
Yield Portfolio is also subject to the following principal risks, more
fully described in "Risk Factors" in this Prospectus. Some or all of these
risks may adversely affect the High Yield Portfolio's net asset value,
yield and/or total return:
o High yield securities are riskier than investment-grade
securities and are more likely to decline in value than
investment-grade securities due to defaults or bankruptcies.
o Portfolio investments that are already in default when
acquired may experience further market value declines or
become worthless.
o The rate of inflation may increase, resulting in higher
interest rates, causing the High Yield Portfolio's securities
to decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o An issuer's credit quality may be downgraded.
o The High Yield Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
This may occur, for example, when the average life of a
mortgage-related security is shortened.
o A financial intermediary involved in a loan participation may
become insolvent or the High Yield Portfolio, as holder of the
loan, may be compelled to participate in restructuring the
underlying loan.
o Foreign securities are more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
Who May Want to Invest in the High Yield Portfolio
The High Yield Portfolio may be appropriate for investors who:
o seek high current income coupled with asset growth potential.
The High Yield Portfolio may not be appropriate for investors who:
o are not willing to accept the greater risks associated with
high yield issues when compared to higher-rated corporate and
U.S. Government bonds;
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
High Yield Portfolio 7
<PAGE>
Performance
Class Y shares of the High Yield Portfolio have not yet commenced
operations. The bar chart and table below illustrate the risks of
investing in the High Yield Portfolio by showing the performance of its
Class A shares since inception. The returns for Class A shares would have
annual returns that are substantially similar to those of Class Y shares
because both classes are invested in the same portfolio of securities. The
returns for Class Y shares offered by this Prospectus will differ from the
return for the Class A shares shown on the bar chart and table, depending
on the expenses of the Class Y shares.
The bar chart does not reflect any sales charges that are imposed on the
purchase and sale of Class A shares. If sales charges were reflected,
returns would be lower than those shown.
High Yield Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1998 4.28
Past performance is not necessarily an indication of future results.
1 The High Yield Portfolio's year-to-date return as of June 30, 1999,
was 2.10%.
During the period shown in the bar chart, the highest quarterly return was
8.30% (for the quarter ended March 31, 1998) and the lowest quarterly
return was (6.75)% (for the quarter ended September 30, 1998).
The table shows how the High Yield Portfolio's average annual total return
since the date of inception compared to the Credit Suisse First Boston
Global High Yield Index, a broad-based unmanaged index that represents the
general performance of high yield fixed income securities. The table also
compares the High Yield Portfolio's performance to that of the Lipper High
Yield Bond Fund Index, a measure of the performance of high yield fixed
income mutual funds. The figures shown in the table assume reinvestment of
dividends and distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the period ended December 31, 1998) Since Inception*
================================================================================
High Yield Portfolio - Class A (0.45)%
- --------------------------------------------------------------------------------
Credit Suisse First Boston Global High Yield Index (1.13)%
- --------------------------------------------------------------------------------
Lipper High Yield Bond Fund Index (0.07)%
- --------------------------------------------------------------------------------
* Class A shares commenced operations on January 2, 1998.
8 High Yield Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the High Yield Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
================================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
- --------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fees **
- --------------------------------------------------------------------------------
Exchange fees None
- --------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
================================================================================
Management Fees 0.60%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
- --------------------------------------------------------------------------------
Other Expenses 0.79%
-----
- --------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.39%
- --------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (0.74)%
-----
- --------------------------------------------------------------------------------
Net Expenses(1) 0.65%
-----
- --------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The expenses shown are based on estimated expenses of Class Y shares of
the High Yield Portfolio for the fiscal year ending March 31, 2000. The
Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the High Yield Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the High Yield Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the High Yield Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the High Yield Portfolio;
o your investment returns 5% each year;
o the High Yield Portfolio's operating expenses remain the
same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
===================================================
Class Y $66 $367 $690 $1,604
---------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 0.65% until March 31, 2000, and thereafter will
equal 1.39%.
High Yield Portfolio 9
<PAGE>
Emerging Markets Debt Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
High current income by investing primarily in debt obligations of issuers
located in emerging countries with a secondary objective of capital
appreciation.
Principal Strategies
Under normal market conditions, the Emerging Markets Debt Portfolio ("EMD
Portfolio") will invest at least 80% of its total assets in debt
obligations of issuers in emerging countries. "Debt obligations" include
fixed or floating rate bonds, notes, debentures, commercial paper, loans,
Brady bonds, 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. Debt obligations also include
preferred stock and convertible securities, which have characteristics of
both debt and equity investments. Under normal market conditions, the EMD
Portfolio may invest up to 10% of its total assets in convertible
securities.
The EMD Portfolio's investments in debt obligations may have stated
maturities ranging from overnight to 30 years.
"Emerging countries" 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. An issuer
is considered to be located in an emerging country if it (i) derives 50%
or more of its total revenues from either goods produced, sales made or
services performed in emerging countries, or (ii) is organized under the
laws of, and with a principal office in, an emerging country. The EMD
Portfolio intends to focus its investments in Asia, Eastern Europe, Latin
America and Africa. Countries that are not considered emerging countries
include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Spain, Sweden, Switzerland, the United Kingdom and the United States.
In selecting investments for the EMD Portfolio, the Adviser will emphasize
investments in countries that are making the most progress toward
sustainable economic growth with lower inflation. The EMD Portfolio will
apply the percentage limits described in the Risk/Return Summary at the
time of purchase.
The EMD Portfolio
o will invest at least 70% of its total assets in at least three
emerging countries;
o may invest up to 40% of its total assets in any one country;
o may invest up to 20% of its total assets in loans and
participations; and
o will invest at least 30% of its total assets in Latin America.
The EMD Portfolio seeks capital appreciation by investing in securities that it
expects will benefit from declines in long-term interest rates or improvements
in an issuer's credit quality.
10 EMD Portfolio
<PAGE>
Currency. The EMD Portfolio primarily invests in a combination of
high-yield U.S. dollar- denominated instruments and local currency
instruments in emerging countries where the relationship between interest
rates and anticipated foreign exchange movements relative to the U.S.
dollar are expected to result in a high dollar rate of return. In addition
to current income, the EMD Portfolio also seeks capital appreciation from
interest-rate and currency exchange fluctuations and improving credit
quality.
The EMD Portfolio will invest at least 70% of its total assets in U.S.
dollar-denominated instruments. The EMD Portfolio may invest up to 30% of
its assets in debt obligations denominated in local currencies, although
the EMD Portfolio expects that it will not invest more than 20% of its
assets in debt obligations denominated in the currency of any one country.
Quality. The EMD Portfolio may invest in debt obligations that the Adviser
determines to be suitable investments notwithstanding any credit ratings
that may be assigned to such securities. All of the EMD Portfolio's assets
may be invested in debt obligations that are unrated or below investment
grade. The EMD Portfolio may purchase non-performing securities and some
of these securities may be comparable to securities rated as low as the
lowest credit ratings of an NRSRO. For a discussion of the ratings
categories of various NRSROs, see the Appendix to the SAI.
Principal Risks
You may lose money by investing in the EMD Portfolio. The EMD Portfolio is
also subject to the following principal risks, more fully described in
"Risk Factors" in this Prospectus. Some or all of these risks may
adversely affect the EMD Portfolio's net asset value, yield and/or total
return:
o Foreign securities issued in emerging countries are generally
more volatile than securities issued in established markets
because the securities markets in these countries have
comparatively less trading volume and fewer participants.
o Inefficient settlement procedures in emerging countries may
cause the EMD Portfolio to miss investment opportunities or be
exposed to liability for failure to deliver securities.
o Issuers in emerging countries that are subject to less
government regulation than their counterparts in the United
States.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
fluctuations in currency exchange rates, and the risks that a
foreign government may confiscate assets, restrict the ability
to exchange currency or restrict the delivery of securities.
o The rate of inflation may increase, resulting in higher
interest rates, causing the EMD Portfolio's securities to
decline in value. The value of a longer-term fixed income
security is usually more sensitive to rising interest rates
than that of short-term fixed income securities.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
EMD Portfolio 11
<PAGE>
o An issuer's credit quality may be downgraded.
o Below investment-grade securities are riskier than
investment-grade securities and are more likely to decline in
value than investment-grade securities due to defaults or
bankruptcies.
o A financial intermediary involved in a loan participation may
become insolvent or the EMD Portfolio, as holder of the loan,
may be compelled to participate in restructuring the
underlying loan.
o The EMD Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield.
o Computer systems in emerging countries may experience greater
difficulty in processing Year 2000 data than systems in other
countries, resulting in delays in the payment of interest or
principal.
The EMD Portfolio is a non-diversified mutual fund which means that it may
devote a larger portion of its assets to the securities of a single issuer
than if it were diversified. This could make the EMD Portfolio more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in the EMD Portfolio
The EMD Portfolio may be appropriate for investors who:
o seek high current income;
o want to add an emerging markets fixed income component to an
existing portfolio;
o are willing to accept the relatively greater price volatility
of investments in emerging markets compared to other fixed
income investments.
The EMD Portfolio may not be appropriate for investors who:
o are not willing to accept the risks associated with foreign
securities markets or currency fluctuation;
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Performance
Class Y shares of the EMD Portfolio have not yet commenced operations. The
bar chart and table below illustrate the risks of investing in the EMD
Portfolio by showing changes in the performance of its Class A shares for
various time periods. The returns for Class A shares would have annual
returns that are substantially similar to those of Class Y shares because
both classes are invested in the same portfolio of securities. The returns
for Class Y shares offered by this Prospectus will differ from the return
for the Class A shares shown on the bar chart and table, depending on the
expenses of the Class Y shares.
Each of the Portfolios is a series of the Trust, a series-type registered
investment company. Prior to July 29, 1999, the EMD Portfolio was a series
of Bear Stearns Investment Trust, another registered investment company
advised by BSAM. The performance information below reflects the
performance of the EMD Portfolio during the time that it was a series of
Bear Stearns Investment Trust and BSAM served as its investment adviser.
12 EMD Portfolio
<PAGE>
The bar chart does not reflect any sales charges that are imposed on the
purchase and sale of Class A shares. If sales charges were reflected,
returns would be lower than those shown.
EMD Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 40.80(2)
1997 14.61
1998 -10.76
Past performance is not necessarily an indication of future results.
1 The EMD Portfolio's year-to-date return as of June 30, 1999, was
(3.96)%.
2 The EMD Portfolio's performance prior to January 1, 1996, is not
shown because it was managed by an investment adviser other than
BSAM, its current investment adviser, for the period from inception
(May 3, 1993) to May 3, 1995.
During the period shown in the bar chart, the highest quarterly return was
17.69% (for the quarter ended June 30, 1995) and the lowest quarterly
return was (18.67)% (for the quarter ended September 30, 1998).
The table shows how the EMD Portfolio's average annual total return for
one year and since the date of inception compared to the Salomon Smith
Barney Emerging Markets Debt Mutual Fund Index (the "EMMF Index"). The
EMMF Index is a broad-based unmanaged index that represents the general
performance of Brady bonds and assets of two non-Brady countries, Morocco
and Russia. The EMMF Index is designed for use by mutual funds, whose tax
diversification requirements preclude use of a Brady bond index, which is
heavily weighted among a few issuers. The figures shown in the table
assume reinvestment of dividends and distributions and all applicable
sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
================================================================================
EMD Portfolio - Class A (14.78)% 15.52%**
- --------------------------------------------------------------------------------
EMMF Index (9.57)% 18.88%
- --------------------------------------------------------------------------------
* The Adviser began managing Class A shares on May 4, 1995.
** Total return figures for Class A shares reflect the current maximum sales
load of 4.50%. Prior to December 24, 1997, the maximum sales load was
3.75%.
EMD Portfolio 13
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the EMD Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
================================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
- --------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fees **
- --------------------------------------------------------------------------------
Exchange fees None
- --------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
================================================================================
Management Fees(1) 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
- --------------------------------------------------------------------------------
Other Expenses 1.68%
-----
- --------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.68%
- --------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (1.28)%
-----
- --------------------------------------------------------------------------------
Net Expenses(2) 1.40%
-----
- --------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 Management fees are based on the EMD Portfolio's average daily net assets
at an annual rate of 1.00% charged on assets up to $50 million, 0.85%
charged on assets between $50 million and $100 million and 0.55% charged
on assets above $100 million.
2 The expenses shown are based on estimated expenses of the EMD Portfolio
for the fiscal year ending March 31, 2000. The Adviser has agreed to waive
a portion of its fee and reimburse certain expenses until at least March
31, 2000, so that the EMD Portfolio's net expenses do not exceed the
amount indicated above.
Example
This Example illustrates the cost of investing in the EMD Portfolio over
various time periods. It is intended to help you compare the cost of
investing in the EMD Portfolio with the cost of investing in other mutual
funds. The Example assumes that:
o you invest $10,000 in the EMD Portfolio;
o your investment returns 5% each year;
o the EMD Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
==================================================
Class Y $143 $711 $1,306 $2,918
--------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.40% until March 31, 2000, and thereafter will
equal 2.68%.
14 EMD Portfolio
<PAGE>
INVESTMENTS
Principal Investment Strategies--Additional Information
Income Portfolio
The Income Portfolio seeks to identify and respond to phases in the
business cycle -- expansion, topping out, recession and downturn --
and to shift among market sectors, maturities and relative credit
quality to achieve its objective, taking into account the volatility
and risk associated with investing in longer term fixed income
securities and, to a lesser extent, with investing in below
investment-grade securities.
The Income Portfolio evaluates a security's duration and maturity.
Duration measures a security's sensitivity to interest rate changes
and takes into account its cash flows over time, including the
effect of prepayments and interest rate changes. Maturity measures
only the time until final payment is due. The Adviser may, for
example, increase the average duration of the Income Portfolio's
holdings when interest rates are declining and decrease the average
duration when interest rates are increasing.
The Income Portfolio seeks to equal or exceed the performance of the
Salomon BIG Index. As of March 31, 1999, the weighted average
maturity of securities in the Salomon BIG Index was approximately
eight and one-half years with an average duration of approximately
four and one-half years.
High Yield Portfolio
Securities offering high current yield are generally issued by
rapidly growing companies incurring debt to fund plant expansion or
pay for acquisitions and large, well-known, highly leveraged
companies. These securities are also generally rated in the
medium-to-lower quality categories by the NRSROs. The Adviser
evaluates an issuer's financial history and condition, prospects and
management and will not rely principally on the ratings assigned by
NRSROs, although the Adviser does consider such ratings.
The High Yield Portfolio seeks capital appreciation by investing in
securities that it expects will benefit from declines in long-term
interest rates or improvements in an issuer's business or prospects.
EMD Portfolio
The EMD Portfolio seeks to identify investment opportunities in
emerging countries that are positioning themselves for sustainable
economic growth with low inflation. These countries typically show
signs of improving economic and political fundamentals, such as the
appointment or election of reform-minded governments, tighter
monetary and fiscal policies, privatization of state-controlled
industries, and reform of social security and civil service systems.
The EMD Portfolio will attempt to maximize returns by adjusting the
portfolio in response to numerous factors affecting debt
obligations, including political and economic developments and
changes in credit quality and exchange rates. Investing in floating
rate and short-to- intermediate term securities may enable the EMD
Portfolio to maximize returns in different interest rate
environments. In addition, the ability to invest in fixed-rate
securities with maturities of up to 30 years may allow the EMD
Portfolio to take advantage of changes in prevailing interest rates.
15
<PAGE>
Investments
This table summarizes some of the principal investments and techniques,
described below, that each Portfolio may use to achieve its investment
objectives.
<TABLE>
<CAPTION>
Income Portfolio High Yield Portfolio EMD Portfolio
==================================================================================================
<S> <C> <C> <C>
Asset-backed securities x
- --------------------------------------------------------------------------------------------------
Brady bonds x
- --------------------------------------------------------------------------------------------------
Convertible securities x x x
- --------------------------------------------------------------------------------------------------
Discount securities x x x
- --------------------------------------------------------------------------------------------------
Distressed securities x x x
- --------------------------------------------------------------------------------------------------
Indexed securities x x
- --------------------------------------------------------------------------------------------------
Loans x x
- --------------------------------------------------------------------------------------------------
Mortgage-related securities x
- --------------------------------------------------------------------------------------------------
</TABLE>
o Asset-backed securities have a structure that is similar to
mortgage-related securities (see below). The collateral for
these securities includes home equity loans, automobile and
credit card receivables, boat loans, computer leases, airplane
leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
o Brady bonds are debt securities issued in exchange for
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.
Treasury Secretary Nicholas Brady.
o Convertible securities are bonds, debentures, notes, preferred
stocks or other securities that may be converted into or
exchanged for common stock. Convertible securities are
char-acterized by higher yields than common stocks, but lower
yields than comparable non- convertible securities, less price
fluctuation than the underlying common stock since they have
fixed income characteristics, and potential for capital
appreciation if the market price of the underlying common
stock increases.
o Discount securities. Zero-coupon securities, which pay no cash
income, are fixed income securities that are sold at
substantial discounts from their face value. They include
pay-in-kind bonds, which pay all or a portion of their
interest in the form of debt or equity securities. 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.
o Distressed securities are debt or equity securities of
financially troubled or bankrupt companies that the Adviser
believes to be undervalued relative to their long-term
potential for growth.
o Indexed securities are investments whose value is indexed to
that of other securities, securities indices, currencies,
precious metals or other commodities, or other financial
indicators. Indexed securities typically are debt securities
or deposits whose face value or coupon rate is determined by
reference to a specific instrument or statistic.
o Loans are arranged through private negotiations between a
foreign entity and one or more financial institutions. A
Portfolio will usually invest in loans through participations,
in
16
<PAGE>
which the lending institution sells its right to receive
principal and interest payments that it receives from the
borrower.
o Mortgage-related securities represent interests in pools of
mortgage loans made by lenders like savings and loan
institutions, mortgage bankers, commercial banks and others.
Other Investment Strategies
o Temporary defensive measures. From time to time, during
unfavorable market conditions, the Adviser may invest
"defensively." This means a Portfolio may make temporary
investments that are not consistent with its investment
objective and principal strategies. Engaging in temporary
defensive measures may reduce the benefit from any upswing in
the market and may cause a Portfolio to fail to meet its
investment objective.
For temporary defensive purposes, each Portfolio may hold cash
(U.S. dollars) and may invest all of its assets in
high-quality fixed-income securities, repurchase agreements or
U.S. or foreign money market instruments.
For temporary defensive purposes, the EMD Portfolio may hold
foreign currencies or multinational currency units.
o Portfolio turnover. The Adviser may trade actively to achieve
a Portfolio's goals. High yield and emerging country markets
are especially volatile and may result in more frequent
trading. This may result in higher capital gains
distributions, which would increase your tax liability.
Frequent trading may also increase a Portfolio's costs,
lessening its performance over time.
The SAI describes each Portfolio's investment strategies in more detail.
RISK FACTORS
As with all mutual funds, investing in the Portfolios involves certain
risks. There is no guarantee that a Portfolio will meet its investment
objective. You can lose money by investing in a Portfolio if you sell your
shares after it declines in value below your original cost. There is never
any assurance that a Portfolio will perform as it has in the past.
The Portfolios may use various investment techniques, some of which
involve greater amounts of risk than others. You will find a detailed
discussion of these investment techniques in the SAI. To reduce risk, the
Portfolios are subject to certain limitations and restrictions on their
investments, which are also described in the SAI.
Each Portfolio is subject to the following principal risks, except as
noted.
General Risks
o Market risk is the risk that the market value of a security
may go up or down, sometimes rapidly. These fluctuations may
cause the security to be worth less than it was at the time it
was acquired. Market risk may involve a single security or a
particular sector.
17
<PAGE>
o Manager risk is the risk that the portfolio managers'
investment strategy may not produce the intended results.
Manager risk also involves the possibility that the portfolio
managers fail to execute an investment strategy effectively.
o Year 2000 risk. Like all mutual funds, a Portfolio could be
adversely affected if the computer systems used by its service
providers, including shareholder servicing agents, are unable
to recognize dates after 1999. Each Portfolio's service
providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however,
that these steps will be adequate to avoid a temporary service
disruption or other adverse impact on the Portfolios. In
addition, an issuer's failure to process accurately Year 2000
data may cause that issuer's securities to decline in value or
delay the payment of interest to a Portfolio. The risk of
computer failure may be greater with respect to investments in
foreign countries, which may lack the expertise or resources
to adequately address those issues.
Risks of Debt Securities
o Interest rate risk. The value of a debt security typically
changes in the opposite direction from a change in interest
rates. When interest rates go up, the value of a debt security
typically goes down. When interest rates go down, the value of
a debt security typically goes up. Generally, the longer the
maturity of a security, the more sensitive it is to changes in
interest rates.
o Inflation risk is the risk that inflation will erode the
purchasing power of the cash flows generated by debt
securities. Fixed-rate debt securities are more susceptible to
this risk than floating-rate debt securities.
o Reinvestment risk is the risk that when interest rates are
declining, a Portfolio will have to reinvest interest income
or prepayments from a security at lower interest rates. In a
declining interest rate environment, lower reinvestment rates
and price gains resulting from lower interest rates will
offset each other to some extent.
o Credit (or default) risk is the risk that the issuer of a debt
security will be unable to make timely payments of interest or
principal. Credit risk is measured by NRSROs such as S&P,
Fitch IBCA, or Moody's.
o Below investment-grade securities ("junk bonds") may be less
liquid, more susceptible to real or perceived adverse economic
conditions and more difficult to evaluate than higher-rated
securities. The market for these securities has relatively few
participants, mostly institutional investors, and low trading
volume. At times, a Portfolio may have difficulty selling
particular high yield securities at a fair price and obtaining
accurate valuations in order to calculate its net asset value.
Securities that are rated "Ba" or lower by Moody's, "BB" or
lower by S&P or comparably rated by any other NRSRO, or
unrated securities that the Adviser determines to be of
comparable quality may be considered speculative and subject
to higher risk of default than investment-grade securities.
High yield securities rated below "Caa" by Moody's or "CCC" by
S&P and comparable unrated bonds are highly speculative and
may be in default of principal and/or interest payments at the
time of purchase.
18
<PAGE>
Risks of Foreign Securities
o Foreign issuer risk. Compared to U.S. companies, less
information is generally available to the public about foreign
companies. Foreign brokers and issuers may not be subject to
the uniform accounting, auditing, and financial reporting
standards and practices prevalent in the U.S. In addition,
foreign stock exchanges and other securities markets may be
more volatile and subject to less governmental supervision
than their counterparts in the U.S. Investments in foreign
countries could be affected by factors not present in the
U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can
make foreign investments, especially those in emerging
countries, more volatile than U.S. investments.
o Currency risk. Fluctuations in exchange rates between the U.S.
dollar and foreign currencies may negatively affect an
investment. Adverse changes in exchange rates may erode or
reverse any gains produced by foreign currency-denominated
investments and may widen any losses. On January 1, 1999,
participating nations in the European Economic and Monetary
Union introduced a single currency, the euro. This action may
present unique uncertainties for securities denominated in
currencies that are components of the euro. Political and
economic risks, along with other factors, could adversely
affect the value of a Portfolio's securities.
o Emerging markets risk. Emerging country economies often
compare unfavorably with the United States economy in growth
of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of
payments position. Certain emerging countries have experienced
and continue to experience high rates of inflation, sharply
eroding the value of their financial assets. An emergency may
arise where trading of emerging country securities may cease
or may be severely limited or where an emerging country
governmental or corporate issuer defaults on its obligations.
The governments of certain emerging countries impose
restrictions or controls that may limit or preclude a
Portfolio's investment in certain securities. A Portfolio may
need governmental approval for the repatriation of investment
income, capital or sales proceeds. An emerging country
government may also impose temporary restrictions on the
disposition of portfolio securities.
Risks of Mortgage-Related Securities (Income Portfolio only)
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of
mortgage-related securities. The level of interest rates and
other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the
prepayment rate tends to decrease, lengthening the average
life of a pool of mortgage-related securities. In periods of
falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a
Portfolio may have to reinvest the proceeds from prepayments
at lower interest rates.
o Extension risk is the risk that the rate of anticipated
prepayments of principal may not occur, typically because of a
rise in interest rates, and the expected maturity of the
security will increase. During periods of rapidly rising
interest rates, the weighted average maturity of a security
may be extended past what was anticipated. The market value of
securities with longer maturities tends to be more volatile.
19
<PAGE>
Risks of Distressed Securities
o Distressed securities include securities of companies involved
in bankruptcy proceedings, reorganizations and financial
restructurings. Securities of financially troubled issuers are
less liquid and more volatile than securities of companies not
experiencing financial difficulties. A Portfolio may own a
significant portion of a company's distressed securities. As a
result, the Portfolio may participate actively in the affairs
of the company, which may subject the Portfolio to litigation
risks or prevent the Portfolio from selling the securities.
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the
investment adviser of the Portfolios. The Adviser was established in 1985
and 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 & Co. Inc.,
is a leading U.S. investment banking, securities trading and brokerage
firm serving U.S. and foreign corporations, governments and institutional
and individual investors. The Adviser is a registered investment adviser
and offers investment advisory and administrative services to open-end
investment funds and other managed accounts with aggregate assets at June
30, 1999, of over $12.2 billion.
The Adviser supervises and assists in the overall management of the
affairs of the Trust, subject to oversight by the Trust's Board of
Trustees.
For the fiscal year ended March 31, 1999, the Adviser received management
fees based on a percentage of the average daily net assets of each
Portfolio, after waivers, as shown in the following table.
Income Portfolio 0.00%
-----------------------------------
High Yield Portfolio 0.03%
-----------------------------------
EMD Portfolio 0.24%
-----------------------------------
Portfolio Management Team
The Adviser uses a team approach to manage each Portfolio. The members of
each team together are primarily responsible for the day-to-day management
of each Portfolio's investments. No single individual is responsible for
managing a Portfolio. Each team consists of senior portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to
manage the assets of each Portfolio.
HOW THE PORTFOLIOS VALUE THEIR SHARES
The net asset value ("NAV"), multiplied by the number of Portfolio shares
you own, gives you the value of your investment. Each Portfolio calculates
its share price, called its NAV, each business day as of the close of the
New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m.
Eastern Time. You may buy, sell or exchange shares on any business day at
a price that is based on the NAV that is calculated after you place your
order. A business day is a day on which the NYSE is open for trading or
any day in which enough trading has occurred in the securities held by a
Portfolio to affect the NAV materially.
20
<PAGE>
Portfolio securities that are listed primarily on foreign exchanges may
trade on weekends or on other days on which the Portfolios do not price
their shares. In this case, the NAV of a Portfolio's shares may change on
days when you are not able to buy or sell shares.
The Portfolios value their investments based on market value or, where
market quotations are not readily available, based on fair value as
determined in good faith by the Trust's Board of Trustees. The NAV for
each class is calculated by adding up the total value of the relevant
Portfolio's investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the
class.
Total Assets Less Liabilities
NAV = -----------------------------
Number of Shares Outstanding
You can request each Portfolio's current NAV by calling 1-800-447-1139.
INVESTING IN THE PORTFOLIOS
This section provides information to assist you in purchasing shares of
the Portfolios. Please read the entire Prospectus carefully before buying
Class Y shares of a Portfolio.
How to Buy Shares
The minimum initial investment is $3,000,000; there is no minimum for
subsequent investments. You may buy Class Y shares of a Portfolio through
your account representative at a broker-dealer with whom the Distributor
has entered into a sales agreement (an "Authorized Dealer") or the
Transfer Agent by wire only.
To buy Class Y shares of a Portfolio by Federal Reserve wire, call the
Transfer Agent at 1-800-447-1139 or call your account representative.
If you do not wire Federal Funds, you must have the wire converted into
Federal Funds, which usually takes one business day after receipt of a
bank wire. The Transfer Agent will not process your investment until it
receives Federal Funds.
The following procedure will help assure prompt receipt of your Federal
Funds wire:
Call the Transfer Agent 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
The Transfer Agent will then provide you with a Portfolio account number. (If
you already have an account, you must also notify the Portfolio before wiring
funds.)
21
<PAGE>
Instruct your bank to wire the specified amount to the Portfolio as
follows:
PNC Bank, N.A.
ABA #031000053
Credit Account Number: #85-5102-0143
From: [your name]
Account Number: [your Portfolio account number]
For Purchase of ______________________ Portfolio
Amount: [amount to be invested]
You may open an account when placing an initial order by telephone,
provided you then submit an Account Information Form by mail. The Transfer
Agent will not process your investment until it receives a fully completed
and signed Account Information Form.
The Trust and the Transfer Agent each reserve the right to reject any
purchase order for any reason.
How to Sell Shares
o You may sell shares on any business day through the
Distributor, Authorized Dealers or the Transfer Agent.
o When the Trust receives your redemption requests in proper
form, it will sell your shares at the next determined net
asset value.
o The Trust will send you payment proceeds generally within
seven days after it receives your redemption request.
Redemption Procedures
Redemption Through the Distributor or Authorized Dealers
Method of Redemption Instructions
[GRAPHIC] In person o Visit your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By telephone o Call your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By mail o Mail your redemption request to your
account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
[GRAPHIC] By wire o Submit wiring instructions to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
22
<PAGE>
Redemption Through the Transfer Agent
[GRAPHIC] By mail o Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[name of Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
[GRAPHIC] By telephone o Call the Transfer Agent at 1-800-447-1139.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to sell.
Additional Information About Redemptions
o Wiring redemption proceeds. Upon request, the Trust will wire
your proceeds ($500 minimum) to your brokerage account or a
designated commercial bank account. There is a transaction fee
of $7.50 for this service. Please call your account
representative for information on how to wire funds to your
brokerage account. If you do not have a brokerage account,
call the Transfer Agent to wire funds to your bank account.
o Signature guarantees. If your redemption proceeds exceed
$50,000, or if you instruct the Trust to send the proceeds to
someone other than the record owner at the record address, or
if you are a corporation, partnership, trust or fiduciary,
your signature must be guaranteed by any eligible guarantor
institution. Call the Transfer Agent at 1-800-447-1139 for
information about obtaining a Medallion Program signature
guarantee.
o Telephone policies. You may authorize the Transfer Agent to
accept telephone instructions. If you do, the Transfer Agent
will accept instructions from people who it believes are
authorized to act on your behalf. The Transfer Agent will use
reasonable procedures (such as requesting personal
identification) to ensure that the caller is properly
authorized. Neither the Portfolio nor the Transfer Agent will
be liable for losses for following instructions reasonably
believed to be genuine.
o Redemption by mail may cause a delay. During times of extreme
economic or market conditions, you may experience difficulty
in contacting your account representative by telephone to
request a redemption of shares. If this occurs, please
consider using the other redemption procedures described in
this Prospectus. Alternative procedures may take longer to
sell your shares.
o Automatic redemption; redemption in kind. If the value of your
account falls below $750 (for reasons other than changes in
market conditions), the Trust may automatically liquidate your
account and send you the proceeds. The Trust will send you a
notice at least 60 days before doing this. The Trust also
reserves the right to redeem your shares "in kind." For
example, if you sell a large number of shares and the
Portfolio is unable to sell securities to raise cash, the
Trust may send you a combination of cash and a share of actual
portfolio securities. Call the Transfer Agent for details.
23
<PAGE>
o Suspension of the Right of Redemption. A Portfolio may suspend
your right to redeem your shares under any of the following
circumstances:
-- during non-routine closings of the NYSE;
-- when the Securities and Exchange Commission ("SEC")
determines either that trading on the NYSE is restricted
or that an emergency prevents the sale or valuation of
the Portfolio's securities; or
-- when the SEC orders a suspension to protect the
Portfolio's shareholders.
Exchanges
You may exchange Class Y shares of one Portfolio for Class Y shares of
another Portfolio described in this Prospectus, Class Y shares of another
Portfolio of the Trust, or shares of the Money Market Portfolio of the RBB
Fund, Inc. (You may obtain more information about other Portfolios of the
Trust by calling the Transfer Agent at 1-800-447-1139.)
The Trust does not currently charge a fee for exchanges, although it may
change this policy in the future.
Exchange procedures. To exchange your shares, you must give exchange
instructions to your account representative or the Transfer Agent in
writing or by telephone.
Exchange policies. When exchanging your shares, please keep in mind:
o An exchange of shares may create tax liability for you. You
may have a gain or loss on the transaction, since the shares
you are exchanging will be treated like a sale.
o When the market is very active, telephone exchanges may be
difficult to complete. You may have to submit exchange
requests to your account representative or the Transfer Agent
in writing, which will cause a delay.
o The shares you exchange must have a value of at least $250
(except in the case of certain retirement plans). If you are
establishing a new account, you must exchange the minimum
dollar amount needed to open that account.
o Before you exchange your shares, you must review a copy of the
current prospectus of the Portfolio that you would like to
buy.
o The Trust may reject your exchange request. The Trust may
modify or terminate the exchange option at any time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
If you buy shares of a Portfolio shortly before it declares a dividend or
a distribution, a portion of your investment in the Portfolio may be
returned to you in the form of a taxable distribution.
Distributions
The Portfolios pass along your share of their investment earnings in the
form of dividends. Dividend distributions are the net dividends or
interest earned on investments after expenses. As with any investment, you
should consider the tax consequences of an investment in a Portfolio.
24
<PAGE>
Ordinarily, each Portfolio declares and pays dividends from its net
investment income monthly. The Portfolios will distribute short-term
capital gains, as necessary, and normally will pay any long-term capital
gains once a year.
You can receive dividends or distributions in one of the following ways:
o Reinvestment. You can automatically reinvest your dividends
and distributions in additional shares of your Portfolio. If
you do not indicate another choice on your Account Information
Form, you will receive your distributions this way.
o Cash. The Trust will send you a check no later than seven days
after the payable date.
o Partial reinvestment. The Trust will automatically reinvest
your dividends in additional shares of your Portfolio and pay
your capital gain distributions to you in cash. Or, the Trust
will automatically reinvest your capital gain distributions
and send you your dividends in cash.
o Directed dividends. You can automatically reinvest your
dividends and distributions in the same class of shares of
another Portfolio or the Money Market Portfolio of The RBB
Fund, Inc. You may not use this service to establish a new
account.
o Direct deposit. In most cases, you can automatically transfer
dividends and distributions to your bank checking or savings
account. Under normal circumstances, the Transfer Agent will
transfer the funds within seven days of the payment date. To
receive dividends and distributions this way, the name on your
bank account must be the same as the registration on your
Portfolio account.
You may choose your distribution method on your original Account
Information Form. If you would like to change the option you selected,
please call your account executive or the Transfer Agent at
1-800-447-1139.
Taxes
Each Portfolio intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders. It is important for you
to be aware of the following information about the tax treatment of your
investment.
o Ordinary dividends from a Portfolio are taxable as ordinary
income; dividends from a Portfolio's long-term capital gains
are taxable as capital gain.
o Dividends are treated in the same manner for federal income
tax purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
o Dividends from the Portfolios that are attributable to
interest on certain U.S. Government obligations may be exempt
from certain state and local income taxes. The extent to which
ordinary dividends are attributable to these U.S. Government
obligations will be provided on the tax statements you receive
from a Portfolio.
25
<PAGE>
o Certain dividends paid to you in January will be taxable as if
they had been paid to you the previous December.
o The Trust will mail you tax statements every January showing
the amounts and tax status of distributions you received.
o When you sell (redeem) or exchange shares of a Portfolio, you
must recognize any gain or loss.
o Because your tax treatment depends on your purchase price and
tax position, you should keep your regular account statements
for use in determining your tax.
o You should review the more detailed discussion of federal
income tax considerations in the SAI.
The Trust provides this tax information for your general information. You
should consult your own tax adviser about the tax consequences of
investing in a Portfolio.
ADDITIONAL INFORMATION
Performance
Financial publications, such as Business Week, Forbes, Money or
SmartMoney, may compare a Portfolio's performance to the performance of
various indexes and investments for which reliable performance data is
available. These publications may also compare a Portfolio's performance
to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services, such as Lipper Inc.
Shareholder Communications
The Trust may eliminate duplicate mailings of Portfolio materials to
shareholders who reside at the same address.
26
<PAGE>
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27
<PAGE>
Financial Highlights -- Income Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Income Portfolio since its inception. This
information reflects financial results for a single share of the Income
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the Income Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Income Portfolio's financial statements, are included in the
Income Portfolio's annual report, which is available by calling the Trust
at 1-800-447-1139.
Class Y shares of the High Yield Portfolio and the EMD Portfolio have not
yet commenced operations.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends From Net
Value, Net and Unrealized From Net Realized
Beginning Investment Gain/(Loss) on Investment Capital
Of Period Income*(1) Investments*(2) Income Gains
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $12.37 $0.78 $(0.03) $(0.78) $(0.19)
- --------------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 12.03 0.80 0.36 (0.80) (0.02)
- --------------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 12.26 0.77 (0.20) (0.77) (0.03)
- --------------------------------------------------------------------------------------------------------------------
For the period September 8, 1995**
through March 31, 1996 12.35 0.41 0.05 (0.41) (0.04)
</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.
** Commencement of initial public offering.
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.
28
<PAGE>
Financial Highlights -- Income Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Net Ratio of Reflected in
Asset Net Assets, Ratio of Net Investment Expense Ratios and
Value, Total End of Expenses to Income Net Investment Income
End of Investment Period Average Net To Average Due to Waivers and Portfolio
Period Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Class Y
$12.15 6.13% $4,406 0.45% 6.27% 3.23% 107.21%
- --------------------------------------------------------------------------------------------------------------------------------
12.37 9.81 4,339 0.45 6.39 1.78 244.78
- --------------------------------------------------------------------------------------------------------------------------------
12.03 4.77 13,486 0.45 6.34 1.73 262.95
- --------------------------------------------------------------------------------------------------------------------------------
12.26 2.92(4) 12,199 0.45(5) 5.93(4)(5) 2.89(4)(5) 107.35
- --------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
29
<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.
575 Lexington Avenue
New York, NY 10022
CUSTODIANS
Income and High Yield Portfolios:
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
EMD 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 LLP
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
30
<PAGE>
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31
<PAGE>
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32
<PAGE>
Statement of Additional Information. The Statement of Additional Information
("SAI") provides a more complete discussion of several of the matters contained
in this Prospectus and is incorporated by reference, which means that it is
legally a part of this Prospectus as if it were included here.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about each Portfolio's investments,
including a discussion of the market conditions and investment strategies that
significantly affected a Portfolio's performance during its last fiscal year.
o To obtain a free copy of the SAI and the current annual or
semi-annual reports or to make any other inquiries about a
Portfolio, you may call or write:
PFPC Inc.
Attention: The Bear Stearns Funds
P.O. Box 8960
Wilmington, Delaware 19899-8960
Telephone: 1-800-447-1139 or 1-800-766-4111
o You may obtain copies of the SAI or financial reports
o for free by calling or writing broker-dealers or other
financial intermediaries that sell a Portfolio's shares;
o for a fee by writing the Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549-6009;
o for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
o You may review and copy information about the Portfolios (including
the SAI) at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 to obtain information about this service.
You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns
Worldwide Web site at http://www.bearstearns.com.
Investment Company Act File No. 811-8798
BSF-P-018-03
<PAGE>
The
Bear Stearns
Funds
Prospectus Dated
July 29, 1999
Equity Funds
S&P STARS Portfolio
The Insiders Select Fund
Large Cap Value Portfolio
Small Cap Value Portfolio
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio
Class A, B and C Shares
This Prospectus provides important information about each Portfolio that you
should know before investing. Please read it carefully and keep it for future
reference.
The Securities and Exchange Commission has not approved any Portfolio's shares
or determined whether this Prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
[LOGO] The Bear Stearns Funds o 575 Lexington Avenue New York, NY 10022
1-800-447-1139
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Risk/Return Summaries 1
-------------------------------------------------------------
S&P STARS Portfolio
The Insiders Select Fund
Large Cap Value Portfolio
Small Cap Value Portfolio
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio
Investments 39
-------------------------------------------------------------
Risk Factors 43
-------------------------------------------------------------
Management of the Portfolios 47
-------------------------------------------------------------
Investment Adviser
Portfolio Management Team
How the Portfolios Value Their Shares 48
-------------------------------------------------------------
Investing in the Portfolios 48
-------------------------------------------------------------
Investment Requirements
Choosing a Class of Shares
How the Trust Calculates Sales Charges
Sales Charge Reductions and Waivers
Distribution Fees and Shareholder Servicing Fees
How to Buy Shares
How to Sell Shares
Exchanges
Shareholder Services 58
-------------------------------------------------------------
Dividends, Distributions and Taxes 59
-------------------------------------------------------------
Additional Information 60
-------------------------------------------------------------
Financial Highlights 62
-------------------------------------------------------------
Each Portfolio described in this Prospectus is a series of The Bear
Stearns Funds, a registered open-end management investment company
(the "Trust").
It is important to keep in mind that mutual fund shares are:
o not deposits or obligations of any bank
o not insured by the Federal Deposit Insurance
Corporation;
o subject to investment risk, including possible loss of
the money invested.
<PAGE>
S&P STARS Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
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 Index").
Principal Strategies
To achieve the investment objective of the S&P STARS Portfolio, Bear
Stearns Asset Management Inc., the investment adviser for each Portfolio
("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock
Appreciation Ranking System (or "STARS") to identify common stocks in the
highest category (five stars) for purchase and in the lowest category (one
star) for short selling. The Adviser believes that this approach will
provide opportunities to achieve performance that exceeds the S&P 500
Index's total return.
o Generally, the S&P STARS Portfolio will invest at least 85% of
its total assets in U.S. common stocks and U.S.
dollar-denominated American Depositary Receipts that are
listed on U.S. exchanges ("ADRs") that, at their time of
initial purchase, were ranked five stars or, at their time of
short sale, were ranked one star.
o Generally, the S&P STARS Portfolio may invest up to 15% of its
total assets in U.S. common stocks and ADRs without regard to
STARS ranking. See "Principal Investment Strategies --
Additional Information."
In selecting investments, the Adviser analyzes the stocks ranked by S&P
analysts according to the STARS ranking system and selects those it
believes have the best potential for capital appreciation. The Adviser
focuses on companies that show the potential to achieve growth at a
reasonable price. The Adviser considers various factors including market
segment, industry, earnings history, price-to-earnings ratio and
management. The Adviser may select securities of companies with small,
middle and large market capitalizations.
The S&P STARS Portfolio may invest up to 15% of its total assets without
regard to STARS ranking to increase exposure to additional sectors or take
advantage of investment opportunities in securities of issuers that S&P
may not follow. If S&P downgrades a security held by the S&P STARS
Portfolio to four stars from five stars, the Portfolio may purchase
additional shares of that security without limitation. In addition, if S&P
upgrades a security held by the S&P STARS Portfolio to two stars from one
star, the Portfolio may sell short additional shares of that security
without limitation.
S&P's research staff analyzes and ranks the stocks of approximately 1,100
issuers and evaluates the short-term (up to 12 months) appreciation
potential of the reviewed stocks, as shown below.
***** Buy Expected to be among the best performers over the
next 6 to 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.
S&P STARS Portfolio 1
<PAGE>
The S&P STARS Portfolio may "sell short" securities that at their time of
initial sale were rated one star. In a short sale, the Adviser sells a
security it has borrowed, with the expectation that the security will
decline in value. If the Adviser correctly predicts the decline in value,
the Adviser will repurchase the security at a lower price and realize a
gain for the S&P STARS Portfolio. Short selling is considered "leverage"
and may involve substantial risk.
Principal Risks
You may lose money by investing in the S&P STARS Portfolio. The S&P STARS
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the S&P STARS Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
o A small- or middle-capitalization company's stock may decline
in value because the company lacks management experience,
operating experience, financial resources and product
diversification that permit larger companies to adapt to
changing market conditions.
o Small- or middle-capitalization company stocks may be subject
to wider price swings or be less liquid because they trade
less frequently and in smaller volume than large company
stocks.
o Short sales may involve substantial risk and may involve
leverage, which may increase potential losses.
o Ratings by S&P's research group may not accurately assess the
investment prospects of a particular security.
The S&P STARS Portfolio is a non-diversified mutual fund, which means that
it may invest a larger portion of its assets in a single issuer than if it
were diversified. This could make the S&P STARS Portfolio more susceptible
to price changes of securities of a particular issuer.
2 S&P STARS Portfolio
<PAGE>
Who May Want to Invest in the S&P STARS Portfolio
The S&P STARS Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add an equity component to their portfolio.
The S&P STARS Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the S&P
STARS Portfolio by showing changes in its performance for various time
periods.
The bar chart shows the returns for Class A shares of the S&P STARS
Portfolio. The returns for Class B and C shares offered by this Prospectus
will differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
S&P STARS Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 27.77
1997 17.99
1998 39.69
Past performance is not necessarily an indication of future results.
1 The S&P STARS Portfolio's year-to-date return as of June 30, 1999
was 14.78%.
During the period shown in the bar chart, the highest quarterly return was
28.69% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (11.65)% (for the quarter ended September 30, 1998).
S&P STARS Portfolio 3
<PAGE>
The table shows the average annual total returns for Class A, B and C
shares of the S&P STARS Portfolio. The table shows how the S&P STARS
Portfolio's average annual total return for one year and since the date of
inception compared to the S&P 500 Index, a broad-based unmanaged index
that represents the general performance of domestically traded common
stocks of mid- to large-size companies. The figures shown in the table
assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception
==========================================================================
S&P STARS Portfolio - Class A* 32.01% 26.80%**
--------------------------------------------------------------------------
S&P STARS Portfolio - Class B*** N/A 31.98%
--------------------------------------------------------------------------
S&P STARS Portfolio - Class C 38.00% 28.07%**
--------------------------------------------------------------------------
S&P 500 Index 28.57% 29.43%
--------------------------------------------------------------------------
* Total return figures for Class A shares reflect the current maximum
sales load of 5.50%. Prior to December 24, 1997, the maximum sales
load was 4.75%.
** Class A and C shares commenced operations on April 3, 1995.
*** Class B shares commenced operations on January 5, 1998.
4 S&P STARS Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the S&P STARS Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
=========================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
-----------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
-----------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
-----------------------------------------------------------------------------------------
Redemption fees *** *** ***
-----------------------------------------------------------------------------------------
Exchange fees None None None
-----------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=========================================================================================
Management Fees 0.75% 0.75% 0.75%
-----------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
-----------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 0.77% 0.77% 0.77%
----- ----- -----
-----------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.77% 2.27% 2.27%
-----------------------------------------------------------------------------------------
Fee Waiver (0.27)% (0.27)% (0.27)%
----- ----- -----
-----------------------------------------------------------------------------------------
Net Expenses(2) 1.50% 2.00% 2.00%
----- ----- -----
-----------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a contingent deferred sales charge ("CDSC") of 1% of
the lesser of purchase or sale price of your Class A shares if you
sell them up to one year after the date of purchase if you purchased
them at net asset value because (a) you purchased $1 million or more
of Class A shares or (b) you purchased them within 60 days of
selling shares of a mutual fund that charges a sales load or is
subject to a CDSC and not distributed by Bear Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the S&P
STARS Portfolio's net expenses do not exceed the amounts indicated
above.
S&P STARS Portfolio 5
<PAGE>
Example
This Example illustrates the cost of investing in the S&P STARS Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the S&P STARS Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the S&P STARS Portfolio;
o your investment returns 5% each year;
o the S&P STARS Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
==================================================
Class A $694 $1,052 $1,433 $2,498
--------------------------------------------------
Class B $703 $983 $1,391 $2,459**
--------------------------------------------------
Class C $303 $683 $1,191 $2,584
--------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
==================================================
Class B $203 $683 $1,191 $2,459**
--------------------------------------------------
Class C $203 $683 $1,191 $2,584
--------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.50% for Class A and 2.00% for both Class B and C
shares until March 31, 2000, and thereafter will equal 1.77%
for Class A and 2.27% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
6 S&P STARS Portfolio
<PAGE>
The Insiders Select Fund
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, The Insiders Select Fund invests at least
85% of its assets in the equity securities of U.S. issuers that it
believes provide opportunities for capital appreciation. Equity securities
consist of common stocks, convertible securities and preferred stocks. The
Adviser anticipates that the issuers principally will be
mid-capitalization companies (companies that under current market
conditions have market capitalizations that range from $2 billion to $10
billion at the time of purchase). The Insiders Select Fund will invest in
U.S. equity securities that the Adviser believes will equal or exceed the
performance of the Standard & Poor's MidCap 400 Stock Index (the "S&P
MidCap 400 Index"). The dollar-weighted average market capitalization of
stocks in the S&P MidCap 400 Index was approximately $4 billion as of June
30, 1999. The Insiders Select Fund may invest in stocks that are not
included in the S&P MidCap 400 Index.
In selecting investments for The Insiders Select Fund, the Adviser
analyzes
o trading in a company's securities by corporate insiders,
officers, directors and significant stockholders;
o published company reports prepared by financial analysts,
including revisions to earnings predictions; and
o a company's corporate finance activities, including stock
repurchase programs, dividend policies and new securities
issuance.
Insiders, analysts and the company may send signals that the Adviser
analyzes to produce valuable information about the prospects for
individual companies. 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, among other sources, which compiles this
information from publicly available SEC filings.
In addition to the factors described above, the Adviser also uses a
"value" approach to investing. The Adviser looks for equity securities
that have relatively low price-to-book ratios, low price-to-earnings
ratios or lower-than-average price-to-cash-flow ratios and dividend
payments. The Adviser may consider factors such as the company's earnings
growth, dividend payout ratios, return on equity, stock price volatility
relative to the market, new management and upcoming corporate
restructuring, the general business cycle, the company's position within a
specific industry and the company's responsiveness to changing conditions.
Insiders Select Fund 7
<PAGE>
Insiders Select Fund
Principal Risks
You may lose money by investing in The Insiders Select Fund. The Insiders
Select Fund is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect The Insiders Select Fund's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
o A middle-capitalization company's stock may decline in value
because the company lacks management experience, operating
experience, financial resources and product diversification
that permit larger companies to adapt to changing market
conditions.
o Middle capitalization company stocks may be subject to wider
price swings or be less liquid because they trade less
frequently and in smaller volume than large company stocks.
The Insiders Select Fund is a non-diversified mutual fund, which means
that it may invest a larger portion of its assets in a single issuer than
if it were diversified. This could make The Insiders Select Fund more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in The Insiders Select Fund
The Insiders Select Fund may be appropriate for investors who:
o are investing for the long term;
o believe that insider buying patterns may be a good indicator
of the future direction of a company's stock price.
The Insiders Select Fund may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
8 Insiders Select Fund
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in The
Insiders Select Fund by showing changes in its performance for various
time periods.
The bar chart shows returns for Class A of The Insiders Select Fund. The
returns for Class B and C shares offered by this Prospectus will differ
from the return for the Class A shares shown on the bar chart, depending
on the expenses of each class. The bar chart does not reflect any sales
charges that you may be required to pay when you buy or sell your shares.
If sales charges were reflected, returns would be lower than those shown.
The Insiders Select Fund Annual Total Return (%)(1)
[BAR GRAPH]
1996 21.38
1997 29.64
1998 9.29
Past performance is not necessarily an indication of future results.
1 The Insiders Select Fund's year-to-date return as of June 30, 1999,
was 12.19%.
During the period shown in the bar chart, the highest quarterly return was
16.35% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (16.52)% (for the quarter ended September 30, 1998).
The table shows the average annual total returns for Class A, B and C
shares of The Insiders Select Fund. The table shows how The Insiders
Select Fund's average annual total return for one year and since the date
of inception compared to the S&P MidCap 400 Index, a broad-based unmanaged
index that represents the general performance of domestically traded
common stocks of mid-size companies. The figures shown in the table assume
reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception
==========================================================================
Insiders Select Fund - Class A* 3.29% 18.80%**
--------------------------------------------------------------------------
Insiders Select Fund - Class B*** N/A 3.46%
--------------------------------------------------------------------------
Insiders Select Fund - Class C 7.74% 20.72%**
--------------------------------------------------------------------------
S&P MidCap 400 Index 19.09% 23.56%
--------------------------------------------------------------------------
* Total return figures for Class A shares reflect the current maximum
sales load of 5.50%. Prior to December 24, 1997, the maximum sales
load was 4.75%.
** Class A and C shares commenced operations on June 16, 1995.
*** Class B shares commenced operations on January 6, 1998.
Insiders Select Fund 9
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of The Insiders Select Fund.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
===============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
-----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
-----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
-----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
-----------------------------------------------------------------------------------------------
Exchange fees None None None
-----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
===============================================================================================
Management Fees(2) 1.00% 1.00% 1.00%
-----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
-----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 1.21% 1.21% 1.21%
----- ----- -----
-----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.46% 2.96% 2.96%
-----------------------------------------------------------------------------------------------
Fee Waiver (0.81)% (0.81)% (0.81)%
----- ----- -----
-----------------------------------------------------------------------------------------------
Net Expenses(3) 1.65% 2.15% 2.15%
----- ----- -----
-----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The management fee may increase or decrease by 0.50% based on The
Insiders Select Fund's performance.
3 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that The Insiders
Select Fund's net expenses do not exceed the amounts indicated
above.
10 Insiders Select Fund
<PAGE>
Example
This Example illustrates the cost of investing in The Insiders Select Fund
over various time periods. It is intended to help you compare the cost of
investing in The Insiders Select Fund with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in The Insiders Select Fund;
o your investment returns 5% each year;
o The Insiders Select Fund's operating expenses remain the
same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
==================================================
Class A $709 $1,201 $1,719 $3,135
--------------------------------------------------
Class B $718 $1,139 $1,686 $3,105**
--------------------------------------------------
Class C $318 $839 $1,486 $3,223
--------------------------------------------------
If you do not sell your shares at the end of each period -- ***
1 Year 3 Years 5 Years 10 Years
==================================================
Class B $218 $839 $1,486 $3,105**
--------------------------------------------------
Class C $218 $839 $1,486 $3,223
--------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.65% for Class A and 2.15% for both Class B and C
shares until March 31, 2000, and thereafter will equal 2.46%
for Class A and 2.96% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
Insiders Select Fund 11
<PAGE>
Large Cap Value Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, the Large Cap Value Portfolio ("Large Cap
Portfolio") invests at least 65% of its total assets in equity securities
of companies with market capitalizations (at time of purchase) of more
than $10 billion ("large companies") that the Adviser identifies as
"value" securities. Within this 65% category, the Large Cap Portfolio may
invest up to 10% of its total assets in equity securities of foreign
issuers in the form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Large Cap Portfolio may invest must be rated at least "investment
grade" by a nationally recognized statistical rating organization
("NRSRO") at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
The weighted average market capitalization of issuers in whose securities
the Large Cap Portfolio invests will vary depending on market conditions.
As of June 30, 1999, the weighted average market capitalization of issuers
of securities held by the Large Cap Portfolio was greater than
$35 billion.
Principal Risks
You may lose money by investing in the Large Cap Portfolio. The Large Cap
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Large Cap Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
12 Large Cap Portfolio
<PAGE>
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
Who May Want to Invest in the Large Cap Portfolio
The Large Cap Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add a large-cap equity component to their portfolio.
The Large Cap Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Large Cap Portfolio 13
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in the
Large Cap Portfolio by showing changes in its performance for various time
periods.
The bar chart shows returns for Class A shares of the Large Cap Portfolio.
The returns for Class B and C shares offered by this Prospectus will
differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
Large Cap Value Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 14.37
1997 31.07
1998 15.61
Past performance is not necessarily an indication of future results.
1 The Large Cap Portfolio's year-to-date return as of June 30, 1999
was 8.89%.
During the period shown in the bar chart, the highest quarterly return was
17.59% (for the quarter ended June 30, 1997) and the lowest quarterly
return was (12.73)% (for the quarter ended September 30, 1998).
The table shows average annual total returns for Class A and C shares of
the Large Cap Portfolio. The table shows how the Large Cap Portfolio's
average annual total return for one year and since the date of inception
compared to the S&P 500 Index, a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies. The figures shown in the table assume
reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Large Cap Portfolio - Class A 9.23% 21.07%**
--------------------------------------------------------------------------
Large Cap Portfolio - Class C 14.20% 22.32%
--------------------------------------------------------------------------
S&P 500 Index 28.57% 29.43%
--------------------------------------------------------------------------
* Class A and C shares commenced operations on April 3, 1995. Class B
shares commenced operations on January 28, 1998. Returns for Class B
shares are not included in this table because these shares did not
have a full year of operations as of December 31, 1998.
** Total return figures for Class A shares reflect the current maximum
sales load of 5.50%. Prior to December 24, 1997, the maximum sales
load was 4.75%.
14 Large Cap Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
===============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
- -----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
- -----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
- -----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
- -----------------------------------------------------------------------------------------------
Exchange fees None None None
- -----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
===============================================================================================
Management Fees 0.75% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 1.96% 1.96% 1.96%
----- ----- -----
- -----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.96% 3.46% 3.46%
- -----------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (1.46)% (1.46)% (1.46)%
----- ----- -----
- -----------------------------------------------------------------------------------------------
Net Expenses(2) 1.50% 2.00% 2.00%
----- ----- -----
- -----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of your
Class A shares if you sell them up to one year after the date of purchase
if you purchased them at net asset value because (a) you purchased $1
million or more of Class A shares or (b) you purchased them within 60 days
of selling shares of a mutual fund that charges a sales load or is subject
to a CDSC and not distributed by Bear Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the Trust
Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Large Cap Portfolio's
net expenses do not exceed the amounts indicated above.
Large Cap Portfolio 15
<PAGE>
Example
This Example illustrates the cost of investing in the Large Cap Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Large Cap Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Large Cap Portfolio;
o your investment returns 5% each year;
o the Large Cap Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
==================================================
Class A $694 $1,285 $1,900 $3,552
--------------------------------------------------
Class B $703 $1,227 $1,873 $3,529**
--------------------------------------------------
Class C $303 $927 $1,673 $3,642
--------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
==================================================
Class B $203 $927 $1,673 $3,529**
--------------------------------------------------
Class C $203 $927 $1,673 $3,642
--------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.50% for Class A and 2.00% for both Class B and C
shares until March 31, 2000, and thereafter will equal 2.96%
for Class A and 3.46% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
16 Large Cap Portfolio
<PAGE>
Small Cap Value Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, the Small Cap Value Portfolio ("Small Cap
Portfolio") invests at least 65% of its total assets in equity securities
of companies with market capitalizations (at time of purchase) of up to
$1.5 billion ("small companies") that the Adviser identifies as value
companies. Within this 65% category, the Small Cap Portfolio may invest up
to 10% of its total assets in equity securities of foreign issuers in the
form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Small Cap Portfolio may invest must be rated at least "investment
grade" by an NRSRO at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
The weighted average market capitalization of issuers in whose securities
the Small Cap Portfolio invests will vary depending on market conditions.
As of June 30, 1999 the weighted average market capitalization of issuers
whose securities were held by the Small Cap Portfolio was approximately
$700 million.
Principal Risks
You may lose money by investing in the Small Cap Portfolio. The Small Cap
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Small Cap Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
o A small company's stock may decline in value because the
company lacks management experience, operating experience,
financial resources and product diversification that permit
larger companies to adapt to changing market conditions.
Small Cap Portfolio 17
<PAGE>
o Small company stocks may be subject to wider price swings or
be less liquid because they trade less frequently and in
smaller volume than large company stocks.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
Who May Want to Invest in the Small Cap Portfolio
The Small Cap Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add a small-cap equity component to their portfolio.
The Small Cap Portfolio may not be appropriate for investors who:
o want to invest only in larger, more established companies;
o are not willing to take any risk that they may experience
share price fluctuations, assume the risks associated with
smaller-company stocks or lose money on their investment.
18 Small Cap Portfolio
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in the
Small Cap Portfolio by showing changes in its performance for various time
periods.
The bar chart shows the returns for Class A shares of the Small Cap
Portfolio. The returns for Class B and C shares offered by this Prospectus
will differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
Small Cap Value Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1996 15.45
1997 32.64
1998 -1.41
Past performance is not necessarily an indication of future results.
1 The Small Cap Portfolio's year-to-date return as of June 30, 1999
was 11.22%.
During the period shown in the bar chart, the highest quarterly return was
22.04% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (26.11)% (for the quarter ended September 30, 1998).
The table shows average annual total returns for Class A and C shares of
the Small Cap Portfolio. The table shows how the Small Cap Portfolio's
average annual total return for one year and since the date of inception
compared to the Russell 2000 Index, a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
small-size companies. The figures shown in the table assume reinvestment
of dividends and distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Small Cap Portfolio - Class A (6.85)% 17.25%**
--------------------------------------------------------------------------
Small Cap Portfolio - Class C (2.83)% 18.41%
--------------------------------------------------------------------------
Russell 2000 Index (2.25)% 15.24%
--------------------------------------------------------------------------
* Class A and C shares commenced operations on April 3, 1995. Class B
shares commenced on January 21, 1998. Returns for Class B shares are
not included in this table because these shares did not have a full
year of operations as of December 31, 1998.
** Total return figures for Class A shares reflect the current maximum
sales load of 5.50%. Prior to December 24, 1997, the maximum sales
load was 4.75%.
Small Cap Portfolio 19
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Small Cap Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
==============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
----------------------------------------------------------------------------------------------
Exchange fees None None None
----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==============================================================================================
Management Fees 0.75% 0.75% 0.75%
----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 1.15% 1.15% 1.15%
----- ----- -----
----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.15% 2.65% 2.65%
----------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (0.65)% (0.65)% (0.65)%
----- ----- -----
----------------------------------------------------------------------------------------------
Net Expenses(2) 1.50% 2.00% 2.00%
----- ----- -----
----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the Small
Cap Portfolio's net expenses do not exceed the amounts indicated
above.
20 Small Cap Portfolio
<PAGE>
Example
This Example illustrates the cost of investing in the Small Cap Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Small Cap Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Small Cap Portfolio;
o your investment returns 5% each year;
o the Small Cap Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
=================================================
Class A $694 $1,127 $1,585 $2,848
-------------------------------------------------
Class B $703 $1,062 $1,547 $2,814**
-------------------------------------------------
Class C $303 $762 $1,347 $2,935
-------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years
=================================================
Class B $203 $762 $1,347 $2,814**
-------------------------------------------------
Class C $203 $762 $1,347 $2,935
-------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.50% for Class A and 2.00% for both Class B and C
shares until March 31, 2000, and thereafter will equal 2.15%
for Class A and 2.65% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
Small Cap Portfolio 21
<PAGE>
The Focus List Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, 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 included on the Bear Stearns
Focus List (the "Focus List").
The Focus List Portfolio may invest up to 35% of its total assets in
stocks that are not on the Focus List. The Adviser may select non-Focus
List securities, for example, when the Adviser determines that Focus List
stocks are illiquid, would cause the Focus List Portfolio to be
overweighted in a particular sector or overly concentrated in a particular
industry, or for other reasons.
Using a rating system of "1" through "5," the Bear Stearns Equity Research
Department, consisting of 90 analysts who cover common stocks of more than
1,100 U.S. and foreign companies, assigns the following ratings: 1 (Buy),
2 (Attractive), 3 (Neutral), 4 (Avoid), 5 (Sell). More than 600 stocks are
rated Buy or Attractive. The Focus List typically consists of 20 stocks
rated Buy or Attractive. The Adviser determines how much of the Focus List
Portfolio's assets to allocate to each Focus List stock.
The Bear Stearns Research Department and the Research Stock Selection
Committee (comprised of senior Research personnel) will assign a Buy
rating to stocks when they believe the stock will significantly outperform
the market over the next three to six months because of a catalyst or
near-term event that they expect will 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 and is undervalued in comparison to
comparable companies.
Principal Risks
You may lose money by investing in the Focus List Portfolio. The Focus
List Portfolio is also subject to the following principal risks, more
fully described in "Risk Factors" in this Prospectus. Some or all of these
risk factors may affect the Focus List Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
22 Focus List Portfolio
<PAGE>
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
The Focus List Portfolio is a non-diversified mutual fund, which means
that it may invest a larger portion of its assets in a single issuer than
if it were diversified. This could make the Focus List Portfolio more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in the Focus List Portfolio
The Focus List Portfolio may be appropriate for investors who:
o are investing for the long term;
o are seeking an equity component for their portfolio.
The Focus List Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations, assume the risks associated with
stocks selected by the Bear Stearns Focus List Committee or
lose money on their investment.
Focus List Portfolio 23
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in the
Focus List Portfolio by showing its performance for various time periods.
The bar chart shows returns for Class A shares of the Focus List
Portfolio. The returns for Class B and C shares offered by this Prospectus
will differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
Focus List Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1998 33.64
Past performance is not necessarily an indication of future results.
1 The Focus List Portfolio's year-to-date return as of June 30, 1999
was 12.74%.
During the period shown in the bar chart, the highest quarterly return was
32.75% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (10.65)% (for the quarter ended September 30, 1998).
The table shows average annual total returns for Class A, B and C shares
of the Focus List Portfolio. The table shows how the Focus List
Portfolio's average annual total return for one year and since the date of
inception compared to the S&P 500 Index, a broad-based unmanaged index
that represents the general performance of domestically traded common
stocks of mid- to large-size companies. The figures shown in the table
assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Focus List Portfolio - Class A 26.27% 26.27%
--------------------------------------------------------------------------
Focus List Portfolio - Class B 21.21% 21.21%
--------------------------------------------------------------------------
Focus List Portfolio - Class C 30.72% 30.72%
--------------------------------------------------------------------------
S&P 500 Index 28.57% 28.57%
--------------------------------------------------------------------------
* Class A, B and C shares commenced operations on December 29, 1997.
This table does not reflect any performance information for the
period December 29, 1997 through December 31, 1997.
24 Focus List Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Focus List Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
==============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
----------------------------------------------------------------------------------------------
Exchange fees None None None
----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==============================================================================================
Management Fees 0.65% 0.65% 0.65%
----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 3.39% 3.39% 3.39%
----- ----- -----
----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 4.29% 4.79% 4.79%
----------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.89)% (2.89)% (2.89)%
----- ----- -----
----------------------------------------------------------------------------------------------
Net Expenses(2) 1.40% 1.90% 1.90%
----- ----- -----
----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the Focus
List Portfolio's net expenses do not exceed the amounts indicated
above.
Focus List Portfolio 25
<PAGE>
Example
This Example illustrates the cost of investing in the Focus List Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Focus List Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Focus List Portfolio;
o your investment returns 5% each year;
o the Focus List Portfolio's operating expenses remain the
same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
=================================================
Class A $685 $1,531 $2,389 $4,588
-------------------------------------------------
Class B $693 $1,483 $2,377 $4,579**
-------------------------------------------------
Class C $293 $1,183 $2,177 $4,680
-------------------------------------------------
If you do not sell your shares at the end of each period -- ***
1 Year 3 Years 5 Years 10 Years
=================================================
Class B $193 $1,183 $2,177 $4,579**
-------------------------------------------------
Class C $193 $1,183 $2,177 $4,680
-------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.40% for Class A and 1.90% for both Class B and C
shares until March 31, 2000, and thereafter will equal 4.29%
for Class A and 4.79% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
26 Focus List Portfolio
<PAGE>
Balanced Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Long-term capital growth and current income.
Principal Strategies
The Balanced Portfolio seeks capital appreciation primarily through the
equity component of its portfolio while investing in fixed income
securities primarily to lessen overall portfolio volatility and to provide
income for regular quarterly dividends.
The percentage of the Balanced 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 forecasts. When allocating equity and fixed
income investments, the Adviser takes into account the Balanced
Portfolio's intention to pay regular quarterly dividends. The amount of
quarterly dividends may fluctuate depending on prevailing interest rates,
dividend policies of issuers and how the Adviser allocates the Balanced
Portfolio's assets, among other things.
Under normal market conditions, the Balanced Portfolio will invest at
least 90% of its total assets in equity and fixed income securities.
Equity Securities. Under normal market conditions, the Balanced Portfolio
invests between 40% and 60% of its total assets in equity securities. Of
this amount, the Balanced Portfolio may invest up to 10% of its assets in
equity securities of foreign issuers in the form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Balanced Portfolio may invest must be rated at least "investment
grade" by an NRSRO at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
Fixed Income Securities. Under normal market conditions, the Balanced
Portfolio invests between 40% and 60% of its total assets in fixed income
securities. The Balanced Portfolio invests primarily in high quality debt
obligations that have been rated "A-" or higher by S&P or "A3" or better
by Moody's Investors Service, Inc. ("Moody's"). The Balanced Portfolio may
also invest in debt obligations that are rated below these categories but
considered investment-grade by Moody's or S&P. In addition, the Balanced
Portfolio may invest up to 5% of its total assets in higher-risk, below
investment-grade debt securities rated no lower than "B" by an NRSRO or
that the Adviser considers to be of comparable quality. The Adviser looks
for debt obligations that offer attractive returns that compare favorably
to those of comparable maturity U.S. Treasury securities, on a
risk-adjusted basis. For a discussion of the ratings categories of various
NRSROs, see the Appendix to the Statement of Additional Information
("SAI").
Balanced Portfolio 27
<PAGE>
Under normal market conditions, the Balanced Portfolio will invest in debt
obligations with an average maturity of 10 years or less, except that the
Portfolio may invest in U.S. government obligations of any maturity.
The Balanced Portfolio's fixed income investments include
o securities issued by the U.S. Government, its agencies,
instrumentalities or sponsored enterprises;
o debt securities issued by companies;
o mortgage-backed and asset-backed securities; and
o U.S. dollar-denominated securities issued by foreign
governments.
Principal Risks
You may lose money by investing in the Balanced Portfolio. The Balanced
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Balanced Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
and the risks that a foreign government may confiscate assets.
o The rate of inflation may increase, resulting in higher
interest rates, causing the Balanced Portfolio's debt
securities to decline in value. The value of a longer-term
fixed income security is usually more sensitive to rising
interest rates than that of short-term debt.
o Below investment-grade securities are riskier than
investment-grade securities and are more likely than
investment-grade securities to decline in value due to
defaults or bankruptcies.
o The Balanced Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield,
e.g., when the average life of a mortgage-related security is
shortened through prepayment.
28 Balanced Portfolio
<PAGE>
Who May Want to Invest in the Balanced Portfolio
The Balanced Portfolio may be appropriate for investors who:
o seek current income coupled with asset growth potential;
o are setting up trust accounts, such as charitable remainder
trusts, that have minimum payout requirements.
The Balanced Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience
share price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Balanced Portfolio by showing its performance for various time periods.
The bar chart shows the returns for Class A shares of the Balanced
Portfolio. The returns for Class B and C shares offered by this Prospectus
will differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
Balanced Portfolio Annual Total Return (%)(1)
1998 12.19
Past performance is not necessarily an indication of future results.
1 The Balanced Portfolio's year-to-date return as of June 30, 1999 was
4.75%.
During the period shown in the bar chart, the highest quarterly return was
8.41% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (5.72)% (for the quarter ended September 30, 1998).
Balanced Portfolio 29
<PAGE>
The table shows the average annual total returns for Class A, B and C
shares of the Balanced Portfolio. The table shows how the Balanced
Portfolio's average annual total return for one year and since the date of
inception compared to the S&P 500 Index, a broad-based unmanaged index
that represents the general performance of domestically traded common
stocks of mid-to large-size companies, and the Lipper Balanced Fund Index,
a non-weighted index of the 30 largest funds within the Lipper balanced
fund investment category. The figures shown in the table assume
reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Balanced Portfolio - Class A 6.01% 6.01%
--------------------------------------------------------------------------
Balanced Portfolio - Class B 6.72% 6.72%
--------------------------------------------------------------------------
Balanced Portfolio - Class C 10.63% 10.63%
--------------------------------------------------------------------------
S&P 500 Index 28.57% 28.57%
--------------------------------------------------------------------------
Lipper Balanced Fund Index 20.00% 20.00%**
--------------------------------------------------------------------------
* Class A, B and C shares commenced operations on December 29, 1997.
This table does not reflect any performance information for the
period December 29, 1997 through December 31, 1997.
** The information for the Lipper Balanced Fund Index reflects its
performance from January 1, 1998 through December 31, 1998.
30 Balanced Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Balanced Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
==============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
----------------------------------------------------------------------------------------------
Exchange fees None None None
----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==============================================================================================
Management Fees 0.65% 0.65% 0.65%
----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 2.38% 2.38% 2.38%
----- ----- -----
----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.28% 3.78% 3.78%
----------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.08)% (2.08)% (2.08)%
----- ----- -----
----------------------------------------------------------------------------------------------
Net Expenses(2) 1.20% 1.70% 1.70%
----- ----- -----
----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the of
purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the Balanced
Portfolio's net expenses do not exceed the amounts indicated above.
Balanced Portfolio 31
<PAGE>
Example
This Example illustrates the cost of investing in the Balanced Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Balanced Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Balanced Portfolio;
o your investment returns 5% each year;
o the Balanced Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
==================================================
Class A $666 $1,320 $1,997 $3,795
--------------------------------------------------
Class B $673 $1,263 $1,973 $3,776**
--------------------------------------------------
Class C $273 $963 $1,773 $3,886
--------------------------------------------------
If you do not sell your shares at the end of each period -- ***
1 Year 3 Years 5 Years 10 Years
==================================================
Class B $173 $963 $1,773 $3,776**
--------------------------------------------------
Class C $173 $963 $1,773 $3,886
--------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.20% for Class A and 1.70% for both Class B and C
shares until March 31, 2000, and thereafter will equal 3.28%
for Class A and 3.78% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
32 Balanced Portfolio
<PAGE>
International Equity Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Long-term capital appreciation.
Principal Strategies
Under normal market conditions, the International Equity Portfolio invests
substantially all of its assets in equity securities of foreign companies,
with at least 65% of its total assets invested in such securities. Foreign
securities include 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).
The International Equity Portfolio's investments may be denominated in
U.S. dollars, foreign currencies or multinational currency units.
Under normal market conditions, the International Equity Portfolio invests
in the securities of companies located in at least three countries outside
of the United States. The International Equity Portfolio expects to invest
a substantial portion of its assets in the securities of issuers located
in Australia, Canada, Japan, New Zealand and the developed countries of
Western Europe.
In selecting investments for the International Equity Portfolio, Marvin &
Palmer Associates Inc., the International Equity Portfolio's investment
sub-adviser (the "Sub-Adviser"), evaluates whether a particular country's
securities markets have higher-than-average potential for capital
appreciation. The Sub-Adviser will then seek out companies with strong
fundamental characteristics, including solid management, sound balance
sheets and the potential for positive earnings growth.
The International Equity Portfolio also may invest in the securities of
issuers located in countries that are considered to be emerging or
developing ("emerging countries") by the World Bank, the International
Finance Corporation, or the United Nations and its authorities. These
countries are located primarily in Africa, Asia (ex-Japan), the Caribbean
islands, Latin America, the Middle East and certain parts of Europe
(Cyprus, the Czech Republic, Estonia, Greece, Hungary, Poland, Russia,
Slovakia and Turkey).
A company is considered to be an emerging country issuer if any of the
following apply:
o Its securities are principally traded in an emerging country.
o It derives at least 50% of its total revenue from (a)
providing goods or services in emerging countries or (b) sales
made in emerging countries.
o It maintains 50% or more of its assets in one or more emerging
countries.
o It is organized under the laws of, or has a principal office
in, an emerging country.
International Equity Portfolio 33
<PAGE>
Foreign Currency Hedging -- Use of Forward Foreign Exchange Contracts. The
International Equity Portfolio may purchase or sell forward foreign
currency exchange contracts ("forward contracts") for hedging purposes. A
forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date. When the Sub-Adviser believes that a
foreign currency may suffer a substantial decline against the U.S. dollar,
the International Equity Portfolio 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.
The International Equity Portfolio may enter into a forward contract for
the following reasons:
o To "lock in" the U.S. dollar price of a security denominated
in a foreign currency (transaction hedge).
o To protect against an anticipated decline in the foreign
currency in which a portfolio security is denominated against
the U.S. dollar (position hedge).
o To protect against an anticipated decline in the foreign
currency in which a portfolio security is denominated against
another foreign currency (cross hedge).
Principal Risks
You may lose money by investing in the International Equity Portfolio. The
International Equity Portfolio is also subject to the following principal
risks, more fully described in "Risk Factors" in this Prospectus. Some or
all of these risks may adversely affect the International Equity
Portfolio's net asset value, yield and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or
otherwise generate the intended result.
o A security's value will fluctuate in response to events
affecting an issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher
political and economic risks, lack of reliable information,
fluctuations in currency exchange rates, and the risks that a
foreign government may confiscate assets, restrict the ability
to exchange currency or restrict the delivery of securities.
o The value of the International Equity Portfolio's investment
in forward contracts suffers from unanticipated changes in
currency prices.
o Foreign securities issued in emerging countries generally are
more volatile than securities issued in established markets
because the securities markets in these countries have
comparatively less trading volume and fewer participants.
o Inefficient settlement procedures in emerging countries may
cause the International Equity Portfolio to miss investment
opportunities or be exposed to liability for failure to
deliver securities.
o Issuers in emerging countries are subject to less government
regulation than their counterparts in the United States.
34 International Equity Portfolio
<PAGE>
Who May Want to Invest in the International Equity Portfolio
The International Equity Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add an international equity component to their
portfolio.
The International Equity Portfolio may not be appropriate for investors
who:
o are not willing to accept the risks associated with foreign
securities markets or currency fluctuation;
o are not willing to take any risk that they may experience
share price fluctuations, assume the risks associated with
foreign stocks or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
International Equity Portfolio by showing its performance for various time
periods.
The bar chart shows returns for Class A shares of the International Equity
Portfolio. The returns for Class B and C shares offered by this Prospectus
will differ from the return for the Class A shares shown on the bar chart,
depending on the expenses of each class. The bar chart does not reflect
any sales charges that you may be required to pay when you buy or sell
your shares. If sales charges were reflected, returns would be lower than
those shown.
International Equity Portfolio Annual Total Return (%)(1)
[BAR GRAPH]
1998 25.86
Past performance is not necessarily an indication of future results.
1 The International Equity Portfolio's year-to-date return as of June
30, 1999 was 4.11%.
During the period shown in the bar chart, the highest quarterly return was
16.62% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (14.18)% (for the quarter ended September 30, 1998).
International Equity Portfolio 35
<PAGE>
The table shows average annual total returns for Class A, B and C shares
of the International Equity Portfolio. The table shows how the
International Equity Portfolio's average annual total return for one year
and since the date of inception compared to the Morgan Stanley Capital
International Europe, Australasia, Far East Index (the "MSCI EAFE Index"),
a broad-based unmanaged index that represents the general performance of
common stocks of issuers located in developed countries in Europe and the
Pacific Basin, weighted by each component country's market capitalization.
The figures shown in the table assume reinvestment of dividends and
distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
International Equity Portfolio - Class A 18.94% 18.94%
--------------------------------------------------------------------------
International Equity Portfolio - Class B 20.27% 20.27%
--------------------------------------------------------------------------
International Equity Portfolio - Class C 24.27% 24.27%
--------------------------------------------------------------------------
MSCI EAFE Index 20.00% 20.00%
--------------------------------------------------------------------------
* Class A, B and C shares commenced operations on December 29, 1997.
This table does not reflect any performance information for the
period December 29, 1997 through December 31, 1997.
36 International Equity Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the International Equity Portfolio.
<TABLE>
<CAPTION>
Shareholder Fees (paid directly from your investment)* Class A Class B Class C
==============================================================================================
<S> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.50% None None
----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) ** 5.00%(1) 1.00%
----------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
----------------------------------------------------------------------------------------------
Redemption fees *** *** ***
----------------------------------------------------------------------------------------------
Exchange fees None None None
----------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==============================================================================================
Management Fees 1.00% 1.00% 1.00%
----------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 0.75% 0.75%
----------------------------------------------------------------------------------------------
Other Expenses (includes a 0.25% shareholder servicing fee) 2.88% 2.88% 2.88%
----- ----- -----
----------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 4.13% 4.63% 4.63%
----------------------------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.38)% (2.38)% (2.38)%
----- ----- -----
----------------------------------------------------------------------------------------------
Net Expenses(2) 1.75% 2.25% 2.25%
----- ----- -----
----------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale
or exchange of Portfolio shares.
** You will pay a CDSC of 1% of the lesser of purchase or sale price of
your Class A shares if you sell them up to one year after the date
of purchase if you purchased them at net asset value because (a) you
purchased $1 million or more of Class A shares or (b) you purchased
them within 60 days of selling shares of a mutual fund that charges
a sales load or is subject to a CDSC and not distributed by Bear
Stearns.
*** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Class B deferred sales charge declines over time. See "How the
Trust Calculates Sales Charges -- Class B Shares."
2 The Adviser has agreed to waive a portion of its fee and reimburse
certain expenses until at least March 31, 2000, so that the
International Equity Portfolio's net expenses do not exceed the
amounts indicated above.
International Equity Portfolio 37
<PAGE>
Example
This Example illustrates the cost of investing in the International Equity
Portfolio over various time periods. It is intended to help you compare
the cost of investing in the International Equity Portfolio with the cost
of investing in other mutual funds.
The Example assumes that:
o you invest $10,000 in the International Equity Portfolio;
o your investment returns 5% each year;
o the International Equity Portfolio's operating expenses remain
the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
=================================================
Class A $718 $1,531 $2,358 $4,490
-------------------------------------------------
Class B $728 $1,483 $2,345 $4,480**
-------------------------------------------------
Class C $328 $1,183 $2,145 $4,582
-------------------------------------------------
If you do not sell your shares at the end of each period -- ***
1 Year 3 Years 5 Years 10 Years
=================================================
Class B $228 $1,183 $2,145 $4,480**
-------------------------------------------------
Class C $228 $1,183 $2,145 $4,582
-------------------------------------------------
* This Example assumes that net portfolio operating expenses
will equal 1.75% for Class A and 2.25% for both Class B and C
shares until March 31, 2000, and thereafter will equal 4.13%
for Class A and 4.63% for both Class B and C shares.
** Class B shares convert to Class A shares eight years after
purchase; therefore, Class A expenses are used in the Example
after year eight in the case of Class B shares.
*** Class A shares are not shown in this table because generally
no CDSC applies to investments of $10,000 in Class A shares.
See "How the Trust Calculates Sales Charges" and "Sales Charge
Reductions and Waivers."
38 International Equity Portfolio
<PAGE>
INVESTMENTS
Principal Investment Strategies -- Additional Information
S&P STARS Portfolio
S&P introduced S&P STARS in January 1987. Since 1993, on average, each S&P
STARS category has consisted of approximately the number of stocks shown
below. Rankings may change frequently as S&P analysts evaluate
developments affecting individual securities and the markets.
S&P STARS Category Number of Stocks
-------------------------------------------------------
Five stars 95
-------------------------------------------------------
Four stars 385
-------------------------------------------------------
Three stars 530
-------------------------------------------------------
Two stars 90
-------------------------------------------------------
One star 10 to 23
-------------------------------------------------------
To evaluate the performance of stocks in the various categories, and thus
the performance of its analysts, S&P STARS initially gives equal weight by
dollar amount to each stock, does not rebalance the portfolio based on
changes in values or rankings and does not reflect dividends or
transaction costs. While the performance of S&P STARS categories cannot be
used to predict actual results, S&P believes it is useful in evaluating
its analysts. The pool of S&P analysts changes and their past performance
does not necessarily predict future results either of S&P STARS-ranked
stocks or of the S&P STARS Portfolio. From January 1, 1987 through June
30, 1999:
o The S&P 500 Index (measured on a total return basis, without
dividend reinvestment) increased by 466.84%. During this
period, the average dividend yield of securities included in
the S&P 500 Index was 2.65% and the average dividend yield of
five-star stocks was 1.52%.
o The ranked stocks experienced the following changes in value:
S&P STARS Category Percentage change in value
-----------------------------------------------------------
Five stars 976.87%
-----------------------------------------------------------
Four stars 494.53%
-----------------------------------------------------------
Three stars 270.53%
-----------------------------------------------------------
Two stars 244.13%
-----------------------------------------------------------
One star (8.02)%
-----------------------------------------------------------
The Adviser believes that this information means only that, historically,
five-star stocks have significantly outperformed lower-ranked stocks and
that one star stocks have significantly underperformed the higher-ranked
stocks. You should not use this information to predict whether past
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 Index. In addition, the performance of five-star and one-star stocks
has not borne a consistent relationship to each other or to the
performance of the S&P 500 Index, as shown below. The S&P STARS Portfolio
is managed actively. Its performance will depend primarily on the
Adviser's investment decisions. The S&P STARS Portfolio will incur
transaction and other costs, including management and distribution fees,
that are not reflected in the information shown below.
39
<PAGE>
Relative Performance Rankings (1 = highest performance)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
=========================================================================================================
<S> <C> <C> <C> <C> <C>
1 One star stocks S&P 500 Index Five star stocks Five star stocks Five star stocks
- ---------------------------------------------------------------------------------------------------------
2 S&P 500 Index Five star stocks S&P 500 Index S&P 500 Index S&P 500 Index
- ---------------------------------------------------------------------------------------------------------
3 Five star stocks One star stocks One star stocks One star stocks One star stocks
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The S&P STARS Portfolio need not sell a security whose S&P STARS ranking
has been downgraded. Also, the S&P STARS Portfolio need not terminate a
"short" position if a one star security's STARS ranking has been upgraded.
In addition, if S&P downgrades a security held by the S&P STARS Portfolio
to four stars from five stars, the Portfolio may purchase additional
shares of that security without limitation. Similarly, if S&P upgrades a
shorted security from one star to two stars, the Portfolio may sell short
additional shares of that security without limitation.
For purposes of calculating the 85% of total assets that the S&P STARS
Portfolio will invest pursuant to its principal investment strategy,
"total assets" will not include the Portfolio's investment in money market
instruments to maintain liquidity.
The Insiders Select Fund
The Adviser believes that collecting, classifying and analyzing legally
required reports of corporate insider transactions provides valuable
investment management information, because these insiders are in the best
position to understand their companies' near-term prospects. Corporate
insiders trade their company's stock for various reasons. Some
transactions are unrelated to the future of the company, such as the sale
of stock to buy a home or finance a child's college education, tax
planning or token purchases to signal confidence in the company. 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 may believe that 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 may indicate broad
agreement within a firm as to the direction of the stock.
Financial analysts employ a number of research tools to learn more about
the companies they follow, including visits to the company and in-depth
discussions with management. Successful analysts learn to interpret
management's words and actions. Management may use discussions with
certain analysts to signal its views to the market. The Adviser also
believes that revisions in analysts' earnings and ratings predictions may
indicate a stock's future returns.
A company must routinely decide whether to maintain or change its dividend
policy, buy its own stock in the open market or issue new securities. From
time to time the company may decide that its stock is undervalued,
providing an opportunity to buy back the stock in the open market. By
contrast, a company's decision to sell securities may indicate that the
company believes that its stock has reached a near-term high, a possible
sell signal.
40
<PAGE>
Focus List Portfolio
Bear Stearns publishes the Focus List, which is a list of stocks selected
by the Bear Stearns Focus List Committee. The Committee monitors the Focus
List daily, and candidates are considered based on one or more of the
following criteria: market outlook, perception of the stock's sector, and
the stock's current valuation relative to the market and its industry.
Domestic and international stocks and ADRs rated Buy (1) or Attractive (2)
are eligible for inclusion on the Focus List.
Generally, 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 how much of the Focus List
Portfolio's assets to allocate to each Focus List stock. The Adviser may
make changes in the allocation as investment and economic conditions
change. Depending upon market conditions and to the extent the Focus List
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 before Bear Stearns publishes it.
The Focus List Committee automatically removes from the Focus List stocks
that an analyst has downgraded below Attractive. However, the Focus List
Committee may delete stocks for other reasons. For example, it may delete
a stock when the stock has achieved its target price range, a catalyst
fails to materialize or have its expected effect, or new, more attractive
opportunities arise.
The Focus List may include stocks of issuers for which Bear Stearns or an
affiliate performs investment banking services for which it receives fees,
as well as stocks in which Bear Stearns or an affiliate makes a market and
may have a long or short position. When Bear Stearns or an affiliate
participates in a distribution of stock, the Adviser may be prohibited
from purchasing that stock for the Focus List Portfolio. The activities of
Bear Stearns or an affiliate may 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. The Focus List is
available to other clients of Bear Stearns and its affiliates, including
the Adviser.
41
<PAGE>
Investments and Techniques
This table summarizes some of the principal investments and techniques,
described below, that each Portfolio may use to achieve its investment
objectives.
<TABLE>
<CAPTION>
International
S&P STARS Insiders Large Cap Small Cap Focus List Balanced Equity
Portfolio Select Fund Portfolio Portfolio Portfolio Portfolio Portfolio
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
ADRs x x x x x x
- ---------------------------------------------------------------------------------------------------------------
Asset-backed
securities x
- ---------------------------------------------------------------------------------------------------------------
Convertible
securities x x x x x x
- ---------------------------------------------------------------------------------------------------------------
Debt securities x
- ---------------------------------------------------------------------------------------------------------------
Equity securities x x x x x x x
- ---------------------------------------------------------------------------------------------------------------
Mortgage-related
securities x
- ---------------------------------------------------------------------------------------------------------------
Real estate investment
trusts ("REITs") x
- ---------------------------------------------------------------------------------------------------------------
Short sales x
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
o ADRs are receipts for the foreign company shares held by a
United States depositary institution, entitling the holder to
all dividends and capital gains of the underlying shares. ADRs
are quoted in U.S. dollars and are traded on U.S. exchanges.
o Asset-backed securities have a structure that is similar to
mortgage-related securities (see below). The collateral for
these securities includes home equity loans, automobile and
credit card receivables, boat loans, computer leases, airplane
leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
o Convertible securities are bonds, debentures, notes, preferred
stocks or other securities that may be converted into or
exchanged for common stock. Convertible securities are
characterized by higher yields than common stocks, but lower
yields than comparable non-convertible securities, less price
fluctuation than the underlying common stock since they have
fixed income characteristics, and potential for capital
appreciation if the market price of the underlying common
stock increases.
o Debt securities, including bills, bonds, and notes, represent
money borrowed that must be repaid, usually having a fixed
amount, a specific maturity date or dates, and a specific rate
of interest (or formula for determining the interest rate) or
an original purchase discount.
o Equity securities include foreign and domestic common or
preferred stocks, rights and warrants.
o Mortgage-related securities represent interests in pools of
mortgage loans made by lenders like savings and loan
institutions, mortgage bankers, commercial banks and others.
o 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.
o Short sales. In a short sale, a Portfolio sells a security it
does not own anticipating that the price will decline. To
complete a short sale, the Portfolio must borrow the security
to make delivery and must then replace the security borrowed
by buying it at the prevailing market price, which may be
higher or lower than the price at which the Portfolio sold the
security short. Short sales involve leverage, which may
exaggerate a gain or loss.
42
<PAGE>
Other Investment Strategies
o Temporary defensive measures. From time to time, during
unfavorable market conditions, the Adviser may invest
"defensively." This means a Portfolio may make temporary
investments that are not consistent with its investment
objective and principal strategies. Engaging in temporary
defensive measures may reduce the benefit from any upswing in
the market and may cause a Portfolio to fail to meet its
investment objective.
For temporary defensive purposes, each Portfolio may hold cash
(U.S. dollars) and may invest all of its assets in
high-quality fixed-income securities, repurchase agreements or
U.S. or foreign money market instruments.
For temporary defensive purposes, the International Equity
Portfolio may hold foreign currencies or multinational
currency units.
o Portfolio turnover. The Adviser may trade actively to achieve
a Portfolio's goals. Emerging country markets are especially
volatile and may result in more frequent trading. This may
result in higher capital gains distributions, which would
increase your tax liability. Frequent trading may also
increase the Portfolio's costs, lessening its performance over
time.
The SAI describes each Portfolio's investment strategies in more detail.
RISK FACTORS
As with all mutual funds, investing in the Portfolios involves certain
risks. There is no guarantee that a Portfolio will meet its investment
objective. You can lose money by investing in a Portfolio if you sell your
shares after it declines in value below your original cost. There is never
any assurance that a Portfolio will perform as it has in the past.
The Portfolios may use various investment techniques, some of which
involve greater amounts of risk than others. You will find a detailed
discussion of these investment techniques in the SAI. To reduce risk, the
Portfolios are subject to certain limitations and restrictions on their
investments, which are also described in the SAI.
Each Portfolio is subject to the following principal risks, except as
noted.
General Risks
o Market risk is the risk that the market value of a security
may go up or down, sometimes rapidly. These fluctuations may
cause the security to be worth less than it was at the time it
was acquired. Market risk may involve a single security or a
particular sector.
o Manager risk is the risk that the portfolio managers'
investment strategy may not produce the intended results.
Manager risk also involves the possibility that the portfolio
managers fail to execute an investment strategy effectively.
o Year 2000 risk. Like all mutual funds, a Portfolio could be
adversely affected if the computer systems used by its service
providers, including shareholder servicing agents, are unable
to recognize dates after 1999. Each Portfolio's service
providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however,
that these steps will be adequate to avoid a temporary service
disruption or other adverse impact on the Portfolios. In
addition, an issuer's failure to process accurately Year 2000
data may
43
<PAGE>
cause that issuer's securities to decline in value or delay
the payment of interest to a Portfolio. The risk of computer
failure may be greater with respect to investments in foreign
countries, which may lack the expertise or resources to
adequately address the issue.
Risks of Equity Securities
o Equity risk is the risk that a security's value will fluctuate
in response to events affecting an issuer's profitability or
viability. Unlike debt securities, which have a superior claim
to a company's earnings and cash flow in case of liquidation,
equity securities benefit from a company's earnings and cash
flow only after the company meets its other obligations. For
example, a company must pay interest on its bonds before it
pays stock dividends to shareholders, and bondholders have a
superior claim to the company's assets in the event of
bankruptcy.
Risks of Hedging or Leverage Transactions
o Correlation risk. Futures and options contracts and other
derivative instruments can be used in an effort to hedge
against risk. Generally, an effective hedge generates an
offset to gains or losses of other investments made by a
Portfolio. Correlation risk is the risk that a hedge using
futures or options contracts (or any derivative, for that
matter) does not, in fact, respond to economic or market
conditions in the manner the portfolio manager expected. In
such a case, the hedge may not generate gains sufficient to
offset losses and may actually generate losses due to the cost
of the hedge or otherwise.
o Leverage risk is the risk associated with those techniques in
which a relatively small amount of money invested puts a much
larger amount of money at risk through borrowing or futures
trading, for example. Selling short securities or using
derivatives for hedging may involve leverage. If a portfolio
manager does not execute the strategy properly, or the market
does not move as anticipated, losses may substantially exceed
the amount of the original investment. A Portfolio's use of
derivatives for asset substitution may also involve leverage.
Risks of Foreign Securities
o Foreign issuer risk. Compared to U.S. companies, less
information is generally available to the public about foreign
companies. Foreign brokers and issuers may not be subject to
the uniform accounting, auditing, and financial reporting
standards and practices prevalent in the U.S. In addition,
foreign stock exchanges and other securities markets may be
more volatile and subject to less governmental supervision
than their counterparts in the U.S. Investments in foreign
countries could be affected by factors not present in the
U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can
make foreign investments, especially those in emerging
countries, more volatile than U.S. investments.
44
<PAGE>
o Currency risk (International Equity Portfolio only).
Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment.
Adverse changes in exchange rates may erode or reverse any
gains produced by foreign currency-denominated investments and
may widen any losses. On January 1, 1999, participating
nations in the European Economic and Monetary Union introduced
a single currency, the euro. This action may present unique
uncertainties for securities denominated in currencies that
are components of the euro. Political and economic risks,
along with other factors, could adversely affect the value of
the International Portfolio's securities.
o Emerging markets risk (International Equity Portfolio only).
Emerging country economies often compare unfavorably with the
United States economy in growth of gross domestic product,
rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position. Certain
emerging countries have experienced and continue to experience
high rates of inflation, sharply eroding the value of their
financial assets. An emergency may arise where trading of
emerging country securities may cease or may be severely
limited or where an emerging country governmental or corporate
issuer defaults on its obligations. The governments of certain
emerging countries impose restrictions or controls that may
limit or preclude the International Equity Portfolio's
investment in certain securities. The International Equity
Portfolio may need governmental approval for the repatriation
of investment income, capital or sales proceeds. An emerging
country government may also impose temporary restrictions on
the disposition of portfolio securities.
Risks of Debt Securities (Balanced Portfolio only)
o Interest rate risk. The value of a debt security typically
changes in the opposite direction from a change in interest
rates. When interest rates go up, the value of a debt security
typically goes down. When interest rates go down, the value of
a debt security typically goes up. Generally, the longer the
maturity of a security, the more sensitive it is to changes in
interest rates.
o Inflation risk is the risk that inflation will erode the
purchasing power of the cash flows generated by debt
securities. Fixed-rate debt securities are more susceptible to
this risk than floating-rate debt securities.
o Reinvestment risk is the risk that when interest rates are
declining, a Portfolio will have to reinvest interest income
or prepayments on a security at lower interest rates. In a
declining interest rate environment, lower reinvestment rates
and price gains resulting from lower interest rates will
offset each other to some extent.
o Credit (or default) risk is the risk that the issuer of a debt
security will be unable to make timely payments of interest or
principal. Credit risk is measured by NRSROs such as S&P,
Fitch IBCA, Inc. or Moody's.
o Below investment-grade securities ("junk bonds") may be less
liquid, more susceptible to real or perceived adverse economic
conditions and more difficult to evaluate than higher-rated
securities. The market for these securities has relatively few
participants, mostly institutional investors, and low trading
volume. At times, a Portfolio may have difficulty selling
particular high yield securities at a fair price and obtaining
accurate valuations in order to calculate its net asset value.
45
<PAGE>
Risks of Mortgage-Related Securities (Balanced Portfolio only)
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of
mortgage-related securities. The level of interest rates and
other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the
prepayment rate tends to decrease, lengthening the average
life of a pool of mortgage-related securities. In periods of
falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a
Portfolio may have to reinvest the proceeds from prepayments
at lower interest rates.
Risks of Real Estate Securities (Balanced Portfolio only)
o Real estate risk is the risk that the value of a security will
fluctuate because of changes in, among other things, property
values, rental property vacancies, overbuilding, changes in
local laws, increased property taxes and operating expenses.
o Regulatory risk. Certain REITs may fail to qualify for
pass-through of income under federal tax law, or to maintain
their exemption from federal securities laws registration
requirements.
Particular Risks of the S&P STARS Portfolio Only
o S&P STARS rankings represent the subjective determination of
S&P analysts. Past performance of securities included in S&P
STARS does not necessarily predict the S&P STARS Portfolio's
future performance.
46
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the
investment adviser of the Portfolios. The Adviser was established in 1985
and 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 & Co. Inc.,
is a leading United States investment banking, securities trading and
brokerage firm serving U.S. and foreign corporations, governments and
institutional and individual investors. The Adviser is a registered
investment adviser and offers investment advisory and administrative
services to open-end investment funds and other managed accounts with
aggregate assets at June 30, 1999 of over $12.2 billion.
The Adviser supervises and assists in the overall management of the
affairs of the Trust, subject to oversight by the Trust's Board of
Trustees.
For the fiscal year ended March 31, 1999, the Adviser received management
fees based on a percentage of the average daily net assets of each
Portfolio, after waivers, as shown in the following table.
S&P STARS Portfolio 0.48%
---------------------------------------
Insiders Select Fund 0.57%
---------------------------------------
Large Cap Portfolio 0.00%
---------------------------------------
Small Cap Portfolio 0.10%
---------------------------------------
Focus List Portfolio 0.00%
---------------------------------------
Balanced Portfolio 0.00%
---------------------------------------
International Equity Portfolio 0.00%
---------------------------------------
Portfolio Management Team
The Adviser uses a team approach to manage each Portfolio. The members of
each team together are primarily responsible for the day-to-day management
of each Portfolio's investments. No single individual is responsible for
managing a Portfolio. Each team consists of senior portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to
manage the assets of each Portfolio.
Investment Sub-Adviser -- International Equity Portfolio
Marvin & Palmer Associates, Inc. (the "Sub-Adviser") serves as the
investment sub-adviser to the International Equity Portfolio, pursuant to
an agreement with the Adviser and subject to the overall supervision of
the Adviser. The Sub-Adviser, a registered investment adviser, was founded
in 1986 and specializes in global, non-U.S., emerging market and U.S.
equity portfolio management for institutional accounts. As of June 30,
1999, the Sub-Adviser managed over $8.7 billion in assets. The Sub-Adviser
is located at 1201 North Market Street, Suite 2300, Wilmington, Delaware
19801.
47
<PAGE>
HOW THE PORTFOLIOS VALUE THEIR SHARES
The net asset value ("NAV"), multiplied by the number of Portfolio shares
you own, gives you the value of your investment. Each Portfolio calculates
its share price, called its NAV, each business day as of the close of the
New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m.
Eastern Time. You may buy, sell or exchange shares on any business day at
a price that is based on the NAV that is calculated after you place your
order. A business day is a day on which the NYSE is open for trading or
any day in which enough trading has occurred in the securities held by a
Portfolio to affect the NAV materially.
Portfolio securities that are listed primarily on foreign exchanges may
trade on weekends or on other days on which the Portfolios do not price
their shares. In this case, the NAV of a Portfolio's shares may change on
days when you are not able to buy or sell shares.
The Portfolios value their investments based on market value or, where
market quotations are not readily available, based on fair value as
determined in good faith by the Trust's Board of Trustees. The NAV for
each class is calculated by adding up the total value of the relevant
Portfolio's investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the
class.
NAV = Total Assets Less Liabilities
-----------------------------
Number of Shares Outstanding
You can request each Portfolio's current NAV by calling 1-800-447-1139.
INVESTING IN THE PORTFOLIOS
This section provides information to assist you in purchasing shares of
the Portfolios. It describes the minimum investment requirements for the
Portfolios, the expenses and sales charges applicable to each Class of
shares and the procedures to follow if you decide to buy shares. Please
read the entire Prospectus carefully before buying shares of a Portfolio.
Investment Requirements
Minimum Initial Investment:
o Non-Retirement Account: $1,000
o Retirement Account: $500
Minimum Subsequent Investment:
o Non-Retirement Account: $50
o Retirement Account: $25
48
<PAGE>
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, B and 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 representative can help you choose the class of shares
that best suits your investment needs.
o Class A shares have a front-end sales charge, which is added
to the Class A NAV to determine the offering price per share.
o Class B 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 and C shares have a
contingent deferred sales charge ("CDSC") that you must pay if
you sell your shares within a specified period of time. In
addition, the annual expenses of Class B and C shares are
higher than the annual expenses of Class A shares.
In deciding which class is best, you may consider, among other things:
o how much you intend to invest;
o the length of time you expect to hold your investment.
49
<PAGE>
Relative Advantages of Each Share Class
<TABLE>
<CAPTION>
Investor Characteristics Advantages
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A o Long-term investment horizon and/or o Lower expense structure and the amount
qualify for waiver or reduction of sales of the initial sales charge decreases as
charge you invest more money
- ---------------------------------------------------------------------------------------------------
Class B o Long-term investment horizon o No front-end sales charge so the full
amount of your investment is put to work
right away; converts to Class A shares
after eight years
- ---------------------------------------------------------------------------------------------------
Class C o Short-term investment horizon o No front-end sales charge so the full
amount of your investment is put to work
right away and the CDSC is lower than
that of Class B shares, declining to zero
after one year
- ---------------------------------------------------------------------------------------------------
</TABLE>
You should consult your financial adviser or account representative before
investing in a Portfolio.
You may be eligible to use the Right of Accumulation or Letter of Intent
privileges to reduce your Class A sales charges. See "Reduction of Class A
Sales Charges" below.
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 5.50% None None
Sales Charge*
- -----------------------------------------------------------------------------------------------
CDSC None** 5% to 0%, declining 1%, if you sell shares
the longer you hold within one year of
your shares purchase
- -----------------------------------------------------------------------------------------------
Annual Lower than Class B Higher than Class A shares Higher than Class A
Expenses and C shares (Note: Class B shares convert shares; same as Class
to Class A shares 8 years B shares
after purchase)***
- -----------------------------------------------------------------------------------------------
</TABLE>
* There are several ways that you can reduce these charges, as described
under "Sales Charge Reductions and Waivers."
** You will pay a CDSC of 1% of the lesser of purchase or sale price of your
Class A shares if you sell them up to one year after the date of purchase
if you purchased them at net asset value because (a) you purchased $1
million or more of Class A shares or (b) you purchased them within 60 days
of selling shares of a mutual fund that charges a sales load or is subject
to a CDSC and not distributed by Bear Stearns.
*** Class B shares will not convert to Class A shares if the Adviser believes
that the Internal Revenue Service will consider the conversion to be a
taxable event. If Class B shares do not convert to Class A shares, they
will continue to be subject to higher expenses than Class A shares
indefinitely.
50
<PAGE>
How the Trust Calculates Sales Charges
Class A Shares
The public offering price for Class A shares is the NAV that the Trust
calculates after you place your order plus the applicable sales load, as
determined in the following table.
Total Sales Load
Amount As a % of offering
of Investment price per share As a % of NAV
- --------------------------------------------------------------------------------
Less than $50,000 5.50 5.82
$50,000 or more but less than $100,000 4.75 4.99
$100,000 or more but less than $250,000 3.75 3.90
$250,000 or more but less than $500,000 2.75 2.83
$500,000 or more but less than $1,000,000 2.00 2.04
$1,000,000 and above 0.00* 0.00
- ----------
* You will pay a CDSC of 1% of the lesser of purchase or sale price of your
Class A shares if you sell them up to one year after the date of purchase
if you purchased them at net asset value because (a) you purchased $1
million or more of Class A shares or (b) you purchased them within 60 days
of selling shares of a mutual fund that charges a sales load or is subject
to a CDSC and not distributed by Bear Stearns.
Class B Shares
The public offering price for Class B shares is the NAV that the Trust
calculates after you place your order. You pay no initial sales charge on
Class B shares, but you will pay a CDSC if you sell your shares within six
years of purchase. The amount of the CDSC, if any, will vary depending on
the number of years from the time you buy until the time you sell your
Class B shares. Class B shares have higher annual expenses than Class A
shares.
For the purpose of determining the number of years from the time of any
purchase, the Trust will aggregate all payments during a month and
consider them made on the first day of that month.
CDSC as a % of Dollar
Year Since Purchase Amount Subject to CDSC
------------------------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
- ----------
* 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 will convert into Class A shares of the new
Portfolio based on the date of the initial purchase of the shares of the
exchanged Portfolio. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of the
initial purchase of the underlying shares, on a pro rata basis. The Trust
does not consider conversion to Class A shares, to be a purchase or sale
for federal income tax purposes. You should consult with your own tax
adviser.
51
<PAGE>
Class C Shares
The public offering price for Class C shares is the NAV that the Trust
calculates after you place your order. You pay no initial sales charge at
the time of purchase. You will pay a CDSC of 1%, however, if you sell
Class C shares within the first year of purchase.
The Trust will calculate the CDSC on Class B and C shares in a manner that
results in the lowest possible charge. The Portfolios will apply the CDSC
to the lower of
o the purchase price of the shares, or
o the current market value of the shares being sold. You will
pay no CDSC when you sell shares you have acquired through
reinvestment of dividends or capital gain distributions.
Sales Charge Reductions and Waivers
Waiver of Class A Sales Charges
The following categories of investors may buy Class A shares without a
front-end sales charge:
o Bear Stearns, its affiliates and their officers, directors or
employees (including retired employees); any partnership of
which Bear Stearns is a general partner, any Trustee or
officer of the Trust and certain family members of any of the
these individuals.
o Employees or registered representatives of any broker-dealers
with whom the Distributor has entered into sales agreements
("Authorized Dealers") and their spouses and minor children.
o Qualified retirement plans of Bear Stearns.
o Trustees or directors of investment companies for which BSAM
or an affiliate acts as sponsor.
o Any state, county or city, or any instrumentality, department,
authority or agency that is prohibited by law from paying a
sales load or commission in connection with the purchase of
shares of a Portfolio.
o Institutional investment clients, including
corporate-sponsored pension and profit-sharing plans, other
benefit plans and insurance companies.
o Pension funds, state and municipal governments or funds,
Taft-Hartley plans and qualified non-profit organizations,
foundations and endowments.
o Trust institutions (including bank trust departments)
investing on their own behalf or on behalf of their clients.
o Service providers to the Portfolios.
o Accounts for which an Authorized Dealer or investment adviser
charges an asset management fee (including "wrap" fees).
o Current shareholders of other mutual funds not distributed by
Bear, Stearns & Co. Inc., the Portfolios' distributor, that
have paid a front end sales charge or were subject to a CDSC,
and that buy shares of a Portfolio within 60 days of selling
shares of the other mutual fund. To qualify for this waiver,
you or your Authorized Dealer must notify Bear Stearns in
writing. However, if you sell your Portfolio shares up to one
year after purchase, the Portfolio will impose a CDSC on 1% of
the lesser of purchase or sale price.
To take advantage of the sales charge waiver, you must indicate your
eligibility on your Account Information Form. If you think you may be
eligible for a sales charge waiver, please contact your account
representative or call PFPC Inc., the Portfolios' Transfer Agent, at
1-800-447-1139.
52
<PAGE>
Reduction of Class A Sales Charges
You may reduce your Class A sales charge by taking advantage of the
following privileges:
o Right of Accumulation. Lets you add the value of all Class A
shares of the Portfolios that you currently own for purposes
of calculating the sales charge on future purchases of Class A
shares. You may count share purchases made by the following
investors to calculate the reduced sales charge: you, your
spouse and your children under the age of 21 (including shares
in certain retirement accounts), and a company that you, your
spouse or your children control; a trustee or other fiduciary
account (including an employee benefit plan); a trustee or
other fiduciary that buys shares concurrently for two or more
employee benefit plans of a single employer or of affiliated
employers.
o Letter of Intent. Lets you buy Class A shares of any Portfolio
over a 13-month period at the same sales charge as if all
shares had been bought at once. You are not obligated to buy
the full amount of the shares. However, you must complete the
intended purchase to obtain the reduced sales load. To qualify
for this plan, check the "Letter of Intent" box on the Account
Information Form at the time you buy shares of any Portfolio.
Waiver of CDSC
The Trust will waive the CDSC of Class A, B and C shares under the
following circumstances:
o redemptions made within one year after the death or disability
of a shareholder;
o redemptions by employees participating in eligible benefit
plans, including separation of service;
o redemptions as a result of a combination of any investment
company with a Portfolio by merger, acquisition of assets or
otherwise;
o a mandatory distribution under a tax-deferred retirement plan;
o redemptions made through 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 you establish
the automatic withdrawal feature.
If you believe you may qualify for a waiver of the CDSC, please contact
your account representative or the Transfer Agent.
53
<PAGE>
Distribution Fees and Shareholder Servicing Fees
Distribution Fees. The Trust has adopted a distribution plan in accordance
with Rule 12b-1 under the Investment Company Act of 1940 for each
Portfolio's Class A, B and C shares. Under the distribution plan, each
Portfolio pays the Distributor a fee for the sale and distribution of its
shares. The plan provides that each Portfolio's Class A shares pays 0.25%
of its average daily net assets and each Portfolio's Class B and C shares
each pay 0.75% of its average daily net assets.
Keep in mind that:
o Each Portfolio pays distribution fees on an ongoing basis.
Over time, these fees will increase the cost of your
investment and may cost you more than paying higher front-end
or back-end sales charges.
o The Distributor will waive its distribution fees to the extent
that a Portfolio would exceed the limitations imposed by the
National Association of Securities Dealers on asset-based
sales charges.
Shareholder Servicing Fees. The Trust has adopted a shareholder servicing
plan for the Class A, B and C shares of each Portfolio. The shareholder
servicing plan allows the Portfolios or the Distributor to pay shareholder
servicing agents up to 0.25% of the average annual daily net assets of
each of these classes of shares for personal shareholder services and for
maintaining shareholder accounts. Shareholder servicing agents are
financial institutions that may include Authorized Dealers, fiduciaries,
and financial institutions that sponsor "mutual fund supermarkets," "no-
transaction fee" programs or similar programs.
When you buy shares, you must specify the class of shares. Otherwise, the
Trust will assume that you wish to buy Class A shares.
How to Buy Shares
You may buy shares of the Portfolios through your account representative
by check or by wire or through the Transfer Agent. If you place your order
before the close of regular trading on the NYSE (usually 4:00 p.m.,
Eastern time), you will receive the NAV that the Trust calculates that
day. Orders placed after the close of trading on the NYSE will be priced
at the next business day's NAV.
54
<PAGE>
Purchase Procedures
Purchase Through the Distributor or Authorized Dealers
Method of Purchase Instructions
[GRAPHIC] In person o Visit your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By telephone o Call your account representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By mail o Mail your purchase request to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
[GRAPHIC] By wire o Submit wiring instructions to your account
representative.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
Purchase Through the Transfer Agent
[GRAPHIC] By mail o Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[name of Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
[GRAPHIC] By telephone o Call the Transfer Agent at 1-800-447-1139.
o Specify the name of the Portfolio, class
of shares and the number or dollar amount
of shares that you wish to buy.
How to Sell Shares
o You may sell shares on any business day through the
Distributor, Authorized Dealers or the Transfer Agent. Please
refer to the instructions under "How to Buy Shares" for
information on selling your shares in person, by telephone, by
mail or by wire.
o When the Trust receives your redemption requests in proper
form, it will sell your shares at the next determined net
asset value.
o The Trust will send you payment proceeds generally within
seven days after it receives your redemption request.
55
<PAGE>
Additional Information About Redemptions
o Waiting period. If you buy shares by check, the Trust will
wait for your check to clear (up to 15 days) before it accepts
your request to sell those shares.
o Wiring redemption proceeds. Upon request, the Trust will wire
your proceeds ($500 minimum) to your brokerage account or a
designated commercial bank account. There is a transaction fee
of $7.50 for this service. Please call your account
representative for information on how to wire funds to your
brokerage account. If you do not have a brokerage account,
call the Transfer Agent to wire funds to your bank account.
o Signature guarantees. If your redemption proceeds exceed
$50,000, or if you instruct the Trust to send the proceeds to
someone other than the record owner at the record address, or
if you are a corporation, partnership, trust or fiduciary,
your signature must be guaranteed by any eligible guarantor
institution. Call the Transfer Agent at 1-800-447-1139 for
information about obtaining a Medallion Program signature
guarantee.
o Telephone policies. You may authorize the Transfer Agent to
accept telephone instructions. If you do, the Transfer Agent
will accept instructions from people who it believes are
authorized to act on your behalf. The Transfer Agent will use
reasonable procedures (such as requesting personal
identification) to ensure that the caller is properly
authorized. Neither the Portfolio nor the Transfer Agent will
be liable for losses for following instructions reasonably
believed to be genuine.
o Redemption by mail may cause a delay. During times of extreme
economic or market conditions, you may experience difficulty
in contacting your account representative by telephone to
request a redemption of shares. If this occurs, please
consider using the other redemption procedures described in
this Prospectus. Alternative procedures may take longer to
sell your shares.
o Automatic redemption; redemption in kind. If the value of your
account falls below $750 (for reasons other than changes in
market conditions), the Trust may automatically liquidate your
account and send you the proceeds. The Trust will send you a
notice at least 60 days before doing this. The Trust also
reserves the right to redeem your shares "in kind." For
example, if you sell a large number of shares and the
Portfolio is unable to sell securities to raise cash, the
Trust may send you a combination of cash and a share of actual
portfolio securities. Call the Transfer Agent for details.
o Suspension of the Right of Redemption. A Portfolio may suspend
your right to redeem your shares under any of the following
circumstances:
-- during non-routine closings of the NYSE;
-- when the Securities and Exchange Commission ("SEC")
determines either that trading on the NYSE is restricted
or that an emergency prevents the sale or valuation of
the Portfolio's securities; or
-- when the SEC orders a suspension to protect the
Portfolio's shareholders.
56
<PAGE>
Exchanges
You may exchange shares of one Portfolio for shares of the same class of
another Portfolio described in this Prospectus or the same class of
another Portfolio of the Trust, usually without paying any additional
sales charges. (You may obtain more information about other Portfolios of
the Trust by calling the Transfer Agent at 1-800-447-1139.) You may pay a
sales charge if the Portfolio you are exchanging did not impose an initial
sales charge. You will not have to pay an additional sales charge if the
Portfolio you are exchanging was acquired in any of the following ways:
o by a previous exchange from shares bought with a sales charge;
o through reinvestment of dividends and distributions paid with
respect to these shares.
The Trust does not currently charge a fee for exchanges, although it may
change this policy in the future.
Exchange procedures. To exchange your shares, you must give exchange
instructions to your account representative or the Transfer Agent in
writing or by telephone.
Exchange policies. When exchanging your shares, please keep in mind:
o An exchange of shares may create tax liability for you. You
may have a gain or loss on the transaction, since the shares
you are exchanging will be treated like a sale.
o When the market is very active, telephone exchanges may be
difficult to complete. You may have to submit exchange
requests to your account representative or the Transfer Agent
in writing, which will cause a delay.
o The shares you exchange must have a value of at least $250
(except in the case of certain retirement plans). If you are
establishing a new account, you must exchange the minimum
dollar amount needed to open that account.
o Before you exchange your shares, you must review a copy of the
current prospectus of the Portfolio that you would like to
buy.
o You may qualify for a reduced sales charge. See the SAI for
details, or call your account representative.
o The Trust may reject your exchange request. The Trust may
modify or terminate the exchange option at any time.
57
<PAGE>
SHAREHOLDER SERVICES
The Trust offers several additional shareholder services. If you would
like to take advantage of any of these services, please call your account
representative or the Transfer Agent at 1-800-447-1139 to obtain the
appropriate forms. These services may be changed or terminated at any time
with 60 days' notice.
o Automatic investment plan. You may buy shares of a Portfolio
at regular intervals by direct transfer of funds from your
bank. You may invest a set amount ($250 for the initial
purchase; minimum subsequent investments of $50 or $25 for
retirement accounts) monthly, bi-monthly, quarterly or
annually and you can terminate the program at any time.
o Directed distribution option. You may automatically reinvest
your dividends and capital gain distributions in the same
class of shares of another Portfolio or the Money Market
Portfolio of The RBB Fund, Inc. You may buy Class A shares
without a sales charge at the current NAV. However, if you buy
Class B or Class C shares, they may be subject to a CDSC when
you sell them. You may not use this service to establish a new
account.
o Systematic withdrawal plan. You may withdraw a set amount ($25
minimum) monthly, bi-monthly, quarterly or annually, as long
as you have a beginning account balance of at least $5,000.
You or the Transfer Agent may terminate the arrangement at any
time. If you plan to buy new shares when you participate in a
systematic plan, you may have to pay an additional sales
charge.
o Reinstatement privilege. If you sell your Class A shares, you
may repurchase them (or Class A shares of any other Portfolio)
within 60 days without paying an additional sales charge.
58
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
If you buy shares of a Portfolio shortly before it declares a dividend or
a distribution, a portion of your investment in the Portfolio may be
returned to you in the form of a taxable distribution.
Distributions
The Portfolios pass along your share of their investment earnings in the
form of dividends. Dividend distributions are the net dividends or
interest earned on investments after expenses. As with any investment, you
should consider the tax consequences of an investment in a Portfolio.
Ordinarily, each Portfolio, other than the Balanced Portfolio, declares
and pays dividends from its net investment income annually. The Balanced
Portfolio declares and pays dividends quarterly. The Portfolios will
distribute short-term capital gains, as necessary, and normally will pay
any long-term capital gains once a year.
You can receive dividends or distributions in one of the following ways:
o Reinvestment. You can automatically reinvest your dividends
and distributions in additional shares of your Portfolio. If
you do not indicate another choice on your Account
Application, you will receive your distributions this way.
o Cash. The Trust will send you a check no later than seven days
after the payable date.
o Partial reinvestment. The Trust will automatically reinvest
your dividends in additional shares of your Portfolio and pay
your capital gain distributions to you in cash. Or, the Trust
will automatically reinvest your capital gain distributions
and send you your dividends in cash.
o Directed dividends. You can automatically reinvest your
dividends and distributions in the same class of shares of
another Portfolio. See the description of this option in the
"Shareholder Services" section above.
o Direct deposit. In most cases, you can automatically transfer
dividends and distributions to your bank checking or savings
account. Under normal circumstances, the Transfer Agent will
transfer the funds within seven days of the payment date. To
receive dividends and distributions this way, the name on your
bank account must be the same as the registration on your
Portfolio account.
You may choose your distribution method on your original Account Information
Form. If you would like to change the option you selected, please call your
account executive or the Transfer Agent at 1-800-447-1139.
59
<PAGE>
Taxes
Each Portfolio intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders. It is important for you
to be aware of the following information about the tax treatment of your
investment.
o Ordinary dividends from a Portfolio are taxable as ordinary
income; dividends from a Portfolio's long-term capital gains
are taxable as capital gain.
o Dividends are treated in the same manner for federal income
tax purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
o Dividends from the Portfolios that are attributable to
interest on certain U.S. Government obligations may be exempt
from certain state and local income taxes. The extent to which
ordinary dividends are attributable to these U.S. Government
obligations will be provided on the tax statements you receive
from a Portfolio.
o Certain dividends paid to you in January will be taxable as if
they had been paid to you the previous December.
o The Trust will mail you tax statements every January showing
the amounts and tax status of distributions you received.
o When you sell (redeem) or exchange shares of a Portfolio, you
must recognize any gain or loss.
o Because your tax treatment depends on your purchase price and
tax position, you should keep your regular account statements
for use in determining your tax.
o You should review the more detailed discussion of federal
income tax considerations in the SAI.
The Trust provides this tax information for your general information. You
should consult your own tax adviser about the tax consequences of
investing in a Portfolio.
ADDITIONAL INFORMATION
Performance
Financial publications, such as Business Week, Forbes, Money or
SmartMoney, may compare a Portfolio's performance to the performance of
various indexes and investments for which reliable performance data is
available. These publications may also compare a Portfolio's performance
to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services, such as Lipper Inc.
Shareholder Communications
The Trust may eliminate duplicate mailings of Portfolio materials to
shareholders who reside at the same address.
60
<PAGE>
(This page intentionally left blank)
61
<PAGE>
Financial Highlights -- S&P STARS Portfolio
The financial highlights table is intended to help you understand the
financial performance of the S&P STARS Portfolio since its inception. This
information reflects financial results for a single share of the S&P STARS
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the S&P STARS Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the S&P STARS Portfolio's financial statements, are included in the
S&P STARS Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized from Net
Value, Investment and Unrealized Realized Net Asset
Beginning Income/ Gain on Capital Value, End
Of Period (Loss)**(1) Investments**(2) Gains Of Period
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $19.97 $(0.12) $ 5.46 $(0.92) $24.39
- ---------------------------------------------------------------------------------------------------------------------------------
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 fiscal year ended March 31, 1999 19.86 (0.12) 5.29 (0.92) 24.11
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1999 19.85 (0.22) 5.39 (0.92) 24.10
- ---------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
62
<PAGE>
Financial Highlights -- S&P STARS Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
27.46% $206,130 1.50% (0.73)% 0.27% 76.17%
- -----------------------------------------------------------------------------------------------------------------------------------
43.53 109,591 1.50(7) (0.83)(6) 0.38 172.78(7)
- -----------------------------------------------------------------------------------------------------------------------------------
16.87 67,491 1.50(7) (0.59)(6) 0.70 220.00(7)
- -----------------------------------------------------------------------------------------------------------------------------------
27.68 45,059 1.50(5)(7) (0.01)(5)(6) 0.89(5) 295.97(7)
- -----------------------------------------------------------------------------------------------------------------------------------
Class B
26.75 49,319 2.00 (1.23) 0.27 76.17
- -----------------------------------------------------------------------------------------------------------------------------------
14.34(4) 5,800 2.00(5) (1.47)(4)(5) 0.53(4)(5) 172.78(7)
- -----------------------------------------------------------------------------------------------------------------------------------
Class C
26.75 97,654 2.00 (1.23) 0.27 76.17
- -----------------------------------------------------------------------------------------------------------------------------------
42.80 63,330 2.00(7) (1.32)(6) 0.38 172.78(7)
- -----------------------------------------------------------------------------------------------------------------------------------
16.33 37,622 2.00(7) (1.09) 0.70 220.00(7)
- -----------------------------------------------------------------------------------------------------------------------------------
26.91 28,081 2.00(5)(7) (0.45)(4)(5)(6) 0.92(5) 295.97(7)
- -----------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
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 is related to S&P STARS Master Series for the
period prior to June 25, 1997.
63
<PAGE>
Financial Highlights -- Insiders Select Fund
The financial highlights table is intended to help you understand the
financial performance of The Insiders Select Fund since its inception.
This information reflects financial results for a single share of The
Insiders Select Fund. The total returns in the table represent the rate
that an investor would have gained or lost on an investment in The
Insiders Select Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche
LLP, whose report, along with The Insiders Select Fund 's financial
statements, are included in The Insiders Select Fund's annual report,
which is available by calling the Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized Dividends From Net
Value, Investment and Unrealized from Net Realized Net Asset
Beginning Income/ Gain/(Loss) on Investment Capital Value, End
Of Period (Loss)**(1) Investments**(2) Income Gains Of Period
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $17.88 -- $(0.01) -- $(0.85) $17.02
- ---------------------------------------------------------------------------------------------------------------------------------
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 April 3, 1995*
through March 31, 1996 12.00 0.03 1.98 (0.01) -- 14.00
- ---------------------------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 17.69 -- (0.09) -- (0.85) 16.75
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1999 17.68 -- (0.09) -- (0.85) 16.74
- ---------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
64
<PAGE>
Financial Highlights -- Insiders Select Fund
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
0.29% $24,395 1.65% 0.02% 0.81% 99.71%
- -------------------------------------------------------------------------------------------------------------------
46.02 21,912 1.65 0.03 1.09 115.64
- -------------------------------------------------------------------------------------------------------------------
18.31 13,860 1.65 0.11 1.82 128.42
- -------------------------------------------------------------------------------------------------------------------
16.75 12,132 1.65(5) 0.38(5) 1.87(5) 93.45
- -------------------------------------------------------------------------------------------------------------------
Class B
(0.16) 8,426 2.15 0.03 0.81 99.71
- -------------------------------------------------------------------------------------------------------------------
12.53(4) 2,253 2.15(5) (0.95)(4)(5) 1.82(4)(5) 115.64
- -------------------------------------------------------------------------------------------------------------------
Class C
(0.16) 11,902 2.15 0.02 0.81 99.71
- -------------------------------------------------------------------------------------------------------------------
45.17 12,297 2.15 (0.46) 1.10 115.64
- -------------------------------------------------------------------------------------------------------------------
17.69 9,519 2.15 (0.38) 1.81 128.42
- -------------------------------------------------------------------------------------------------------------------
16.33 9,928 2.15(5) (0.12)(5) 1.92(5) 93.45
- -------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
65
<PAGE>
Financial Highlights -- Large Cap Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Large Cap Portfolio since its inception. This
information reflects financial results for a single share of the Large Cap
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the Large Cap
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Large Cap Portfolio's financial statements, are included in the
Large Cap Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized Dividends From Net
Value, Investment And Unrealized From Net Realized Net Asset
Beginning Income/ Gain On Investment Capital Value, End
Of Period (Loss)**(1) Investments**(2) Income Gains Of Period
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $20.83 $ 0.11 $ 0.59 $(0.11) $(1.68) $19.74
- ------------------------------------------------------------------------------------------------------------------------------------
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 fiscal year ended March 31, 1999 20.66 0.08 0.52 (0.07) (1.68) 19.51
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1999 20.66 0.07 0.53 (0.01) (1.68) 19.57
- ------------------------------------------------------------------------------------------------------------------------------------
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 the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
66
<PAGE>
Financial Highlights -- Large Cap Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
3.68% $9,677 1.50% 0.54% 1.46% 38.27%
- -----------------------------------------------------------------------------------------------------------------
44.59 8,358 1.50 0.32 1.73 61.75
- -----------------------------------------------------------------------------------------------------------------
15.44 4,987 1.50 0.43 1.58 136.67
- -----------------------------------------------------------------------------------------------------------------
26.35 3,616 1.50(5) 0.46(5) 4.34(5) 45.28
- -----------------------------------------------------------------------------------------------------------------
Class B
3.21 1,911 2.00 0.08 1.46 38.27
- -----------------------------------------------------------------------------------------------------------------
13.70(4) 446 2.00(5) (0.73)(4)(5) 1.05(4)(5) 61.75
- -----------------------------------------------------------------------------------------------------------------
Class C
3.22 5,250 2.00 0.08 1.46 38.27
- -----------------------------------------------------------------------------------------------------------------
43.94 4,987 2.00 (0.19) 1.73 61.75
- -----------------------------------------------------------------------------------------------------------------
14.87 2,986 2.00 (0.08) 1.61 136.67
- -----------------------------------------------------------------------------------------------------------------
25.71 3,520 2.00(5) (0.06)5 4.39(5) 45.28
- -----------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
67
<PAGE>
Financial Highlights -- Small Cap Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Small Cap Portfolio since its inception. This
information reflects financial results for a single share of the Small Cap
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the Small Cap
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Small Cap Portfolio's financial statements, are included in the
Small Cap Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized From Net
Value, Investment and Unrealized Realized Net Asset
Beginning Income/ Gain/(Loss) on Capital Value, End
Of Period (Loss)**(1) Investments**(2) Gains Of Period
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $23.65 $(0.13) $(4.65) $(0.94) $17.93
- -------------------------------------------------------------------------------------------------------------------------------
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 fiscal year ended March 31, 1999 23.48 (0.16) (4.67) (0.94) 17.71
- -------------------------------------------------------------------------------------------------------------------------------
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, 1999 23.48 (0.26) (4.58) (0.94) 17.70
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
68
<PAGE>
Financial Highlights -- Small Cap Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
(20.26)% $18,520 1.50% (0.60)% 0.65% 84.12%
- ---------------------------------------------------------------------------------------------------------------------------
46.86 25,111 1.50 (0.71) 0.76 90.39
- ---------------------------------------------------------------------------------------------------------------------------
11.71 13,143 1.50 (0.81) 1.00 56.88
- ---------------------------------------------------------------------------------------------------------------------------
34.36 6,474 1.50(5) (0.66)(5) 2.32(5) 40.79
- ---------------------------------------------------------------------------------------------------------------------------
Class B
(20.63) 2,716 2.00 (1.10) 0.65 84.12
- ---------------------------------------------------------------------------------------------------------------------------
17.69(4) 901 2.00(5) (1.49)(4)(5) 1.31(4)(5) 90.39
- ---------------------------------------------------------------------------------------------------------------------------
Class C
(20.67) 11,112 2.00 (1.10) 0.65 84.12
- ---------------------------------------------------------------------------------------------------------------------------
46.10 18,082 2.00 (1.21) 0.76 90.39
- ---------------------------------------------------------------------------------------------------------------------------
11.12 11,071 2.00 (1.31) 0.99 56.88
- ---------------------------------------------------------------------------------------------------------------------------
33.59 6,753 2.00(5) (1.09)(5) 2.39(5) 40.79
- ---------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
69
<PAGE>
Financial Highlights -- Focus List Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Focus List Portfolio since its inception.
This information reflects financial results for a single share of the
Focus List Portfolio. The total returns in the table represent the rate
that an investor would have gained on an investment in the Focus List
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Focus List Portfolio's financial statements, are included in the
Focus List Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized From Net
Value, Investment and Unrealized Realized Net Asset
Beginning Income/ Gain on Capital Value, End
Of Period (Loss)**(1) Investments**(2) Gains Of Period
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $13.40 $(0.07) $ 4.01 $(0.02) $17.32
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 (0.01) 1.41 -- 13.40
- --------------------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 13.38 (0.13) 3.95 (0.02) 17.18
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 (0.01) 1.39 -- 13.38
- --------------------------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 13.38 (0.13) 3.96 (0.02) 17.19
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 (0.01) 1.39 -- 13.38
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
70
<PAGE>
Financial Highlights -- Focus List Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
29.47% $6,542 1.40% (0.57)% 2.89% 84.49%
- ---------------------------------------------------------------------------------------------------------------------
11.67 3,201 1.40(4) (0.30)(4) 5.01(4) 28.91
- ---------------------------------------------------------------------------------------------------------------------
Class B
28.61 4,460 1.90 (1.07) 2.89 84.49
- ---------------------------------------------------------------------------------------------------------------------
11.50 2,399 1.90(4) (0.78)(4) 5.27(4) 28.91
- ---------------------------------------------------------------------------------------------------------------------
Class C
28.69 3,304 1.90 (1.07) 2.89 84.49
- ---------------------------------------------------------------------------------------------------------------------
11.50 1,687 1.90(4) (0.62)(4) 5.52(4) 28.91
- ---------------------------------------------------------------------------------------------------------------------
</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.
71
<PAGE>
Financial Highlights -- Balanced Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Balanced Portfolio since its inception. This
information reflects financial results for a single share of the Balanced
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the Balanced Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Balanced Portfolio's financial statements, are included in the
Balanced Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends from Net
Value, Net and Unrealized From Net Realized Net Asset
Beginning Investment Gain on Investment Capital Value, End
Of Period Income**(1) Investments**(2) Income Gains Of Period
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $12.93 $ 0.34 $ 0.18 $(0.33) $(0.01) $13.11
- ------------------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 0.06 0.91 (0.04) -- 12.93
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 12.92 0.29 0.16 (0.29) (0.01) 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 0.05 0.90 (0.03) -- 12.92
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 12.92 0.29 0.16 (0.29) (0.01) 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 0.05 0.90 (0.03) -- 12.92
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
72
<PAGE>
Financial Highlights -- Balanced Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income Investment Income
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
4.07% $4,495 1.20% 2.65% 2.08% 45.98%
- ---------------------------------------------------------------------------------------------------------------------
8.04 3,852 1.20(4) 2.47(4) 3.25(4) 12.72
- ---------------------------------------------------------------------------------------------------------------------
Class B
3.56 1,811 1.70 2.15 2.08 45.98
- ---------------------------------------------------------------------------------------------------------------------
7.92 1,044 1.70(4) 1.96(4) 3.30(4) 12.72
- ---------------------------------------------------------------------------------------------------------------------
Class C
3.56 1,089 1.70 2.15 2.08 45.98
- ---------------------------------------------------------------------------------------------------------------------
7.92 858 1.70(4) 1.95(4) 3.33(4) 12.72
- ---------------------------------------------------------------------------------------------------------------------
</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.
73
<PAGE>
Financial Highlights -- International Equity Portfolio
The financial highlights table is intended to help you understand the
financial performance of the International Equity Portfolio since its
inception. This information reflects financial results for a single share
of the International Equity Portfolio. The total returns in the table
represent the rate that an investor would have gained on an investment in
the International Equity Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by Deloitte & Touche
LLP, whose report, along with the International Equity Portfolio's
financial statements, are included in the International Equity Portfolio's
annual report, which is available by calling the Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Net Asset Net Net Realized Dividends
Value, Investment and Unrealized From Net Net Asset
Beginning Income/ Gain on Investment Value, End
Of Period (Loss)**(1) Investments**(2) Income Of Period
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Class A
For the fiscal year ended March 31, 1999 $13.77 $(0.03) $ 1.40 --+ $15.14
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 0.01 1.76 -- 13.77
- --------------------------------------------------------------------------------------------------------------------------
Class B
For the fiscal year ended March 31, 1999 13.75 (0.02) 1.32 --+ 15.05
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 -- 1.75 -- 13.75
- --------------------------------------------------------------------------------------------------------------------------
Class C
For the fiscal year ended March 31, 1999 13.75 (0.02) 1.32 --+ 15.05
- --------------------------------------------------------------------------------------------------------------------------
For the period December 29, 1997*
through March 31, 1998 12.00 -- 1.75 -- 13.75
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
+ Amount is less than $0.01 per share.
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.
74
<PAGE>
Financial Highlights -- International Equity Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A
9.97% $8,299 1.75% 0.05% 2.38% 114.68%
- ----------------------------------------------------------------------------------------------------------------------
14.75 3,765 1.75(4) 0.53 4.06(4) 3.26
- ----------------------------------------------------------------------------------------------------------------------
Class B
9.48 3,156 2.25 (0.45) 2.38 114.68
- ----------------------------------------------------------------------------------------------------------------------
14.58 2,137 2.25(4) (0.06)(4) 4.04(4) 3.26
- ----------------------------------------------------------------------------------------------------------------------
Class C
9.48 2,926 2.25 (0.45) 2.38 114.68
- ----------------------------------------------------------------------------------------------------------------------
14.58 2,173 2.25(4) (0.06)(4) 4.04(4) 3.26
- ----------------------------------------------------------------------------------------------------------------------
</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.
75
<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-INVESTMENT ADVISER
(INTERNATIONAL EQUITY PORTFOLIO)
Marvin & Palmer Associates, Inc.
1201 North Market Street, Suite 2300
Wilmington, DE 19801
ADMINISTRATOR
Bear Stearns Funds Management Inc.
575 Lexington Avenue
New York, NY 10022
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 LLP
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
76
<PAGE>
Statement of Additional Information. The Statement of Additional Information
("SAI") provides a more complete discussion of several of the matters contained
in this Prospectus and is incorporated by reference, which means that it is
legally a part of this Prospectus as if it were included here.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about each Portfolio's investments,
including a discussion of the market conditions and investment strategies that
significantly affected a Portfolio's performance during its last fiscal year.
o To obtain a free copy of the SAI and the current annual or
semi-annual reports or to make any other inquiries about a
Portfolio, you may call or write:
PFPC Inc.
Attention: The Bear Stearns Funds
P.O. Box 8960
Wilmington, Delaware 19899-8960
Telephone: 1-800-447-1139 or 1-800-766-4111
o You may obtain copies of the SAI or financial reports
o for free by calling or writing broker-dealers or other
financial intermediaries that sell a Portfolio's shares;
o for a fee by writing the Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549-6009;
o for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
o You may review and copy information about the Portfolios (including
the SAI) at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 to obtain information about this service.
You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns
Worldwide Web site at http://www.bearstearns.com.
Investment Company Act File No. 811-8798
BSF-P-015-02
<PAGE>
The
Bear Stearns
Funds
Prospectus Dated
July 29, 1999
Equity Funds
. S&P STARS Portfolio
. The Insiders Select Fund
. Large Cap Value Portfolio
. Small Cap Value Portfolio
. Focus List Portfolio
. Balanced Portfolio
. International Equity Portfolio
. Class Y Shares
This Prospectus provides important information about each Portfolio that you
should know before investing. Please read it carefully and keep it for future
reference.
The Securities and Exchange Commission has not approved any Portfolio's shares
or determined whether this Prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
BEAR
STEARNS
The Bear Stearns Funds o 575 Lexington Avenue New York, NY 10022 1-800-447-1139
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Risk/Return Summaries 1
-------------------------------------------------------------------------
S&P STARS Portfolio
The Insiders Select Fund
Large Cap Value Portfolio
Small Cap Value Portfolio
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio
Investments 27
-------------------------------------------------------------------------
Risk Factors 31
-------------------------------------------------------------------------
Management of the Portfolios 34
-------------------------------------------------------------------------
Investment Adviser
Portfolio Management Team
How the Portfolios Value Their Shares 35
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Investing in the Portfolios 36
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How to Buy Shares
How to Sell Shares
Exchanges
Dividends, Distributions and Taxes 39
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Additional Information 41
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Financial Highlights 42
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Each Portfolio described in this Prospectus is a series of The Bear
Stearns Funds, a registered open-end management investment company
(the "Trust").
It is important to keep in mind that mutual fund shares are:
o not deposits or obligations of any bank;
o not insured by the Federal Deposit Insurance Corporation;
o subject to investment risk, including possible loss of the
money invested.
<PAGE>
S&P STARS Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
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 Index").
Principal Strategies
To achieve the investment objective of the S&P STARS Portfolio, Bear
Stearns Asset Management Inc., the investment adviser for each Portfolio
("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock
Appreciation Ranking System (or "STARS") to identify common stocks in the
highest category (five stars) for purchase and in the lowest category (one
star) for short selling. The Adviser believes that this approach will
provide opportunities to achieve performance that exceeds the S&P 500
Index's total return.
o Generally, the S&P STARS Portfolio will invest at least 85% of its
total assets in U.S. common stocks and U.S. dollar-denominated
American Depositary Receipts that are listed on U.S. exchanges
("ADRs") that, at their time of initial purchase, were ranked five
stars or, at their time of short sale, were ranked one star.
o Generally, the S&P STARS Portfolio may invest up to 15% of its total
assets in U.S. common stocks and ADRs without regard to STARS
ranking. See "Principal Investment Strategies -- Additional
Information."
In selecting investments, the Adviser analyzes the stocks ranked by S&P
analysts according to the STARS ranking system and selects those it
believes have the best potential for capital appreciation. The Adviser
focuses on companies that show the potential to achieve growth at a
reasonable price. The Adviser considers various factors including market
segment, industry, earnings history, price-to-earnings ratio and
management. The Adviser may select securities of companies with small,
middle and large market capitalizations.
The S&P STARS Portfolio may invest up to 15% of its total assets without
regard to STARS ranking to increase exposure to additional sectors or take
advantage of investment opportunities in securities of issuers that S&P
may not follow. If S&P downgrades a security held by the S&P STARS
Portfolio to four stars from five stars, the Portfolio may purchase
additional shares of that security without limitation. In addition, if S&P
upgrades a security held by the S&P STARS Portfolio to two stars from one
star, the Portfolio may sell short additional shares of that security
without limitation.
S&P's research staff analyzes and ranks the stocks of approximately 1,100
issuers and evaluates the short-term (up to 12 months) appreciation
potential of the reviewed stocks, as shown below.
***** Buy Expected to be among the best performers over the
next 6 to 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.
S&P STARS Portfolio 1
<PAGE>
The S&P STARS Portfolio may "sell short" securities that at their time of
initial sale were rated one star. In a short sale, the Adviser sells a
security it has borrowed, with the expectation that the security will
decline in value. If the Adviser correctly predicts the decline in value,
the Adviser will repurchase the security at a lower price and realize a
gain for the S&P STARS Portfolio. Short selling is considered "leverage"
and may involve substantial risk.
Principal Risks
You may lose money by investing in the S&P STARS Portfolio. The S&P STARS
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the STARS Portfolio's net asset value, yield and/or
total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, and the risks that a
foreign government may confiscate assets.
o A small- or middle-capitalization company's stock may decline in
value because the company lacks management experience, operating
experience, financial resources and product diversification that
permit larger companies to adapt to changing market conditions.
o Small- or middle-capitalization company stocks may be subject to
wider price swings or be less liquid because they trade less
frequently and in smaller volume than large company stocks.
o Short sales may involve substantial risk and may involve leverage,
which may increase potential losses.
o Ratings by S&P's research group may not accurately assess the
investment prospects of a particular security.
The S&P STARS Portfolio is a non-diversified mutual fund, which means that
it may invest a larger portion of its assets in a single issuer than if it
were diversified. This could make the S&P STARS Portfolio more susceptible
to price changes of securities of a particular issuer.
2 S&P STARS Portfolio
<PAGE>
Who May Want to Invest in the S&P STARS Portfolio
The S&P STARS Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add an equity component to their portfolio.
The S&P STARS Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience share
price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the S&P
STARS Portfolio by showing changes in the performance of its Class Y
shares for various time periods.
[BAR GRAPH]
S&P Stars Portfolio Annual Total Return(%)(1)
1996 28.42
1997 18.59
1998 40.33
Past performance is not necessarily an indication of future results.
1 The S&P STARS Portfolio's year-to-date return as of June 30, 1999 was
15.00%.
During the period shown in the bar chart, the highest quarterly return was
28.79% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (11.51)% (for the quarter ended September 30, 1998).
The table shows how the S&P STARS Portfolio's average annual total return
for one year and since the date of inception compared to the S&P 500
Index, a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of mid-to large-size
companies. The figures shown in the table assume reinvestment of dividends
and distributions.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
S&P STARS Portfolio - Class Y 40.33% 26.55%
--------------------------------------------------------------------------
S&P 500 Index 28.57% 28.34%
--------------------------------------------------------------------------
* Class Y shares commenced operations on August 7, 1995.
S&P STARS Portfolio 3
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the S&P STARS Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
===========================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
---------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
---------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
---------------------------------------------------------------------------
Redemption fees **
---------------------------------------------------------------------------
Exchange fees None
---------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
===========================================================================
Management Fees 0.75%
---------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
---------------------------------------------------------------------------
Other Expenses 0.52%
-----
---------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.27%
---------------------------------------------------------------------------
Fee Waiver (0.27)%
-----
---------------------------------------------------------------------------
Net Expenses(1) 1.00%
-----
---------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the S&P STARS Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the S&P STARS Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the S&P STARS Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the S&P STARS Portfolio;
o your investment returns 5% each year;
o the S&P STARS Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
==========================================================================
1 Year 3 Years 5 Years 10 Years
==========================================================================
Class Y $102 $376 $671 $1,510
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* This Example assumes that net portfolio operating expenses will equal
1.00% until March 31, 2000, and thereafter will equal 1.27%.
4 S&P STARS Portfolio
<PAGE>
The Insiders Select Fund
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, The Insiders Select Fund invests at least
85% of its assets in the equity securities of U.S. issuers that it
believes provide opportunities for capital appreciation. Equity securities
consist of common stocks, convertible securities and preferred stocks. The
Adviser anticipates that the issuers principally will be
mid-capitalization companies (companies that under current market
conditions have market capitalizations that range from $2 billion to $10
billion at the time of purchase). The Insiders Select Fund will invest in
U.S. equity securities that the Adviser believes will equal or exceed the
performance of the Standard & Poor's MidCap 400 Stock Index (the "S&P
MidCap 400 Index"). The dollar-weighted average market capitalization of
stocks in the S&P MidCap 400 Index was approximately $4 billion as of June
30, 1999. The Insiders Select Fund may invest in stocks that are not
included in the S&P MidCap 400 Index.
In selecting investments for The Insiders Select Fund, the Adviser
analyzes
o trading in a company's securities by corporate insiders, officers,
directors and significant stockholders;
o published company reports prepared by financial analysts, including
revisions to earnings predictions; and
o a company's corporate finance activities, including stock repurchase
programs, dividend policies and new securities issuance.
Insiders, analysts and the company may send signals that the Adviser
analyzes to produce valuable information about the prospects for
individual companies. 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, among other sources, which compiles this
information from publicly available SEC filings.
In addition to the factors described above, the Adviser also uses a
"value" approach to investing. The Adviser looks for equity securities
that have relatively low price-to-book ratios, low price-to- earnings
ratios or lower-than-average price-to-cash-flow ratios and dividend
payments. The Adviser may consider factors such as the company's earnings
growth, dividend payout ratios, return on equity, stock price volatility
relative to the market, new management and upcoming corporate
restructuring, the general business cycle, the company's position within a
specific industry and the company's responsiveness to changing conditions.
The Insiders Select Fund 5
<PAGE>
Principal Risks
You may lose money by investing in The Insiders Select Fund. The Insiders
Select Fund is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect The Insiders Select Fund's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o A middle-capitalization company's stock may decline in value because
the company lacks management experience, operating experience,
financial resources and product diversification that permit larger
companies to adapt to changing market conditions.
o Middle-capitalization company stocks may be subject to wider price
swings or be less liquid because they trade less frequently and in
smaller volume than large company stocks.
The Insiders Select Fund is a non-diversified mutual fund, which means
that it may invest a larger portion of its assets in a single issuer than
if it were diversified. This could make The Insiders Select Fund more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in The Insiders Select Fund
The Insiders Select Fund may be appropriate for investors who:
o are investing for the long term;
o believe that insider buying patterns may be a good indicator of the
future direction of a company's stock price.
The Insiders Select Fund may not be appropriate for investors who:
o are not willing to take any risk that they may experience share
price fluctuations or lose money on their investment.
6 The Insiders Select Fund
<PAGE>
Performance
The bar chart and table below illustrate the risks of investing in The
Insiders Select Fund by showing changes in the performance of its Class Y
shares for various time periods.
[BAR GRAPH]
The Insiders Select Fund Annual Total Return(%)(1)
1996 21.89
1997 30.18
1998 9.82
Past performance is not necessarily an indication of future results.
1 The Insiders Select Fund's year-to-date return as of June 30, 1999, was
12.53%.
During the period shown in the bar chart, the highest quarterly return was
16.45% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (16.36)% (for the quarter ended September 30, 1998).
The table shows how The Insiders Select Fund's average annual total return
for one year and since the date of inception compared to the S&P MidCap
400 Index, a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of mid-size companies.
The figures shown in the table assume reinvestment of dividends and
distributions.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Insiders Select Fund - Class Y 9.82% 20.99%
--------------------------------------------------------------------------
S&P MidCap 400 Index 19.09% 23.56%
--------------------------------------------------------------------------
* Class Y shares commenced operations on June 20, 1995.
The Insiders Select Fund 7
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of The Insiders Select Fund.
Shareholder Fees (paid directly from your investment)* Class Y
============================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
----------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
----------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
----------------------------------------------------------------------------
Redemption fees **
----------------------------------------------------------------------------
Exchange fees None
----------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
============================================================================
Management Fees(1) 1.00%
----------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
----------------------------------------------------------------------------
Other Expenses 0.96%
-----
----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.96%
----------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (0.81)%
-----
----------------------------------------------------------------------------
Net Expenses(2) 1.15%
-----
----------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The management fee may increase or decrease by up to 0.50% based on The
Insiders Select Fund's performance.
2 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that The Insiders Select Fund's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in The Insiders Select Fund
over various time periods. It is intended to help you compare the cost of
investing in The Insiders Select Fund with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in The Insiders Select Fund;
o your investment returns 5% each year;
o The Insiders Select Fund's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
==================================================================
Class Y $117 $537 $982 $2,220
------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal
1.15% until March 31, 2000, and thereafter will equal 1.96%.
8 The Insiders Select Fund
<PAGE>
Large Cap Value Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, the Large Cap Value Portfolio ("Large Cap
Portfolio") invests at least 65% all of its total assets in equity
securities of companies with market capitalizations (at time of purchase)
of more than $10 billion ("large companies") that the Adviser identifies
as "value" securities. Within this 65% category, the Large Cap Portfolio
may invest up to 10% of its total assets in equity securities of foreign
issuers in the form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Large Cap Portfolio may invest must be rated at least "investment
grade" by a nationally recognized statistical rating organization
("NRSRO") at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
The weighted average market capitalization of issuers in whose securities
the Large Cap Portfolio invests will vary depending on market conditions.
As of June 30, 1999, the weighted average market capitalization of issuers
of securities held by the Large Cap Portfolio was greater than $35
billion.
Principal Risks
You may lose money by investing in the Large Cap Portfolio. The Large Cap
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Large Cap Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, and the risks that a
foreign government may confiscate assets.
Large Cap Portfolio 9
<PAGE>
Who May Want to Invest in the Large Cap Portfolio
The Large Cap Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add a large-cap equity component to their portfolio.
The Large Cap Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience share
price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Large Cap Portfolio by showing changes in the performance of its Class Y
shares for various time periods.
[BAR GRAPH]
Large Cap Value Portfolio Annual Total Return(%)(1)
1996 14.87
1997 31.64
1998 16.26
Past performance is not necessarily an indication of future results.
1 The Large Cap Portfolio's year-to-date return as of June 30, 1999 was
9.20%.
During the period shown in the bar chart, the highest quarterly return was
17.75% (for the quarter ended June 30, 1997) and the lowest quarterly
return was (12.61)% (for the quarter ended September 30, 1998).
The table shows how the Large Cap Portfolio's average annual total return
for one year and since the date of inception compared to the S&P 500
Index, a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of mid-to large-size
companies. The figures shown in the table assume reinvestment of dividends
and distributions.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Large Cap Portfolio - Class Y 16.24% 21.23%
--------------------------------------------------------------------------
S&P 500 Index 28.57% 29.29%
--------------------------------------------------------------------------
* Class Y shares commenced operations on September 11, 1995.
10 Large Cap Portfolio
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
=============================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
-----------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
-----------------------------------------------------------------------------
Redemption fees **
-----------------------------------------------------------------------------
Exchange fees None
-----------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=============================================================================
Management Fees 0.75%
-----------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
-----------------------------------------------------------------------------
Other Expenses 1.71%
-----
-----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.46%
-----------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (1.46)%
-----
-----------------------------------------------------------------------------
Net Expenses(1) 1.00%
-----
-----------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Large Cap Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the Large Cap Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Large Cap Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Large Cap Portfolio;
o your investment returns 5% each year;
o the Large Cap Portfolio's operating expenses remain the same*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years
=======================================================================
Class Y $102 $627 $1,179 $2,686
-----------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will
equal 1.00% until March 31, 2000, and thereafter will equal 2.46%.
Large Cap Portfolio 11
<PAGE>
Small Cap Value Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, the Small Cap Value Portfolio ("Small Cap
Portfolio") invests at least 65% of its total assets in equity securities
of companies with market capitalizations (at time of purchase) of up to
$1.5 billion ("small companies") that the Adviser identifies as value
companies. Within this 65% category, the Small Cap Portfolio may invest up
to 10% of its total assets in equity securities of foreign issuers in the
form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Small Cap Portfolio may invest must be rated at least "investment
grade" by an NRSRO at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
The weighted average market capitalization of issuers in whose securities
the Small Cap Portfolio invests will vary depending on market conditions.
As of June 30, 1999, the weighted average market capitalization of issuers
whose securities were held by the Small Cap Portfolio was approximately
$700 million.
Principal Risks
You may lose money by investing in the Small Cap Portfolio. The Small Cap
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Small Cap Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o A small company's stock may decline in value because the company
lacks management experience, operating experience, financial
resources and product diversification that permit larger companies
to adapt to changing market conditions.
12 Small Cap Portfolio
<PAGE>
o Small company stocks may be subject to wider price swings or be less
liquid because they trade less frequently and in smaller volume than
large company stocks.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, and the risks that a
foreign government may confiscate assets.
Who May Want to Invest in the Small Cap Portfolio
The Small Cap Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add a small-cap equity component to their portfolio.
The Small Cap Portfolio may not be appropriate for investors who:
o want to invest only in larger, more established companies;
o are not willing to take any risk that they may experience share
price fluctuations, assume the risks associated with smaller-company
stocks or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Small Cap Portfolio by showing changes in the performance of the Small Cap
Portfolio's Class Y shares for various time periods.
[BAR GRAPH]
Small Cap Value Portfolio Annual Total Return(%)(1)
1996 15.89
1997 33.28
1998 -0.93
Past performance is not necessarily an indication of future results.
1 The Small Cap Portfolio's year-to-date return as of June 30, 1999 was
11.48%.
During the period shown in the bar chart, the highest quarterly return was
22.15% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (26.02)% (for the quarter ended September 30, 1998).
The table shows how the Small Cap Portfolio's average annual total return
for one year and since the date of inception compared to the Russell 2000
Index, a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of small-size companies.
The figures shown in the table assume reinvestment of dividends and
distributions.
Small Cap Portfolio 13
<PAGE>
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
Small Cap Portfolio - Class Y (0.93)% 17.92%
--------------------------------------------------------------------------
Russell 2000 Index (2.25)% 13.57%
--------------------------------------------------------------------------
* Class Y shares commenced operations on June 22, 1995.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Small Cap Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
=============================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
-----------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
-----------------------------------------------------------------------------
Redemption fees **
-----------------------------------------------------------------------------
Exchange fees None
-----------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=============================================================================
Management Fees 0.75%
-----------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
-----------------------------------------------------------------------------
Other Expenses 0.90%
------
-----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.65%
-----------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (0.65)%
------
-----------------------------------------------------------------------------
Net Expenses(1) 1.00%
------
-----------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Small Cap Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the Small Cap Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Small Cap Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Small Cap Portfolio;
o your investment returns 5% each year;
o the Small Cap Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
=====================================================================
Class Y $102 $456 $835 $1,900
---------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal
1.00% until March 31, 2000, and thereafter will equal 1.65%.
14 Small Cap Portfolio
<PAGE>
The Focus List Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Capital appreciation.
Principal Strategies
Under normal market conditions, 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 included on the Bear Stearns
Focus List (the "Focus List").
The Focus List Portfolio may invest up to 35% of its total assets in
stocks that are not on the Focus List. The Adviser may select non-Focus
List securities, for example, when the Adviser determines that Focus List
stocks are illiquid, would cause the Focus List Portfolio to be
overweighted in a particular sector or overly concentrated in a particular
industry, or for other reasons.
Using a rating system of "1" through "5," the Bear Stearns Equity Research
Department, consisting of 90 analysts who cover common stocks of more than
1,100 U.S. and foreign companies, assigns the following ratings: 1 (Buy),
2 (Attractive), 3 (Neutral), 4 (Avoid), 5 (Sell). More than 600 stocks are
rated Buy or Attractive. The Focus List typically consists of 20 stocks
rated Buy or Attractive. The Adviser determines how much of the Focus List
Portfolio's assets to allocate to each Focus List stock.
The Bear Stearns Research Department and the Research Stock Selection
Committee (comprised of senior Research personnel) will assign a Buy
rating to stocks when they believe the stock will significantly outperform
the market over the next three to six months because of a catalyst or
near-term event that they expect will 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 and is undervalued in comparison to
comparable companies.
Principal Risks
You may lose money by investing in the Focus List Portfolio. The Focus
List Portfolio is also subject to the following principal risks, more
fully described in "Risk Factors" in this Prospectus. Some or all of these
risk factors may affect the Focus List Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, and the risks that a
foreign government may confiscate assets.
Focus List Portfolio 15
<PAGE>
The Focus List Portfolio is a non-diversified mutual fund, which means
that it may invest a larger portion of its assets in a single issuer than
if it were diversified. This could make the Focus List Portfolio more
susceptible to price changes of securities of a particular issuer.
Who May Want to Invest in the Focus List Portfolio
The Focus List Portfolio may be appropriate for investors who:
o are investing for the long term;
o are seeking an equity component for their portfolio.
The Focus List Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience share
price fluctuations, assume the risks associated with stocks selected
by the Bear Stearns Focus List Committee or lose money on their
investment.
16 Focus List Portfolio
<PAGE>
Performance
Class Y shares of the Focus List Portfolio have not yet commenced
operations. The bar chart and table below illustrate the risks of
investing in the Focus List Portfolio by showing the performance of its
Class A shares for various time periods. The returns for Class A shares
would have annual returns that are substantially similar to those of Class
Y shares because both classes are invested in the same portfolio of
securities. The returns for Class Y shares offered by this Prospectus will
differ from the return for the Class A shares shown on the bar chart and
table, depending on the expenses of the Class Y shares.
The bar chart does not reflect any sales charges that are imposed on the
purchase and sale of Class A shares. If sales charges were reflected,
returns would be lower than those shown.
[BAR GRAPH]
Focus List Portfolio Annual Total Return(%)(1)
1998 33.64
Past performance is not necessarily an indication of future results.
1 The Focus List Portfolio's year-to-date return as of June 30, 1999 was
12.74%.
During the period shown in the bar chart, the highest quarterly return was
32.75% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (10.65)% (for the quarter ended September 30, 1998).
The table shows how the Focus List Portfolio's average annual total return
for one year and since the date of inception compared to the S&P 500
Index, a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of mid- to large-size
companies. The figures shown in the table assume reinvestment of dividends
and distributions and reflect all applicable sales charges.
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
=======================================================================
Focus List Portfolio - Class A 26.27% 26.27%**
-----------------------------------------------------------------------
S&P 500 Index 28.57% 28.57%
-----------------------------------------------------------------------
* Class A shares commenced operations on December 29, 1997. This table
does not reflect any performance information for the period December
29, 1997 through December 31, 1997.
** Total return figures for Class A shares reflect the current maximum
sales load of 5.50%. Prior to December 24, 1997, the maximum sales
load was 4.75%.
Focus List Portfolio 17
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Focus List Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
==========================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
--------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
--------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
--------------------------------------------------------------------------
Redemption fees **
--------------------------------------------------------------------------
Exchange fees None
--------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
==========================================================================
Management Fees 0.65%
--------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
--------------------------------------------------------------------------
Other Expenses 3.14%
------
--------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.79%
--------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.89)
------
--------------------------------------------------------------------------
Net Expenses(1) 0.90%
------
--------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The expenses shown are based on estimated expenses of Class Y shares of
the Focus List Portfolio for the fiscal year ending March 31, 2000. The
Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Focus List Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the Focus List Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Focus List Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Focus List Portfolio;
o your investment returns 5% each year;
o the Focus List Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
=======================================================================
Class Y $92 $891 $1,709 $3,842
-----------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will
equal 0.90% until March 31, 2000, and thereafter will equal 3.79%.
18 Focus List Portfolio
<PAGE>
Balanced Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Long-term capital growth and current income.
Principal Strategies
The Balanced Portfolio seeks capital appreciation primarily through the
equity component of its portfolio while investing in fixed income
securities primarily to lessen overall portfolio volatility and to provide
income for regular quarterly dividends.
The percentage of the Balanced 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 forecasts. When allocating equity and fixed
income investments, the Adviser takes into account the Balanced
Portfolio's intention to pay regular quarterly dividends. The amount of
quarterly dividends may fluctuate depending on prevailing interest rates,
dividend policies of issuers and how the Adviser allocates the Balanced
Portfolio's assets, among other things.
Under normal market conditions, the Balanced Portfolio will invest at
least 90% of its total assets in equity and fixed income securities.
Equity Securities. Under normal market conditions, the Balanced Portfolio
invests between 40% and 60% of its total assets in equity securities. Of
this amount, the Balanced Portfolio may invest up to 10% of its assets in
equity securities of foreign issuers in the form of ADRs.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which
the Balanced Portfolio may invest must be rated at least "investment
grade" by an NRSRO at the time of purchase.
The Adviser uses a "value" approach to investing. The Adviser looks for
equity securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios
and dividend payments. The Adviser may consider factors such as the
company's earnings growth, dividend payout ratios, return on equity, stock
price volatility relative to the market, new management and upcoming
corporate restructuring, the general business cycle, the company's
position within a specific industry and the company's responsiveness to
changing conditions.
Fixed Income Securities. Under normal market conditions, the Balanced
Portfolio invests between 40% and 60% of its total assets in fixed income
securities. The Balanced Portfolio invests primarily in high quality debt
obligations that have been rated "A-" or higher by S&P or "A3" or better
by Moody's Investors Service, Inc. ("Moody's"). The Balanced Portfolio may
also invest in debt obligations that are rated below these categories but
considered investment grade by Moody's or S&P. In addition, the Balanced
Portfolio may invest up to 5% of its total assets in higher-risk, below
investment-grade debt securities rated no lower than "B" by an NRSRO or
that the Adviser considers to be of comparable quality. The Adviser looks
for debt obligations that offer attractive returns that compare favorably
to those of comparable maturity U.S. Treasury securities, on a
risk-adjusted basis. For a discussion of the ratings categories of various
NRSROs, see the Appendix to the Statement of Additional Information
("SAI").
Balanced Portfolio 19
<PAGE>
Under normal market conditions, the Balanced Portfolio will invest in debt
obligations with an average maturity of 10 years or less, except that the
Portfolio may invest in U.S. government obligations of any maturity.
The Balanced Portfolio's fixed income investments include
o securities issued by the U.S. Government, its agencies,
instrumentalities or sponsored enterprises;
o debt securities issued by companies;
o mortgage-backed and asset-backed securities; and
o U.S. dollar-denominated securities issued by foreign governments.
Principal Risks
You may lose money by investing in the Balanced Portfolio. The Balanced
Portfolio is also subject to the following principal risks, more fully
described in "Risk Factors" in this Prospectus. Some or all of these risks
may adversely affect the Balanced Portfolio's net asset value, yield
and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, and the risks that a
foreign government may confiscate assets.
o The rate of inflation may increase, resulting in higher interest
rates, causing the Balanced Portfolio's debt securities to decline
in value. The value of a longer-term fixed income security is
usually more sensitive to rising interest rates than that of
short-term fixed income securities.
o Below investment-grade securities are riskier than investment-grade
securities and are more likely to decline in value than
investment-grade securities due to defaults or bankruptcies.
o The Balanced Portfolio may have to reinvest interest or sale
proceeds at lower interest rates, thereby reducing its yield, e.g.,
when the average life of a mortgage-related security is shortened
through prepayment.
20 Balanced Portfolio
<PAGE>
Who May Want to Invest in the Balanced Portfolio
The Balanced Portfolio may be appropriate for investors who:
o seek current income coupled with asset growth potential;
o are setting up trust accounts, such as charitable remainder trusts,
that have minimum payout requirements.
The Balanced Portfolio may not be appropriate for investors who:
o are not willing to take any risk that they may experience share
price fluctuations or lose money on their investment.
Performance
The bar chart and table below illustrate the risks of investing in the
Balanced Portfolio by showing the performance of its Class Y shares since
inception.
[BAR GRAPH]
Balanced Portfolio Annual Total Return(%)(1)
1998 12.32
Past performance is not necessarily an indication of future results.
1 The Balanced Portfolio's year-to-date return as of June 30, 1999 was
5.00%.
During the period shown in the bar chart, the highest quarterly return was
8.41% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (5.72)% (for the quarter ended September 30, 1998).
The table shows how the Balanced Portfolio's average annual total return
since the date of inception compared to the S&P 500 Index, a broad-based
unmanaged index that represents the general performance of domestically
traded common stocks of mid-to large-size companies, and the Lipper
Balanced Fund Index, a non-weighted index of the 30 largest funds within
the Lipper balanced fund investment category. The figures shown in the
table assume reinvestment of dividends and distributions.
Average Annual Total Returns
(for the period ended December 31, 1998) Since Inception*
=======================================================================
Balanced Portfolio - Class Y 12.32%
-----------------------------------------------------------------------
S&P 500 Index 29.09%
-----------------------------------------------------------------------
Lipper Balanced Fund Index 20.00%**
-----------------------------------------------------------------------
* Class Y shares commenced operations on January 6, 1998.
** The information for the Lipper Balanced Fund Index reflects its
performance from January 1, 1998 through December 31, 1998.
Balanced Portfolio 21
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Balanced Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
=============================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
-----------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
-----------------------------------------------------------------------------
Redemption fees **
-----------------------------------------------------------------------------
Exchange fees None
-----------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=============================================================================
Management Fees 0.65%
-----------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
-----------------------------------------------------------------------------
Other Expenses 2.13%
------
-----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 2.78%
-----------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.08)%
------
-----------------------------------------------------------------------------
Net Expenses(1) 0.70%
------
-----------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The Adviser has agreed to waive a portion of its fee and reimburse certain
expenses until at least March 31, 2000, so that the Balanced Portfolio's
net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the Balanced Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Balanced Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
o you invest $10,000 in the Balanced Portfolio;
o your investment returns 5% each year;
o the Balanced Portfolio's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
=====================================================================
Class Y $72 $664 $1,284 $2,957
---------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will
equal 0.70% until March 31, 2000, and thereafter will equal 2.78%.
22 Balanced Portfolio
<PAGE>
International Equity Portfolio
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
Investment Objective
Long-term capital appreciation.
Principal Strategies
Under normal market conditions, the International Equity Portfolio invests
substantially all of its assets in equity securities of foreign companies
with at least 65% of its total assets invested in such securities. Foreign
securities include 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).
The International Equity Portfolio's investments may be denominated in
U.S. dollars, foreign currencies or multinational currency units.
Under normal market conditions, the International Equity Portfolio invests
in the securities of companies located in at least three countries outside
of the United States. The International Equity Portfolio expects to invest
a substantial portion of its assets in the securities of issuers located
in Australia, Canada, Japan, New Zealand and the developed countries of
Western Europe.
In selecting investments for the International Equity Portfolio, Marvin &
Palmer Associates Inc., the International Equity Portfolio's investment
sub-adviser (the "Sub-Adviser"), evaluates whether a particular country's
securities markets have higher-than-average potential for capital
appreciation. The Sub-Adviser will then seek out companies with strong
fundamental characteristics, including solid management, sound balance
sheets and the potential for positive earnings growth.
The International Equity Portfolio also may invest in the securities of
issuers located in countries that are considered to be emerging or
developing ("emerging countries") by the World Bank, the International
Finance Corporation, or the United Nations and its authorities. These
countries are located primarily in Africa, Asia (ex-Japan), the Caribbean
islands, Latin America, the Middle East and certain parts of Europe
(Cyprus, the Czech Republic, Estonia, Greece, Hungary, Poland, Russia,
Slovakia and Turkey).
A company is considered to be an emerging country issuer if any of the
following apply:
o Its securities are principally traded in an emerging country.
o It derives at least 50% of its total revenue from providing goods or
services in emerging countries, or sales made in emerging countries.
o It maintains 50% or more of its assets in one or more emerging
countries.
o It is organized under the laws of, or has a principal office in, an
emerging country.
Foreign Currency Hedging --Use of Forward Foreign Exchange Contracts. The
International Equity Portfolio may purchase or sell forward foreign
currency exchange contracts ("forward contracts") for hedging purposes. A
forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date. When the Sub-Adviser believes that a
foreign currency may suffer a
International Equity Portfolio 23
<PAGE>
substantial decline against the U.S. dollar, the International Equity
Portfolio 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.
The International Equity Portfolio may enter into a forward contract for
the following reasons:
o To "lock in" the U.S. dollar price of a security denominated in a
foreign currency (transaction hedge).
o To protect against an anticipated decline in the foreign currency in
which a portfolio security is denominated against the U.S. dollar
(position hedge).
o To protect against an anticipated decline in the foreign currency in
which a portfolio security is denominated against another foreign
currency (cross hedge).
Principal Risks
You may lose money by investing in the International Equity Portfolio. The
International Equity Portfolio is also subject to the following principal
risks, more fully described in "Risk Factors" in this Prospectus. Some or
all of these risks may adversely affect the International Equity
Portfolio's net asset value, yield and/or total return:
o The market value of portfolio securities may decline.
o A particular strategy may not be executed effectively or otherwise
generate the intended result.
o A security's value will fluctuate in response to events affecting an
issuer's profitability or viability.
o Foreign securities may be more volatile than their domestic
counterparts, in part because of comparatively higher political and
economic risks, lack of reliable information, fluctuations in
currency exchange rates, and the risks that a foreign government may
confiscate assets, restrict the ability to exchange currency or
restrict the delivery of securities.
o The value of the International Equity Portfolio's investment in
forward contracts suffers from unanticipated changes in currency
prices.
o Foreign securities issued in emerging countries generally are more
volatile than securities issued in established markets because the
securities markets in these countries have comparatively less
trading volume and fewer participants.
o Inefficient settlement procedures in emerging countries may cause
the International Equity Portfolio to miss investment opportunities
or be exposed to liability for failure to deliver securities.
o Issuers in emerging countries are subject to less government
regulation than their counterparts in the United States.
24 International Equity Portfolio
<PAGE>
Who May Want to Invest in the International Equity Portfolio
The International Equity Portfolio may be appropriate for investors who:
o are investing for the long term;
o want to add an international equity component to their portfolio.
The International Equity Portfolio may not be appropriate for investors
who:
o are not willing to accept the risks associated with foreign
securities markets or currency fluctuation;
o are not willing to take any risk that they may experience share
price fluctuations, assume the risks associated with foreign stocks
or lose money on their investment.
Performance
Class Y shares of the International Equity Portfolio have not yet
commenced operations. The bar chart and table below illustrate the risks
of investing in the International Equity Portfolio by showing the
performance of its Class A shares for various time periods. The returns
for Class A shares would have annual returns that are substantially
similar to those of Class Y shares because both classes are invested in
the same portfolio of securities. The returns for Class Y shares offered
by this Prospectus will differ from the return for the Class A shares
shown on the bar chart and table, depending on the expenses of the Class Y
shares.
The bar chart does not reflect any sales charges that are imposed on the
purchase and sale of Class A shares. If sales charges were reflected,
returns would be lower than those shown.
[BAR GRAPH]
International Equity Portfolio Annual Total Return(%)(1)
1998 25.86
Past performance is not necessarily an indication of future results.
1 The International Equity Portfolio's year-to-date return as of June 30,
1999 was 4.11%.
During the period shown in the bar chart, the highest quarterly return was
16.62% (for the quarter ended December 31, 1998) and the lowest quarterly
return was (14.18)% (for the quarter ended September 30, 1998).
The table shows how the International Equity Portfolio's average annual
total return for one year and since the date of inception compared to the
Morgan Stanley Capital International Europe, Australasia, Far East Index
(the "MSCI EAFE Index"), a broad-based unmanaged index that represents the
general performance of common stocks of issuers located in developed
countries in Europe and the Pacific Basin, weighted by each component
country's market capitalization. The figures shown in the table assume
reinvestment of dividends and distributions and reflect all applicable
sales charges.
International Equity Portfolio 25
<PAGE>
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
==========================================================================
International Equity Portfolio - Class A 18.94% 18.94%
--------------------------------------------------------------------------
MSCI EAFE Index 20.00% 20.00%
--------------------------------------------------------------------------
* Class A shares commenced operations on December 29, 1997. This table
does not reflect any performance information for the period December
29, 1997 through December 31, 1997.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the International Equity Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y
=============================================================================
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase or sale price) None
-----------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
-----------------------------------------------------------------------------
Redemption fees **
-----------------------------------------------------------------------------
Exchange fees None
-----------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
=============================================================================
Management Fees 1.00%
-----------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00%
-----------------------------------------------------------------------------
Other Expenses 2.63%
------
-----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.63%
-----------------------------------------------------------------------------
Fee Waiver and Expense Reimbursement (2.38)%
------
-----------------------------------------------------------------------------
Net Expenses(1) 1.25%
------
-----------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
** There is a transaction fee of $7.50 for wiring redemption proceeds.
1 The expenses shown are based on estimated expenses of the International
Equity Portfolio for the fiscal year ending March 31, 2000. The Adviser
has agreed to waive a portion of its fee and reimburse certain expenses
until at least March 31, 2000, so that the International Equity
Portfolio's net expenses do not exceed the amount indicated above.
Example
This Example illustrates the cost of investing in the International Equity
Portfolio over various time periods. It is intended to help you compare
the cost of investing in the International Equity Portfolio with the cost
of investing in other mutual funds. The Example assumes that:
o you invest $10,000 in the International Equity Portfolio;
o your investment returns 5% each year;
o the International Equity Portfolio's operating expenses remain the
same.*
26 International Equity Portfolio
<PAGE>
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
=================================================================
Class Y $127 $891 $1,676 $3,733
-----------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will
equal 1.25% until March 31, 2000, and thereafter will equal
3.63%.
INVESTMENTS
Principal Investment Strategies -- Additional Information
S&P STARS Portfolio
S&P introduced STARS in January 1987. Since 1993, on average, each STARS
category has consisted of approximately the number of stocks shown below.
Rankings may change frequently as S&P analysts evaluate developments
affecting individual securities and the markets.
STARS Category Number of Stocks
----------------------------------------------
Five star 95
----------------------------------------------
Four star 385
----------------------------------------------
Three star 530
----------------------------------------------
Two star 90
----------------------------------------------
One star 10 to 23
----------------------------------------------
To evaluate the performance of stocks in the various categories, and thus
the performance of its analysts, STARS initially gives equal weight by
dollar amount to each stock, does not rebalance the portfolio based on
changes in values or rankings and does not reflect dividends or
transaction costs. While the performance of S&P STARS categories cannot be
used to predict actual results, S&P believes it is useful in evaluating
its analysts. The pool of S&P analysts changes and their past performance
does not necessarily predict future results either of the S&P STARS-ranked
stocks or of the S&P STARS Portfolio. From January 1, 1987 through June
30, 1999:
o The S&P 500 Index (measured on a total return basis, without
dividend reinvestment) increased by 466.84%. During this period,
the average dividend yield of securities included in the S&P 500
Index was 2.65% and the average dividend yield of five-star
stocks was 1.52%.
o The ranked stocks experienced the following changes in value:
STARS Category Percentage change in value
-----------------------------------------------------------
Five stars 976.87%
-----------------------------------------------------------
Four stars 494.53%
-----------------------------------------------------------
Three stars 270.53%
-----------------------------------------------------------
Two stars 244.13%
-----------------------------------------------------------
One star (8.02)%
-----------------------------------------------------------
The Adviser believes that this information means only that, historically,
five-star stocks have significantly outperformed lower-ranked stocks and
that one star stocks have significantly underperformed the higher-ranked
stocks. You should not use this information to predict whether past
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
27
<PAGE>
Industrial Average and the S&P 500 Index. In addition, the performance of
five-star and one-star stocks has not borne a consistent relationship to
each other or to the performance of the S&P 500 Index, as shown below. The
S&P STARS Portfolio is managed actively. Its performance will depend
primarily on the Adviser's investment decisions. The S&P STARS Portfolio
will incur transaction and other costs, including management and
distribution fees, that are not reflected in the information shown below.
Relative Performance Rankings (1 = highest performance)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
====================================================================================================
<S> <C> <C> <C> <C> <C>
1 One star stocks S&P 500 Index Five star stocks Five star stocks Five star stocks
- ----------------------------------------------------------------------------------------------------
2 S&P 500 Index Five star stocks S&P 500 Index S&P 500 Index S&P 500 Index
- ----------------------------------------------------------------------------------------------------
3 Five star stocks One star stocks One star stocks One star stocks One star stocks
- ----------------------------------------------------------------------------------------------------
</TABLE>
The S&P STARS Portfolio need not sell a security whose STARS ranking has been
downgraded. Also, the S&P STARS Portfolio need not terminate a "short"
position if a one star security's STARS ranking has been upgraded. In
addition, if S&P downgrades a security held by the S&P STARS Portfolio to
four stars from five stars, the Portfolio may purchase additional shares of
that security without limitation. Similarly, if S&P upgrades a shorted
security from one star to two stars, the Portfolio may sell short additional
shares of that security without limitation.
For purposes of calculating the 85% of total assets that the S&P STARS
Portfolio will invest pursuant to its principal investment strategy, "total
assets" will not include the Portfolio's investment in money market
instruments to maintain liquidity.
The Insiders Select Fund
The Adviser believes that collecting, classifying and analyzing legally
required reports of corporate insider transactions provides valuable
investment management information, because these insiders are in the best
position to understand their companies' near-term prospects. Corporate
insiders trade their company's stock for various reasons. Some transactions
are unrelated to the future of the company, such as the sale of stock to buy
a home or finance a child's college education, tax planning or token
purchases to signal confidence in the company. 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 may believe that 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 may indicate broad agreement within a firm as to
the direction of the stock.
Financial analysts employ a number of research tools to learn more about the
companies they follow, including visits to the company and in-depth
discussions with management. Successful analysts learn to interpret
management's words and actions. Management may use discussions with certain
analysts to signal its views to the market. The Adviser also believes that
revisions in analysts' earnings and ratings predictions may indicate a
stock's future returns.
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A company must routinely decide whether to maintain or change its dividend
policy, buy its own stock in the open market or issue new securities. From
time to time the company may decide that its stock is undervalued, providing
an opportunity to buy back the stock in the open market. By contrast, a
company's decision to sell securities may indicate that the company believes
that its stock has reached a near-term high, a possible sell signal.
Focus List Portfolio
Bear Stearns publishes the Focus List, which is a list of stocks selected by
the Bear Stearns Focus List Committee. The Committee monitors the Focus List
daily, and candidates are considered based on one or more of the following
criteria: market outlook, perception of the stock's sector, and the stock's
current valuation relative to the market and its industry. Domestic and
international stocks and ADRs rated Buy (1) or Attractive (2) are eligible
for inclusion on the Focus List.
Generally, 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 how much of the Focus List Portfolio's
assets to allocate to each Focus List stock. The Adviser may make changes in
the allocation as investment and economic conditions change. Depending upon
market conditions and to the extent the Focus List 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 before Bear Stearns publishes
it.
The Focus List Committee automatically removes from the Focus List stocks
that an analyst has downgraded below Attractive. However, the Focus List
Committee may delete stocks for other reasons. For example, it may delete a
stock when the stock has achieved its target price range, a catalyst fails to
materialize or have its expected effect, or new, more attractive
opportunities arise.
The Focus List may include stocks of issuers for which Bear Stearns or an
affiliate performs investment banking services for which it receives fees, as
well as stocks in which Bear Stearns or an affiliate makes a market and may
have a long or short position. When Bear Stearns or an affiliate participates
in a distribution of stock, the Adviser may be prohibited from purchasing
that stock for the Focus List Portfolio. The activities of Bear Stearns or an
affiliate may 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. The Focus List is available to other clients of Bear
Stearns and its affiliates, including the Adviser.
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<PAGE>
Investments and Techniques
This table summarizes some of the principal investments and techniques,
described below, that each Portfolio may use to achieve its investment
objectives.
<TABLE>
<CAPTION>
International
S&P STARS Insiders Large Cap Small Cap Focus List Balanced Equity
Portfolio Select Fund Portfolio Portfolio Portfolio Portfolio Portfolio
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
ADRs X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Asset-backed
securities X
- ------------------------------------------------------------------------------------------------------------------
Convertible
securities X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Debt securities X
- ------------------------------------------------------------------------------------------------------------------
Equity securities X X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Mortgage-related
securities X
- ------------------------------------------------------------------------------------------------------------------
Real estate
investment
trusts ("REITs") X
- ------------------------------------------------------------------------------------------------------------------
Short sales X
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
o ADRs are receipts for the foreign company shares held by a United
States depositary institution, entitling the holder to all
dividends and capital gains of the underlying shares. ADRs are
quoted in U.S. dollars and are traded on U.S. exchanges.
o Asset-backed securities have a structure that is similar to
mortgage-related securities (see below). The collateral for these
securities includes home equity loans, automobile and credit card
receivables, boat loans, computer leases, airplane leases, mobile
home loans, recreational vehicle loans and hospital account
receivables.
o Convertible securities are bonds, debentures, notes, preferred
stocks or other securities that may be converted into or
exchanged for common stock. Convertible securities are
characterized by higher yields than common stocks, but lower
yields than comparable non-convertible securities, less price
fluctuation than the underlying common stock since they have
fixed income characteristics, and potential for capital
appreciation if the market price of the underlying common stock
increases.
o Debt securities, including bills, bonds, and notes, represent
money borrowed that must be repaid, usually having a fixed
amount, a specific maturity date or dates, and a specific rate of
interest (or formula for determining the interest rate) or an
original purchase discount.
o Equity securities include foreign and domestic common or
preferred stocks, rights and warrants.
o Mortgage-related securities represent interests in pools of
mortgage loans made by lenders like savings and loan
institutions, mortgage bankers, commercial banks and others.
o 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.
o Short sales. In a short sale, a Portfolio sells a security it
does not own anticipating that the price will decline. To
complete a short sale, the Portfolio must borrow the security to
make delivery and must then replace the security borrowed by
buying it at the prevailing market
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<PAGE>
price, which may be higher or lower than the price at which the
Portfolio sold the security short. Short sales involve leverage,
which may exaggerate a gain or loss.
Other Investment Strategies
o Temporary defensive measures. From time to time, during
unfavorable market conditions, the Adviser may invest
"defensively." This means a Portfolio may make temporary
investments that are not consistent with its investment objective
and principal strategies. Engaging in temporary defensive
measures may reduce the benefit from any upswing in the market
and may cause a Portfolio to fail to meet its investment
objective.
For temporary defensive purposes, each Portfolio may hold cash
(U.S. dollars) and may invest all of its assets in high-quality
fixed-income securities, repurchase agreements or U.S. or
foreign money market instruments.
For temporary defensive purposes, the International Equity
Portfolio may hold foreign currencies or multinational currency
units.
o Portfolio turnover. The Adviser may trade actively to achieve a
Portfolio's goals. Emerging country markets are especially
volatile and may result in more frequent trading. This may result
in higher capital gains distributions, which would increase your
tax liability. Frequent trading may also increase the Portfolio's
costs, lessening its performance over time.
The SAI describes each Portfolio's investment strategies in more detail.
RISK FACTORS
As with all mutual funds, investing in the Portfolios involves certain
risks. There is no guarantee that a Portfolio will meet its investment
objective. You can lose money by investing in a Portfolio if you sell your
shares after it declines in value below your original cost. There is never
any assurance that a Portfolio will perform as it has in the past.
The Portfolios may use various investment techniques, some of which
involve greater amounts of risk than others. You will find a detailed
discussion of these investment techniques in the SAI. To reduce risk, the
Portfolios are subject to certain limitations and restrictions on their
investments, which are also described in the SAI.
Each Portfolio is subject to the following principal risks, except as
noted.
General Risks
o Market risk is the risk that the market value of a security may go
up or down, sometimes rapidly. These fluctuations may cause the
security to be worth less than it was at the time it was acquired.
Market risk may involve a single security or a particular sector.
o Manager risk is the risk that the portfolio managers' investment
strategy may not produce the intended results. Manager risk also
involves the possibility that the portfolio managers fail to execute
an investment strategy effectively.
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<PAGE>
o Year 2000 risk. Like all mutual funds, a Portfolio could be
adversely affected if the computer systems used by its service
providers, including shareholder servicing agents, are unable to
recognize dates after 1999. Each Portfolio's service providers have
been actively updating their systems to be able to process Year 2000
data. There can be no assurance, however, that these steps will be
adequate to avoid a temporary service disruption or other adverse
impact on the Portfolios. In addition, an issuer's failure to
process accurately Year 2000 data may cause that issuer's securities
to decline in value or delay the payment of interest to a Portfolio.
The risk of computer failure may be greater with respect to
investments in foreign countries, which may lack the expertise or
resources to adequately address the issue.
Risks of Equity Securities
o Equity risk is the risk that a security's value will fluctuate in
response to events affecting an issuer's profitability or viability.
Unlike debt securities, which have a superior claim to a company's
earnings and cash flow in case of liquidation, equity securities
benefit from a company's earnings and cash flow only after the
company meets its other obligations. For example, a company must pay
interest on its bonds before it pays stock dividends to
shareholders, and bondholders have a superior claim to the company's
assets in the event of bankruptcy.
Risks of Hedging or Leverage Transactions
o Correlation risk. Futures and options contracts and other derivative
instruments can be used in an effort to hedge against risk.
Generally, an effective hedge generates an offset to gains or losses
of other investments made by a Portfolio. Correlation risk is the
risk that a hedge using futures or options contracts (or any
derivative, for that matter) does not, in fact, respond to economic
or market conditions in the manner the portfolio manager expected.
In such a case, the hedge may not generate gains sufficient to
offset losses and may actually generate losses due to the cost of
the hedge or otherwise.
o Leverage risk is the risk associated with those techniques in which
a relatively small amount of money invested puts a much larger
amount of money at risk through borrowing or futures trading, for
example. Selling short securities or using derivatives for hedging
may involve leverage. If a portfolio manager does not execute the
strategy properly, or the market does not move as anticipated,
losses may substantially exceed the amount of the original
investment. A Portfolio's use of derivatives for asset substitution
may also involve leverage.
Risks of Foreign Securities
o Foreign issuer risk. Compared to U.S. companies, less information is
generally available to the public about foreign companies. Foreign
brokers and issuers may not be subject to the uniform accounting,
auditing, and financial reporting standards and practices prevalent
in the U.S. In addition, foreign stock exchanges and other
securities markets may be more volatile and subject to less
governmental supervision than their counterparts in the U.S.
Investments in foreign countries could be affected by factors not
present in the U.S., including expropriation, confiscation of
property, and difficulties in enforcing contracts. All of these
factors can make foreign investments, especially those in emerging
countries, more volatile than U.S. investments.
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<PAGE>
o Currency risk (International Equity Portfolio only). Fluctuations in
exchange rates between the U.S. dollar and foreign currencies may
negatively affect an investment. Adverse changes in exchange rates
may erode or reverse any gains produced by foreign
currency-denominated investments and may widen any losses. On
January 1, 1999, participating nations in the European Economic and
Monetary Union introduced a single currency, the euro. This action
may present unique uncertainties for securities denominated in
currencies that are components of the euro. Political and economic
risks, along with other factors, could adversely affect the value of
the International Equity Portfolio's securities.
o Emerging markets risk (International Equity Portfolio only).
Emerging country economies often compare unfavorably with the United
States economy in growth of gross domestic product, rate of
inflation, capital reinvestment, resources, self-sufficiency and
balance of payments position. Certain emerging countries have
experienced and continue to experience high rates of inflation,
sharply eroding the value of their financial assets. An emergency
may arise where trading of emerging country securities may cease or
may be severely limited or where an emerging country governmental or
corporate issuer defaults on its obligations.
The governments of certain emerging countries impose restrictions or
controls that may limit or preclude the International Equity
Portfolio's investment in certain securities. The International
Equity Portfolio may need governmental approval for the repatriation
of investment income, capital or sales proceeds. An emerging country
government may also impose temporary restrictions on the disposition
of portfolio securities.
Risks of Debt Securities (Balanced Portfolio only)
o Interest rate risk. The value of a debt security typically changes
in the opposite direction from a change in interest rates. When
interest rates go up, the value of a debt security typically goes
down. When interest rates go down, the value of a debt security
typically goes up. Generally, the longer the maturity of a security,
the more sensitive it is to changes in interest rates.
o Inflation risk is the risk that inflation will erode the purchasing
power of the cash flows generated by debt securities. Fixed-rate
debt securities are more susceptible to this risk than floating-rate
debt securities.
o Reinvestment risk is the risk that when interest rates are
declining, a Portfolio will have to reinvest interest income or
prepayments on a security at lower interest rates. In a declining
interest rate environment, lower reinvestment rates and price gains
resulting from lower interest rates will offset each other to some
extent.
o Credit (or default) risk is the risk that the issuer of a debt
security will be unable to make timely payments of interest or
principal. Credit risk is measured by NRSROs such as S&P, Fitch
IBCA, Inc. or Moody's.
o Below investment-grade securities ("junk bonds") may be less liquid,
more susceptible to real or perceived adverse economic conditions
and more difficult to evaluate than higher-rated securities. The
market for these securities has relatively few participants, mostly
institutional investors, and low trading volume at times, a
Portfolio may have difficulty selling particular high yield
securities at a fair price and obtaining accurate valuations in
order to calculate its net asset value.
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<PAGE>
Risks of Mortgage-Related Securities (Balanced Portfolio only)
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of mortgage-related
securities. The level of interest rates and other factors may affect
the frequency of mortgage prepayments. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the
average life of a pool of mortgage-related securities. In periods of
falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because prepayments
generally occur when interest rates are falling, a Portfolio may
have to reinvest the proceeds from prepayments at lower interest
rates.
Risks of Real Estate Securities (Balanced Portfolio only)
o Real estate risk is the risk that the value of a security will
fluctuate because of changes in, among other things, property
values, rental property vacancies, overbuilding, changes in local
laws, increased property taxes and operating expenses.
o Regulatory risk. Certain REITs may fail to qualify for pass-through
of income under federal tax law, or to maintain their exemption from
federal securities laws registration requirements.
Particular Risks of the S&P STARS Portfolio Only
o S&P STARS rankings represent the subjective determination of S&P
analysts. Past performance of securities included in S&P STARS does
not necessarily predict the S&P STARS Portfolio's future
performance.
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the
investment adviser of the Portfolios. The Adviser was established in 1985
and 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 & Co. Inc.,
is a leading United States investment banking, securities trading and
brokerage firm serving U.S. and foreign corporations, governments and
institutional and individual investors. The Adviser is a registered
investment adviser and offers investment advisory and administrative
services to open-end investment funds and other managed accounts with
aggregate assets at June 30, 1999 of over $12.2 billion.
The Adviser supervises and assists in the overall management of the
affairs of the Trust, subject to oversight by the Trust's Board of
Trustees.
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<PAGE>
For the fiscal year ended March 31, 1999, the Adviser received management
fees based on a percentage of the average daily net assets of each
Portfolio, after waivers, as shown in the following table.
S&P STARS Portfolio 0.48%
------------------------------------------------------
Insiders Select Fund 0.57%
------------------------------------------------------
Large Cap Portfolio 0.00%
------------------------------------------------------
Small Cap Portfolio 0.10%
------------------------------------------------------
Focus List Portfolio 0.00%
------------------------------------------------------
Balanced Portfolio 0.00%
------------------------------------------------------
International Equity Portfolio 0.00%
------------------------------------------------------
Portfolio Management Team
The Adviser uses a team approach to manage each Portfolio. The members of
each team together are primarily responsible for the day-to-day management
of each Portfolio's investments. No single individual is responsible for
managing a Portfolio. Each team consists of senior portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to
manage the assets of each Portfolio.
Investment Sub-Adviser -- International Equity Portfolio
Marvin & Palmer Associates, Inc. (the "Sub-Adviser") serves as the
investment sub-adviser to the International Equity Portfolio, pursuant to
an agreement with the Adviser and subject to the overall supervision of
the Adviser. The Sub-Adviser, a registered investment adviser, was founded
in 1986 and specializes in global, non-U.S., emerging market and U.S.
equity portfolio management for institutional accounts. As of June 30,
1999, the Sub-Adviser managed approximately $8.7 billion in assets. The
Sub-Adviser is located at 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801.
HOW THE PORTFOLIOS VALUE THEIR SHARES
The net asset value ("NAV"), multiplied by the number of Portfolio shares
you own, gives you the value of your investment. Each Portfolio calculates
its share price, called its NAV, each business day as of the close of the
New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m.
Eastern Time. You may buy, sell or exchange shares on any business day at
a price that is based on the NAV that is calculated after you place your
order. A business day is a day on which the NYSE is open for trading or
any day in which enough trading has occurred in the securities held by a
Portfolio to affect the NAV materially.
Portfolio securities that are listed primarily on foreign exchanges may
trade on weekends or on other days on which the Portfolios do not price
their shares. In this case, the NAV of a Portfolio's shares may change on
days when you are not able to buy or sell shares.
The Portfolios value their investments based on market value or, where
market quotations are not readily available, based on fair value as
determined in good faith by the Trust's Board of Trustees. The NAV for
each class is calculated by adding up the total value of the relevant
Portfolio's investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the
class.
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Total Assets Less Liabilities
NAV = ------------------------------
Number of Shares Outstanding
You can request each Portfolio's current NAV by calling 1-800-447-1139.
INVESTING IN THE PORTFOLIOS
This section provides information to assist you in buying and selling
shares of the Portfolios. Please read the entire Prospectus carefully
before buying Class Y shares of a Portfolio.
How to Buy Shares
The minimum initial investment is $3,000,000; there is no minimum for
subsequent investments. You may buy Class Y shares of a Portfolio through
your account representative at a broker-dealer with whom the Distributor
has entered into a sales agreement (an "Authorized Dealer") or the
Transfer Agent by wire only.
To buy Class Y shares of a Portfolio by Federal Reserve wire, call the
Transfer Agent at 1-800-447-1139 or call your account representative.
If you do not wire Federal Funds, you must have the wire converted into
Federal Funds, which usually takes one business day after receipt of a
bank wire. The Transfer Agent will not process your investment until it
receives Federal Funds.
The following procedure will help assure prompt receipt of your Federal
Funds wire:
Call the Transfer Agent 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
The Transfer Agent will then provide you with a Portfolio account
number. (If you already have an account, you must also notify the
Portfolio before wiring funds.)
Instruct your bank to wire the specified amount to the Portfolio as
follows:
PNC Bank, N.A.
ABA #031000053
Credit Account Number: #85-5102-0143
From: [your name]
Account Number: [your Portfolio account number]
For Purchase of ______________________ Portfolio
Amount: [amount to be invested]
You may open an account when placing an initial order by telephone,
provided you then submit an Account Information Form by mail. The Transfer
Agent will not process your investment until it receives a fully completed
and signed Account Information Form.
The Trust and the Transfer Agent each reserve the right to reject any
purchase order for any reason.
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<PAGE>
How to Sell Shares
o You may sell shares on any business day through the Distributor,
Authorized Dealers or the Transfer Agent.
o When the Trust receives your redemption requests in proper form, it
will sell your shares at the next determined net asset value.
o The Trust will send you payment proceeds generally within seven days
after it receives your redemption request.
Redemption Procedures
Redemption Through the Distributor or Authorized Dealers
Method of Redemption Instructions
[GRAPHIC] In person o Visit your account representative.
o Specify the name of the Portfolio,
class of shares and the number or
dollar amount of shares that you
wish to sell.
[GRAPHIC] By telephone o Call your account representative.
o Specify the name of the Portfolio,
class of shares and the number or
dollar amount of shares that you
wish to sell.
[GRAPHIC] By mail o Mail your redemption request to
your account representative.
o Specify the name of the Portfolio,
class of shares and the number or
dollar amount of shares that you
wish to sell.
[GRAPHIC] By wire o Submit wiring instructions to your
account representative.
o Specify the name of the Portfolio,
class of shares and the number or
dollar amount of shares that you
wish to sell.
Redemption Through the Transfer Agent
[GRAPHIC] By mail o Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[name of Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
[GRAPHIC] By telephone o Call the Transfer Agent at
1-800-447-1139.
o Specify the name of the Portfolio,
class of shares and the number or
dollar amount of shares that you
wish to sell.
Additional Information About Redemptions
o Wiring redemption proceeds. Upon request, the Trust will wire your
proceeds ($500 minimum) to your brokerage account or a designated
commercial bank account. There is a transaction fee of $7.50 for
this service. Please call your account representative for
information on how to wire funds to your brokerage account. If you
do not have a brokerage account, call the Transfer Agent to wire
funds to your bank account.
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<PAGE>
o Signature guarantees. If your redemption proceeds exceed $50,000, or
if you instruct the Trust to send the proceeds to someone other than
the record owner at the record address, or if you are a corporation,
partnership, trust or fiduciary, your signature must be guaranteed
by any eligible guarantor institution. Call the Transfer Agent at
1-800-447-1139 for information about obtaining a Medallion Program
signature guarantee.
o Telephone policies. You may authorize the Transfer Agent to accept
telephone instructions. If you do, the Transfer Agent will accept
instructions from people who it believes are authorized to act on
your behalf. The Transfer Agent will use reasonable procedures (such
as requesting personal identification) to ensure that the caller is
properly authorized. Neither the Portfolio nor the Transfer Agent
will be liable for losses for following instructions reasonably
believed to be genuine.
o Redemption by mail may cause a delay. During times of extreme
economic or market conditions, you may experience difficulty in
contacting your account representative by telephone to request a
redemption of shares. If this occurs, please consider using the
other redemption procedures described in this Prospectus.
Alternative procedures may take longer to sell your shares.
o Automatic redemption; redemption in kind. If the value of your
account falls below $750 (for reasons other than changes in market
conditions), the Trust may automatically liquidate your account and
send you the proceeds. The Trust will send you a notice at least 60
days before doing this. The Trust also reserves the right to redeem
your shares "in kind." For example, if you sell a large number of
shares and the Portfolio is unable to sell securities to raise cash,
the Trust may send you a combination of cash and a share of actual
portfolio securities. Call the Transfer Agent for details.
o Suspension of the Right of Redemption. A Portfolio may suspend your
right to redeem your shares under any of the following
circumstances:
-- during non-routine closings of the NYSE;
-- when the Securities and Exchange Commission ("SEC") determines
either that trading on the NYSE is restricted or that an
emergency prevents the sale or valuation of the Portfolio's
securities; or
-- when the SEC orders a suspension to protect the Portfolio's
shareholders.
Exchanges
You may exchange Class Y shares of one Portfolio for Class Y shares of
another Portfolio described in this Prospectus, Class Y shares of another
Portfolio of the Trust, or shares of the Money Market Portfolio of The RBB
Fund, Inc. (You may obtain more information about other Portfolios of the
Trust by calling the Transfer Agent at 1-800-447-1139.)
The Trust does not currently charge a fee for exchanges, although it may
change this policy in the future.
Exchange procedures. To exchange your shares, you must give exchange
instructions to your account representative or the Transfer Agent in
writing or by telephone.
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<PAGE>
Exchange policies. When exchanging your shares, please keep in mind:
o An exchange of shares may create tax liability for you. You may have
a gain or loss on the transaction, since the shares you are
exchanging will be treated like a sale.
o When the market is very active, telephone exchanges may be difficult
to complete. You may have to submit exchange requests to your
account representative or the Transfer Agent in writing, which will
cause a delay.
o The shares you exchange must have a value of at least $250 (except
in the case of certain retirement plans). If you are establishing a
new account, you must exchange the minimum dollar amount needed to
open that account.
o Before you exchange your shares, you must review a copy of the
current prospectus of the Portfolio that you would like to buy.
o The Trust may reject your exchange request. The Trust may modify or
terminate the exchange option at any time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
If you buy shares of a Portfolio shortly before it declares a dividend or
a distribution, a portion of your investment in the Portfolio may be
returned to you in the form of a taxable distribution.
Distributions
The Portfolios pass along your share of their investment earnings in the
form of dividends. Dividend distributions are the net dividends or
interest earned on investments after expenses. As with any investment, you
should consider the tax consequences of an investment in a Portfolio.
Ordinarily, each Portfolio, other than the Balanced Portfolio, declares
and pays dividends from its net investment income annually. The Balanced
Portfolio declares and pays dividends quarterly. The Portfolios will
distribute short-term capital gains, as necessary, and normally will pay
any long-term capital gains once a year.
You can receive dividends or distributions in one of the following ways:
o Reinvestment. You can automatically reinvest your dividends and
distributions in additional shares of your Portfolio. If you do not
indicate another choice on your Account Information Form, you will
receive your distributions this way.
o Cash. The Trust will send you a check no later than seven days after
the payable date.
o Partial reinvestment. The Trust will automatically reinvest your
dividends in additional shares of your Portfolio and pay your
capital gain distributions to you in cash. Or, the Trust will
automatically reinvest your capital gain distributions and send you
your dividends in cash.
o Directed dividends. You can automatically reinvest your dividends
and distributions in the same class of shares of another Portfolio
or the Money Market Portfolio of The RBB Fund, Inc. You may not use
this service to establish a new account.
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<PAGE>
o Direct deposit. In most cases, you can automatically transfer
dividends and distributions to your bank checking or savings
account. Under normal circumstances, the Transfer Agent will
transfer the funds within seven days of the payment date. To receive
dividends and distributions this way, the name on your bank account
must be the same as the registration on your Portfolio account.
You may choose your distribution method on your original Account
Information Form. If you would like to change the option you selected,
please call your account executive or the Transfer Agent at
1-800-447-1139.
Taxes
Each Portfolio intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders. It is important for you
to be aware of the following information about the tax treatment of your
investment.
o Ordinary dividends from a Portfolio are taxable as ordinary income;
dividends from a Portfolio's long-term capital gains are taxable as
capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or additional
shares. They may also be subject to state and local taxes.
o Dividends from the Portfolios that are attributable to interest on
certain U.S. Government obligations may be exempt from certain state
and local income taxes. The extent to which ordinary dividends are
attributable to these U.S. Government obligations will be provided
on the tax statements you receive from a Portfolio.
o Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
o The Trust will mail you tax statements every January showing the
amounts and tax status of distributions you received.
o When you sell (redeem) or exchange shares of a Portfolio, you must
recognize any gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
The Trust provides this tax information for your general information. You
should consult your own tax adviser about the tax consequences of
investing in a Portfolio.
40
<PAGE>
ADDITIONAL INFORMATION
Performance
Financial publications, such as Business Week, Forbes, Money or
SmartMoney, may compare a Portfolio's performance to the performance of
various indexes and investments for which reliable performance data is
available. These publications may also compare a Portfolio's performance
to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services, such as Lipper Inc.
Shareholder Communications
The Trust may eliminate duplicate mailings of Portfolio materials to
shareholders who reside at the same address.
41
<PAGE>
Financial Highlights -- S&P STARS Portfolio
The financial highlights table is intended to help you understand the
financial performance of the S&P STARS Portfolio since its inception. This
information reflects financial results for a single share of the S&P STARS
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the S&P STARS Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the S&P STARS Portfolio's financial statements, are included in the
S&P STARS Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
Class Y shares of the Focus List Portfolio and the International Equity
Portfolio have not yet commenced operations.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Net Realized Dividends From Net
Value, Investment and Unrealized from Net Realized Net Asset
Beginning Income/ Gain/(Loss) on Investment Capital Value, End
Of Period (Loss)**(1) Investments**(2) Income Gains Of Period
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $20.11 $(0.05) $5.54 -- $(0.92) $24.68
- ------------------------------------------------------------------------------------------------------------------------------------
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 August 7, 1995*
through March 31, 1996 14.13 0.07 1.20 (0.03) (0.40) 14.97
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
42
<PAGE>
Financial Highlights -- S&P STARS Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
28.02% $52,483 1.00% (0.23)% 0.27% 76.17%
- ---------------------------------------------------------------------------------------------------------------------------------
44.22 35,652 1.00(7) (0.32)(6) 0.38 172.78(7)
- ---------------------------------------------------------------------------------------------------------------------------------
17.48 14,763 1.00(7) (0.10)(6) 0.70 220.00(7)
- ---------------------------------------------------------------------------------------------------------------------------------
9.09(4) 8,779 1.00(5)(7) 0.82(4)(5)(6) 0.99(4)(5) 295.97(7)
- ---------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
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 is related to S&P STARS Master Series for the
period prior to June 25, 1997.
43
<PAGE>
Financial Highlights -- Insiders Select Fund
The financial highlights table is intended to help you understand the
financial performance of The Insiders Select Fund since its inception.
This information reflects financial results for a single share of The
Insiders Select Fund. The total returns in the table represent the rate
that an investor would have gained on an investment in The Insiders Select
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with The Insiders Select Fund 's financial statements, are included in The
Insiders Select Fund's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends from Net
Value, Net and Unrealized from Net Realized Net Asset
Beginning Investment Gain on Investment Capital Value, End
Of Period Income**(1) Investments**(2) Income Gains Of Period
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $18.09 -- $0.09 -- $(0.85) $17.33
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
44
<PAGE>
Financial Highlights -- Insiders Select Fund
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
0.85% $914 1.15% 0.02% 0.81% 99.71%
- --------------------------------------------------------------------------------------------------------------------------------
46.48 1,265 1.15 0.55 1.07 115.64
- --------------------------------------------------------------------------------------------------------------------------------
18.81 1,557 1.15 0.60 1.81 128.42
- --------------------------------------------------------------------------------------------------------------------------------
15.98(4) 1,293 1.15(5) 0.97(4)(5) 2.04(4)(5) 93.45
- --------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
45
<PAGE>
Financial Highlights -- Large Cap Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Large Cap Portfolio since its inception. This
information reflects financial results for a single share of the Large Cap
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the Large Cap
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Large Cap Portfolio's financial statements, are included in the
Large Cap Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends From Net
Value, Net And Unrealized From Net Realized Net Asset
Beginning Investment Gain On Investment Capital Value, End
Of Period Income**(1) Investments**(2) Income Gains Of Period
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $20.84 $0.17 $0.65 $(0.20) $(1.68) $19.78
- --------------------------------------------------------------------------------------------------------------------------------
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 September 11, 1995*
through March 31, 1996 13.98 0.07 1.16 (0.08) (0.01) 15.12
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
46
<PAGE>
Financial Highlights -- Large Cap Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income Investment Income
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
4.29% $4,741 1.00% 1.08% 1.46% 38.27%
- --------------------------------------------------------------------------------------------------------------------------------
45.27 7,263 1.00 0.83 1.76 61.75
- --------------------------------------------------------------------------------------------------------------------------------
16.04 6,109 1.00 1.00 1.50 136.67
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
8.75(4) 3,413 1.00(5) 0.76(4)(5) 4.41(4)(5) 45.28
</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 The 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.
5 Annualized.
47
<PAGE>
Financial Highlights -- Small Cap Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Small Cap Portfolio since its inception. This
information reflects financial results for a single share of the Small Cap
Portfolio. The total returns in the table represent the rate that an
investor would have gained or lost on an investment in the Small Cap
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Small Cap Portfolio's financial statements, are included in the
Small Cap Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized From Net
Value, Net and Unrealized Realized Net Asset
Beginning Investment Gain/(Loss) on Capital Value, End
Of Period (Loss)**(1) Investments**(2) Gains Of Period
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $23.65 $(0.02) $(4.66) $(0.94) $18.03
- --------------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1998 17.47 (0.04) 8.06 (1.84) 23.65
- --------------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 15.85 (0.05) 1.97 (0.30) 17.47
- --------------------------------------------------------------------------------------------------------------------------------
For the period June 22, 1995*
through March 31, 1996 13.09 -- 3.05 (0.29) 15.85
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
48
<PAGE>
Financial Highlights -- Small Cap Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income/(Loss) Investment Income/(Loss)
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
(19.84)% $24,087 1.00% (0.10)% 0.65% 84.12%
- --------------------------------------------------------------------------------------------------------------------------------
47.54 31,141 1.00 (0.21) 0.77 90.39
- --------------------------------------------------------------------------------------------------------------------------------
12.19 16,724 1.00 (0.31)(4 5) 1.00 56.88
- --------------------------------------------------------------------------------------------------------------------------------
23.52(4) 8,989 1.00(5) -- 2.45(4)(5) 40.79
- --------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
49
<PAGE>
Financial Highlights -- Balanced Portfolio
The financial highlights table is intended to help you understand the
financial performance of the Balanced Portfolio since its inception. This
information reflects financial results for a single share of the Balanced
Portfolio. The total returns in the table represent the rate that an
investor would have gained on an investment in the Balanced Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with the Balanced Portfolio's financial statements, are included in the
Balanced Portfolio's annual report, which is available by calling the
Trust at 1-800-766-4111.
<TABLE>
<CAPTION>
Distributions
Net Asset Net Realized Dividends from Net
Value, Net and Unrealized From Net Realized Net Asset
Beginning Investment Gain on Investment Capital Value, End
Of Period Income**(1) Investments**(2) Income Gains Of Period
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
For the fiscal year ended March 31, 1999 $12.95 $0.37 $0.21 $(0.36) $(0.01) $13.16
- --------------------------------------------------------------------------------------------------------------------------------
For the period January 6, 1998*
through March 31, 1998 12.05 0.06 0.88 (0.04) -- 12.95
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Commencement of operations.
** Calculated based on the shares outstanding on the first and last day of
the respective periods, except for dividends and distributions, if any,
which are based on the actual shares outstanding on the dates of
distributions.
1 Reflects waivers and reimbursements.
2 The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses 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.
50
<PAGE>
Financial Highlights -- Balanced Portfolio
<TABLE>
<CAPTION>
Increase/(Decrease)
Ratio of Reflected in
Net Assets, Ratio of Net Investment Expense Ratios and Net
Total End of Expenses to Income Investment Income
Investment Period Average Net To Average Due to Waivers and Portfolio
Return(3) (000's omitted) Assets(1) Net Assets(1) Reimbursements Turnover Rate
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class Y
4.59% $10,403 0.70% 3.15% 2.08% 45.98%
- --------------------------------------------------------------------------------------------------------------------------------
7.80(4) 5,685 0.70(5) 2.98(4)(5) 3.12(4)(5) 12.72
- --------------------------------------------------------------------------------------------------------------------------------
</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 The 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.
5 Annualized.
51
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
DISTRIBUTOR
Bear, Stearns & Co. Inc.
545 Park Avenue
New York, NY 10167
INVESTMENT ADVISER
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
SUB-INVESTMENT ADVISER
(INTERNATIONAL EQUITY PORTFOLIO)
Marvin & Palmer Associates, Inc.
1201 North Market Street, Suite 2300
Wilmington, DE 19801
ADMINISTRATOR
Bear Stearns Funds Management Inc.
575 Lexington Avenue
New York, NY 10022
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 LLP
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
52
<PAGE>
Statement of Additional Information. The Statement of Additional
Information ("SAI") provides a more complete discussion of several of the
matters contained in this Prospectus and is incorporated by reference,
which means that it is legally a part of this Prospectus as if it were
included here.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about each Portfolio's
investments, including a discussion of the market conditions and
investment strategies that significantly affected a Portfolio's
performance during its last fiscal year.
o To obtain a free copy of the SAI and the current annual or
semi-annual reports or to make any other inquiries about a
Portfolio, you may call or write:
PFPC Inc.
Attention: The Bear Stearns Funds
P.O. Box 8960
Wilmington, Delaware 19899-8960
Telephone: 1-800-447-1139 or 1-800-766-4111
o You may obtain copies of the SAI or financial reports
o for free by calling or writing broker-dealers or other
financial intermediaries that sell a Portfolio's shares;
o for a fee by writing the Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-6009;
o for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
o You may review and copy information about the Portfolios (including
the SAI) at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 to obtain information about this service.
You may also obtain a copy of a Portfolio's prospectus from the Bear
Stearns Worldwide Web site at http://www.bearstearns.com.
Investment Company Act File No. 811-8798
BSF-P-017-02
<PAGE>
THE BEAR STEARNS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Prime Money Market Portfolio Large Cap Value Portfolio
Income Portfolio Small Cap Value Portfolio
High Yield Total Return Portfolio Focus List Portfolio
Emerging Markets Debt Portfolio Balanced Portfolio
S&P STARS Portfolio International Equity Portfolio
The Insiders Select Fund
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES
July 29, 1999
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the current
relevant prospectus (the "Prospectus") dated July 29, 1999 of The Bear Stearns
Funds (the "Trust"), as each may be revised from time to time, offering shares
of the portfolios listed above (each, a "Portfolio"). To obtain a free copy of
such Prospectus, please write to the Trust at PFPC Inc. ("PFPC"), Attention:
[Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960; call the
Trust at 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. Marvin & Palmer Associates, Inc. (the "Sub-Adviser") has
been engaged to provide investment advisory services, including portfolio
management, to the International Equity 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 Portfolios.
Bear Stearns, an affiliate of BSAM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment and Management Policies.................................................... 1
Management of the Trust............................................................... 50
Management Arrangements............................................................... 52
Purchase and Redemption of Shares..................................................... 61
Determination of Net Asset Value...................................................... 66
Taxes................................................................................. 68
Dividends -- Money Market Portfolio................................................... 76
Portfolio Transactions................................................................ 77
Performance Information............................................................... 81
Code of Ethics........................................................................ 84
Information About the Trust........................................................... 84
Custodians, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors.. 95
Financial Statements.................................................................. 95
Appendix.............................................................................. A-1
</TABLE>
<PAGE>
Each of the Portfolios described in this SAI, other than the Prime
Money Market Portfolio (the "Money Market Portfolio"), currently offers Class A,
Class B, Class C and Class Y Shares. The Money Market Portfolio currently offers
only Class Y Shares. The Portfolios, other than the Money Market Portfolio, may
be categorized as follows:
Fixed Income Portfolios
------------------------
Income Portfolio
High Yield Total Return Portfolio ("High Yield Portfolio")
Emerging Markets Debt Portfolio ("EMD Portfolio")
Equity Portfolios:
-------------------
S&P STARS Portfolio
The Insiders Select Fund
Large Cap Value Portfolio ("Large Cap Portfolio")
Small Cap Value Portfolio ("Small Cap Portfolio")
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio
The investment objectives and principal investment policies of each
Portfolio are described in the Prospectus. Each Portfolio's investment objective
cannot be changed without approval by the holders of a majority of such
Portfolio's outstanding voting shares (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")). A Portfolio's investment objective may
not be achieved. The following Portfolios are non-diversified: the S&P STARS
Portfolio, the Insiders Select Fund, the Focus List Portfolio and the EMD
Portfolio. The other Portfolios are diversified. See "Investment and Management
Policies -- Management Policies -- Non-Diversified Status."
INVESTMENT AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the sections in the Prospectus entitled "Risk/Return Summary,"
"Investments" and "Risk Factors."
Portfolio Securities
Instruments in which the Portfolios can invest. The following tables
----------------------------------------------
show some of the securities and investment techniques that the Portfolios may
use in achieving their investment objectives. Unless otherwise stated, the
indicated percentage relates to a Portfolio's total assets that may be committed
to the stated investment, measured at the time the Portfolio makes the
investment. Where the tables provide no information relating to a Portfolio's
ability to invest in a particular instrument, this indicates that the Portfolio
may not enter into that type of transaction, except as may be described
elsewhere in the Prospectus or this SAI. 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.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Asset
Backed Convertible Custodial Debt Equity
Securities Borrowing Securities Receipts Securities Securities
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Permitted 33 1/3% Permitted
- --------------------------------------------------------------------------------------------------------------------
Income Permitted 15% No limit At least 35%
65%**
- --------------------------------------------------------------------------------------------------------------------
High Yield 5% 33 1/3% 10% Permitted At least 20%
80%**
- --------------------------------------------------------------------------------------------------------------------
EMD Permitted 10% 10% At least Permitted
70%**
- --------------------------------------------------------------------------------------------------------------------
S&P STARS 33 1/3% Permitted Permitted At least 85%
- --------------------------------------------------------------------------------------------------------------------
Insiders Select 33 1/3% Permitted* Permitted At least 85%
Fund
- --------------------------------------------------------------------------------------------------------------------
Large Cap 33 1/3% Permitted* Permitted At least 85%
- --------------------------------------------------------------------------------------------------------------------
Small Cap 33 1/3% Permitted* Permitted At least 85%
- --------------------------------------------------------------------------------------------------------------------
Focus List 33 1/3% Permitted At least 90%
- --------------------------------------------------------------------------------------------------------------------
Balanced 10% 33 1/3% 20%* 5% Min. 40%, Min. 40%,
max. 60% max. 60%
- --------------------------------------------------------------------------------------------------------------------
International Permitted 33 1/3% Permitted* 5% of net Up to At least
Equity assets 35%** 65%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* These Portfolios may invest in convertible debt securities that are rated
no lower than "BBB" by Standard & Poor's ("S&P") or "Baa" by Moody's
Investors Service, Inc. ("Moody's"), or if unrated by these rating
organizations, determined to be of comparable quality by the Advisers.
** Including Brady bonds.
2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Floating Futures and Lending
Rate Foreign Forward related Illiquid Portfolio
Securities Securities Contracts Options* Securities Securities
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Permitted Permitted 10%
- ------------------------------------------------------------------------------------------------------------------------
Income Permitted Permitted Permitted Permitted 15% of net 33 1/3%
assets
- ------------------------------------------------------------------------------------------------------------------------
High Yield Permitted 25% 5% Permitted 15% of net 30%
assets
- ------------------------------------------------------------------------------------------------------------------------
EMD Permitted No limit Permitted Permitted 15% of net 33 1/3%
assets
- ------------------------------------------------------------------------------------------------------------------------
S&P STARS Permitted Permitted Permitted Permitted 15% of net 33 1/3%
assets
- ------------------------------------------------------------------------------------------------------------------------
Insiders Select Permitted Permitted Permitted Permitted 15% of net 33 1/3%
Fund assets
- ------------------------------------------------------------------------------------------------------------------------
Large Cap Permitted 10% Permitted Permitted 15% of net 33 1/3%
assets
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Permitted 10% Permitted Permitted 15% of net 33 1/3%
assets
- ------------------------------------------------------------------------------------------------------------------------
Focus List Permitted Permitted Permitted 10% 15% 33-1/3%
- ------------------------------------------------------------------------------------------------------------------------
Balanced Permitted 5% Permitted Permitted 15% 33 1/3%
- ------------------------------------------------------------------------------------------------------------------------
International Permitted At least 65% Permitted Permitted 15% of net 33 1/3%
Equity assets
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each Portfolio (other than the Money Market Portfolio ) may, but is not
required to, use derivatives to reduce risk and enhance return, including
futures contracts on securities and indices and related options, and
options on securities and financial indices.
3
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Purchasing
Money Mortgage Covered
Market Related Municipal Puts and Repurchase
Instruments Securities Obligations Calls** Agreements Short Sales
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Permitted* Permitted Permitted
- ---------------------------------------------------------------------------------------------------------------------------------
Income Permitted Permitted # 25% 5% Permitted 25% of net
assets, 5%
in any one
issuer
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield Permitted 20% 5% 5% Permitted 25% of net
assets, 5%
in any one
issuer
- ---------------------------------------------------------------------------------------------------------------------------------
EMD Permitted Permitted 5% Permitted
- ---------------------------------------------------------------------------------------------------------------------------------
S&P STARS 15% 5% Permitted 5% of net
assets
- ---------------------------------------------------------------------------------------------------------------------------------
Insiders Select Fund Permitted 5% Permitted 33 1/3%
- ---------------------------------------------------------------------------------------------------------------------------------
Large Cap 15% 5% Permitted 25% of net
assets, 5%
in any one
issuer
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap 15% 5% Permitted 25% of net
assets, 5%
in any one
issuer
- ---------------------------------------------------------------------------------------------------------------------------------
Focus List 10% 10% Permitted
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced 20% 25% 5% of net 5% 20%
assets
- ---------------------------------------------------------------------------------------------------------------------------------
International 35% Permitted 5% Permitted
Equity
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Including interest-only and principal-only stripped mortgage related
securities.
* May invest more than 25% of its total assets in bank obligations.
** Each Portfolio (other than the Money Market Portfolio) may, but is not
required to, use derivatives to reduce risk and enhance return, including
futures contracts on securities and indices and related options, and
options on securities and financial indices.
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Warrants
Short Sales Structured or and Stock When-Issued and
against the Indexed Purchase Forward
Box Securities Swaps Rights Commitments
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market 25%
- ----------------------------------------------------------------------------------------------------------------------
Income 15% of net Permitted Permitted 33 1/3%
assets
- ----------------------------------------------------------------------------------------------------------------------
High Yield 25% of net Permitted 5% of net 33 1/3%
assets assets
- ----------------------------------------------------------------------------------------------------------------------
EMD Can make Permitted Permitted Permitted up to 5% in when
as and if issue
securities
- ----------------------------------------------------------------------------------------------------------------------
S&P STARS 15% of net Permitted 5% of net 33 1/3%
assets assets
- ----------------------------------------------------------------------------------------------------------------------
Insiders Select Can make Permitted 5% of net 33 1/3%
Fund assets
- ----------------------------------------------------------------------------------------------------------------------
Large Cap 15% of net Permitted Permitted 5% of net 33 1/3%
assets assets
- ----------------------------------------------------------------------------------------------------------------------
Small Cap 15% of net Permitted Permitted 5% of net 33 1/3%
assets assets
- ----------------------------------------------------------------------------------------------------------------------
Focus List Can make Permitted 33 1/3%
- ----------------------------------------------------------------------------------------------------------------------
Balanced Can make 5% of net 5% of net 5% of net 33 1/3%
assets assets assets
(hedging and
total return)
- ----------------------------------------------------------------------------------------------------------------------
International Can make Permitted 5% of net 20%
Equity assets
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
- ------------------------------------------------------------------------------
Writing Covered Zero Coupon, Pay-in-Kind and
Puts and Calls and Discount Securities
- ------------------------------------------------------------------------------
Money Market Permitted
- ------------------------------------------------------------------------------
Income 20% of net assets Permitted
- ------------------------------------------------------------------------------
High Yield 20% of net assets 25%
- ------------------------------------------------------------------------------
EMD 20% of net assets Permitted
- ------------------------------------------------------------------------------
S&P STARS 20% of net assets Permitted
- ------------------------------------------------------------------------------
Insiders Select Fund 20% of net assets Permitted
- ------------------------------------------------------------------------------
Large Cap 20% of net assets Permitted
- ------------------------------------------------------------------------------
Small Cap 20% of net assets Permitted
- ------------------------------------------------------------------------------
Focus List 10% Permitted
- ------------------------------------------------------------------------------
Balanced 20% of net assets Permitted
- ------------------------------------------------------------------------------
International Equity 20% of net assets only in zero coupon
securities
- ------------------------------------------------------------------------------
High Yield and EMD Portfolios. In addition to the instruments listed
-----------------------------
above, these Portfolios may invest in the following:
. Loans and participations (High Yield Portfolio -- 15%, EMD
Portfolio -- 20%)
. Distressed securities (High Yield Portfolio -- 20%)
. Trade claims
Balanced Portfolio. In addition to the instruments listed in the
------------------
tables above, the Balanced Portfolio may invest in the following:
. Inverse floating rate notes 5% of net assets
. Mortgage dollar rolls 20% of total assets
. Real estate investment trusts ("REITs") 10% of total assets
Asset-Backed Securities. Asset-backed securities represent
-----------------------
participations 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.
6
<PAGE>
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. A 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.
Any asset-backed securities held by the Money Market 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").
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"). State
banking authorities supervise and examine domestic banks organized under state
law. State banks are members of the Federal Reserve System only if they elect
to join. In addition, a Portfolio may acquire state bank-issued certificates of
deposit ("CDs") that are insured by the FDIC (although such insurance may not be
of material benefit, depending on the principal amount of the CDs of each bank
that is held) 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 generally must, among other
things, maintain specified levels of reserves, limit the amounts they loan to a
single borrower and comply with other regulations 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 from 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
7
<PAGE>
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 a certain percentage of their assets, as fixed from
time to time by the appropriate regulatory authority, by depositing assets with
a designated bank within the state; 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, the Advisers carefully evaluate such investments on a case-by-
case basis.
Bank Debt. Bank debt 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 that 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, including banks ("Lenders"). These investments
take 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 public and private debt securities and
from Assignments. In Participations, an investor has a contractual relationship
only with the Lender, not with the borrower. As a result, the investor 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, an investor 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 investor may not benefit
directly from any collateral supporting the loan in which it has purchased the
Participation. Thus, the investor assumes the credit risk of both the borrower
and the Lender that is selling the Participation. In the event of the
insolvency of the Lender, an investor 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 investor
8
<PAGE>
acquires direct rights against the borrower, except that under certain
circumstances such rights may be more limited than those held by the assigning
Lender.
Participations and Assignments otherwise bear risks common to other
debt securities, including nonpayment of principal and interest by the borrower,
impairment of loan collateral and lack of liquidity. The market for such
instruments is not liquid and only a limited number of institutional investors
participate in it. The lack of a liquid secondary market may have an adverse
impact on the value of such instruments and will have an adverse impact on an
investor's ability to dispose of particular Assignments or Participations in
response to a specific event, such as deterioration in the creditworthiness of
the borrower. In addition to the creditworthiness of the borrower, an investor'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
investor and the borrower.
Brady Bonds. Debt obligations commonly known as "Brady bonds" 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. Secretary of the Treasury, Nicholas F. Brady. Brady
bonds have been issued in connection with the restructuring of the bank loans,
for example, of the governments of Mexico, Venezuela and Argentina.
As a consequence of substantial volatility in commodity prices and a
dramatic increase in interest rates in the early 1980s, many emerging market
countries defaulted on syndicated bank loans made during the 1970s and early
1980s. Much of the debt owed by governments to commercial banks was subsequently
restructured, involving the exchange of outstanding bank indebtedness for Brady
bonds. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and are actively traded in the
over-the-counter secondary market. As a pre-condition to issuing Brady bonds,
debtor nations are generally required to agree to monetary and fiscal reform
measures prescribed by the World Bank or the International Monetary Fund,
including liberalization of trade and foreign investments, privatization of
state-owned enterprises and setting targets for public spending and borrowing.
These policies and programs are designed to improve the debtor country's ability
to service its external obligations and promote its growth and development.
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
with 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
9
<PAGE>
with respect to commercial bank loans by public and private entities of
countries issuing Brady bonds, investments in Brady bonds are considered
speculative.
Commercial Paper and Other Short-Term Corporate Obligations.
-----------------------------------------------------------
Commercial paper consists of unsecured promissory notes issued by banks,
corporations and other borrowers. Such instruments are usually discounted,
although some are interest-bearing. Except as noted below with respect to
variable amount master demand notes, issues of commercial paper normally have
maturities of less than nine months and fixed rates of return. Variable rate
demand notes include variable amount master demand notes, which are obligations
that permit a 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, 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, 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 a Portfolio may invest in them only if
at the time of investment the borrower meets the criteria that the Trust's Board
of Trustees (the "Board") has established.
Convertible Securities. Convertible securities include debt
----------------------
securities and preferred stock that are convertible at stated exchange rates
into the issuer's common stock. 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. The convertible securities in which a Portfolio may invest are subject to
the same rating criteria as the Portfolio's investments in non-convertible debt
securities. In the case of convertible security with a call feature, the issuer
may call the security at a pre-determined price. If a convertible security held
by a Portfolio is called, the Portfolio may permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Convertible debt securities may be considered equity investments for
purposes of a Portfolio's investment policies.
Corporate Debt Obligations. Corporate debt obligations include
--------------------------
obligations of industrial, utility and financial issuers in the form of bonds,
debentures, and notes. These securities 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. Except under conditions of default,
10
<PAGE>
changes in the value of a Portfolio's fixed income securities will not affect
cash income derived from these securities but will affect the Portfolio's net
asset value.
Custodial Receipts. 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.
Distressed Securities. Distressed securities are issued by
---------------------
financially troubled or bankrupt companies ("financially troubled issuers") or
companies whose securities are, in the view of the Adviser, currently
undervalued, out-of-favor or price depressed relative to their long-term
potential for growth and income ("operationally troubled issuers").
The securities of financially and operationally troubled issuers may
require active monitoring and at times may require the Adviser to participate in
bankruptcy or reorganization proceedings on behalf of a Portfolio. To the extent
that the Adviser becomes involved in such proceedings, a 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, no Portfolio invests 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 an investor 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 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 Advisers will scrutinize any security interests, the
security interests may be challenged vigorously and found defective in some
respect, or a Portfolio may not be able to prevail against the challenge.
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
11
<PAGE>
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 a Portfolio will attempt to avoid taking the types of action that would
lead to equitable subordination or creditor liability, such claims may be
asserted and the Portfolio may not be able to defend against them successfully.
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, such claims may be asserted and a Portfolio may not be
able to defend against them successfully. To the extent that a 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.
Emerging Market Countries. A Portfolio may invest in the securities
-------------------------
of issuers located in countries that are considered to be emerging or developing
("emerging countries") by the World Bank, the International Finance Corporation,
or the United Nations and its authorities. A company is considered to be an
emerging country issuer if: (i) its securities are principally traded in an
emerging country; (ii) it derives at least 50% of its total revenue from (a)
providing goods or services in emerging countries or (b) sales made in emerging
countries; (iii) it maintains 50% or more of its assets in one or more emerging
countries; or (iv) it is organized under the laws of, or has a principal office
in, an emerging country.
Emerging Market Country Loans. Dollar-denominated fixed and floating
-----------------------------
rate loans may be arranged through private negotiations between one or more
financial institutions and an obligor in an emerging market country ("Emerging
Country Loans"). In connection with purchasing participations, an investor
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement, nor any rights of setoff against the borrower, and
an investor may not directly benefit from any collateral supporting the Emerging
Country Loan in which it has purchased the participation. As a result, an
investor 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, an investor 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 interpositioned between
the Portfolio and the borrower is determined by the Adviser to be creditworthy.
When a Portfolio purchases assignments from lenders, the Portfolio will acquire
direct rights against the borrower of the Emerging Country Loan. However, since
assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by the
Portfolio as the purchaser of an assignment may differ from, and be more limited
than, those held by the assigning lender.
In addition, certain Emerging Country Loans may be or may become
subject to agreements to restructure the obligations. These agreements
occasionally require the owners of the obligations to contribute additional
capital. In such cases, an investor, as a participant, may be required to
contribute its pro-rata portion of the funds demanded even though it may have
insufficient assets to make such contribution. If this were to occur, a
Portfolio could be forced to liquidate loan participations or sub-participations
at unfavorable prices to avoid the new money obligations.
12
<PAGE>
Emerging Market Securities. The securities markets of certain
--------------------------
emerging market countries may be 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 early 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. In addition, 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 a 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, the securities of non-U.S. issuers
generally are not registered with the Securities and Exchange Commission (the
"SEC"), and issuers of these securities usually are not subject to its 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 prevalent in the U.S.
Existing laws and regulations of emerging market countries may be
inconsistently applied. As legal systems in emerging market countries develop,
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. A Portfolio's ability to enforce its
rights against private emerging market country issuers by attaching assets to
enforce a judgment may be limited. Bankruptcy, moratorium and other similar laws
applicable to private emerging market country issuers may differ substantially
from those of other countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of its debt
obligations, for example, is of considerable importance. In addition, the
holders of commercial bank debt may contest payments to the holders of emerging
market country debt securities in the event of default under commercial bank
loan agreements.
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
13
<PAGE>
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 a Portfolio may invest
and adversely affect the value of its 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 certain 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 certain emerging market
countries are vulnerable to weakness in world prices for their commodity
exports.
A 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 "Taxes."
Foreign Government Securities. Investment in sovereign debt
-----------------------------
obligations involves special risks not present in debt obligations of U.S.
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 an investor
may have limited recourse in the event of a default. Periods of economic
uncertainty may result in 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. When an emerging country government defaults on its debt
obligations, the investor must pursue any remedies in the courts of the
defaulting party itself.
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. Below-investment-
grade debt securities are generally unsecured and may be subordinated to the
claims of other creditors, resulting in a heightened risk of loss due to
default.
Foreign Securities. 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, a Portfolio's investment in foreign securities
may be affected by changes in currency rates and in exchange control regulations
and costs incurred in converting among various currencies. A Portfolio may be
subject to currency exposure independent of its securities positions.
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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 a Portfolio that invests in such securities 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 a 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.
Investment in foreign companies, foreign branches of U.S. banks,
foreign banks, or other foreign issuers, may take the form of ownership of
securities issued by such entities or may take the form of sponsored and
unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers. 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 entitles the
shareholder to all dividends and capital gains of the underlying securities.
ADRs are traded on U.S. 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.
In the case of sponsored ADRs, the issuer of the underlying foreign
security and the depositary enter into a deposit agreement, which sets out the
rights and responsibilities of the issuer, the depositary 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
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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. In the case of 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, 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.
Illiquid Securities. 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
that 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. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and an investor 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. An investor 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. The Advisers anticipate 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. The Advisers will monitor the
liquidity of such restricted securities subject to the supervision of the Board.
In reaching liquidity decisions, the Advisers 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
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NRSROs, or if only one NRSRO rates the securities, by that NRSRO, or, if
unrated, be of comparable quality in the view of the Advisers; 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 SEC has taken the position that purchased over-the-counter ("OTC")
options and the assets used as "cover" for written OTC options are deemed
illiquid securities unless a 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.
Inverse Floating Rate Securities. The interest rate on leveraged
--------------------------------
inverse floating rate debt instruments ("inverse floaters") 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 a Portfolio's 15% limitation on investments in such securities.
Investment in Other Investment Companies. In accordance with the 1940
----------------------------------------
Act, a Portfolio may invest a maximum of up to 10% of the value of its total
assets in securities of other investment companies, and the Portfolio may own up
to 3% of the total outstanding voting stock of any one investment company. In
addition, up to 5% of the value of the Portfolio's total assets may be invested
in the securities of any one investment company.
Money Market Instruments. A Portfolio may invest in money market
------------------------
instruments, including U.S. Government obligations, U.S. Treasury bills and
commercial paper that is (a) rated at the time of purchase in the highest
category by a nationally recognized statistical rating organization; (b) issued
by a company having an outstanding unsecured debt issue currently rated not
lower than "Aa3" by Moody's or "AA" by S&P, Fitch IBCA or Duff; or (c) if
unrated, of comparable quality. A Portfolio may also invest in bank obligations,
including, without limitation, time deposits, bankers' acceptances and
certificates of deposit, which 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 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.
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 of principal (net of a
service fee).
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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. A Portfolio may purchase mortgage-related securities at
a premium or at a discount.
A Portfolio may invest in stripped mortgage-related securities that
are created by segregating the cash flows from underlying mortgage loans or
mortgage securities to create two or more new securities. Each has a specified
percentage of the underlying security's principal or interest payments. Mortgage
securities may be partially stripped, so that each class receives some interest
and some principal, or they may be completely stripped. In that case, all of the
interest is distributed to holders of an "interest-only" security, and all of
the principal is distributed to holders of a "principal-only" security. Strips
can be created for pass-through certificates or collateralized mortgage
obligations ("CMOs"). The yields to maturity of interest-only and principal-only
stripped mortgage-related securities are very sensitive to principal repayments
on the underlying mortgages.
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"). Ginnie Maes are
guaranteed as to the timely payment of principal and interest by GNMA and are
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. 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"). FHLMC is a corporate instrumentality of the United
States created pursuant to an Act of Congress, which is owned entirely by the
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. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When 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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Mortgage Dollar Rolls. Mortgage "dollar rolls" involve the sale of
---------------------
securities for delivery in the current month and a simultaneous contract with
the counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the seller loses the right to receive principal and interest paid
on the securities sold. An investor 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. The use of this technique will diminish investment performance
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. A Portfolio will hold and maintain in a
segregated account until the settlement date cash or liquid securities in an
amount equal to the forward purchase price. Successful use of mortgage dollar
rolls depends on the Adviser's ability to predict correctly interest rates and
mortgage prepayments. For financial reporting and tax purposes, a Portfolio
treats mortgage dollar rolls as two separate transactions: one involving the
purchase of a security and a separate transaction involving a sale. No Portfolio
currently intends to enter into mortgage dollar rolls that are accounted for as
a financing.
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 Portfolios
may invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible investments.
Real Estate Investment Trusts ("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"). A Portfolio will indirectly bear its
proportionate share of any expenses incurred 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
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possibilities of failing to qualify for the exemption from tax for distributed
income under the Code and failing to maintain their exemptions from the 1940
Act. REITs (especially mortgage REITs) are also subject to interest rate risks.
Repurchase Agreements. Repurchase agreements are a type of secured
---------------------
lending and typically involve the acquisition of debt securities from a
financial institution, such as a bank, savings and loan association or broker-
dealer, which then agrees to repurchase the security at a specified resale price
on an agreed future date (ordinarily one week or less). The difference between
the purchase and resale prices generally reflects the market interest rate for
the term of the agreement.
A Portfolio's custodian or sub-custodian will have custody of, and
will hold in a segregated account, securities that the Portfolio acquires under
a repurchase agreement. Repurchase agreements are considered by the SEC to be
loans. If the seller defaults, a Portfolio might suffer a loss to the extent the
proceeds from the sale of the securities underlying the repurchase agreement are
less than the repurchase price. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, a Portfolio will enter into repurchase
agreements only with counterparties whose short-term paper is rated no lower
than "A1/P1" or whose corporate parent has a rating of no lower than "A1/P1"
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. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. A Portfolio will consider on an ongoing
basis the creditworthiness of the institutions with which it enters into
repurchase agreements.
Reverse Repurchase Agreements. A Portfolio may borrow by entering
-----------------------------
into reverse repurchase agreements, pursuant to which, it 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 custodian. A reverse repurchase agreement involves
the risk that the market value of the portfolio securities sold by a Portfolio
may decline below the price of the securities it must repurchase, which price is
fixed at the time the Portfolio enters into such agreement.
Standby Commitment Agreements. Standby commitment agreements commit a
-----------------------------
Portfolio, for a stated period of time, to purchase a stated amount of a fixed
income security which may be issued and sold to the Portfolio at the option of
the issuer. The price and coupon of the security are fixed at the time of the
commitment. At the time of entering into the agreement a Portfolio receives a
commitment fee, regardless of whether the security is ultimately issued, which
is typically approximately 0.50% of the aggregate purchase price of the security
that the Portfolio has committed to purchase. A Portfolio will enter into such
agreements only for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous. A Portfolio
will not enter into a standby commitment with a remaining term in excess of 45
days and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with the
value of portfolio securities subject to legal restriction on resale, will not
exceed 10% of its assets determined at the time of the acquisition of such
commitment or security. A Portfolio will at all times maintain a segregated
account with its custodian of cash or liquid securities in U.S. dollars or non-
U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
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Securities subject to a standby commitment may not be issued and the
value of a security, if issued, on the delivery date may be more or less than
its purchase price. Because the issuance of the security underlying the
commitment is at the option of the issuer, a Portfolio may bear the risk of a
decline in the value of such security and may not benefit from an appreciation
in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, any commitment fee previously paid and expensed will be recorded
as income on the expiration date of the standby commitment.
Structured Securities. Structured securities (sometimes referred to
---------------------
as hybrid securities or indexed securities) are considered derivative
instruments. The value of the principal of and/or interest on structured
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 a 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.
Trade Claims. Trade claims 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 debtor, (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 a 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 a 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 substantial
legal expenses to a 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 Code.
Variable and Floating Rate Securities. The interest rates payable on
-------------------------------------
certain fixed-income securities in which a 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
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that approximates 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.
Warrants and Stock Purchase Rights. Warrants or rights (other than
----------------------------------
those acquired in units or attached to other securities) entitle the holder to
buy equity securities at a specific price for a specific period of time.
Warrants and rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
When-Issued and Forward Commitments. A 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. A 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, a Portfolio may dispose of or negotiate a commitment after entering
into it. A Portfolio may realize a capital gain or loss in connection with these
transactions. For purposes of determining a Portfolio's duration, the maturity
of when-issued or forward commitment securities will be calculated from the
commitment date. A 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 securities 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.
The issuance of certain securities 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, a Portfolio would be entitled to retain any funds committed for the
purchase, but the Portfolio may have foregone investment opportunities during
the term of the commitment.
Zero Coupon, Pay-In-Kind Or Deferred Payment Securities. A 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
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annually "accreted income." A 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 zero coupon securities 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 comparably rated securities paying cash interest
at regular intervals. In addition, because a Portfolio must distribute income to
its shareholders to qualify for pass-through federal tax treatment (including
"accreted income" or the value of the pay-in-kind interest), it may have to
dispose of its investments under disadvantageous circumstances to generate the
cash, or may have to borrow to implement these distributions.
Management Policies
Below Investment-Grade and Unrated Securities. Debt securities that
---------------------------------------------
are unrated or below investment grade are generally considered to have a credit
quality rated below investment grade by NRSROs such as Moody's and S&P.
Securities rated below investment grade are the equivalent of high yield, high
risk bonds, commonly known as "junk bonds." Investment grade debt is generally
rated "BBB" or higher by S&P or "Baa" or higher by Moody's. Below investment-
grade debt securities (that is, securities rated "Ba1" or lower by Moody's or
"BB+" or lower by S&P) are regarded as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of the debt securities held by a Portfolio may be comparable to securities
rated as low as "C" by Moody's or "D" by S&P, the lowest ratings assigned by
these agencies. These securities are considered to have extremely poor prospects
of ever attaining any real investment grade standing, and to have a current
identifiable vulnerability to default, and the issuers and/or guarantors of
these securities are considered to be unlikely to have the capacity to pay
interest and repay principal when due in the event of adverse business,
financial or economic conditions and/or to be in default or not current in the
payment of interest or principal.
Below investment-grade and unrated debt securities generally offer a
higher current yield than that available from investment grade issues, but
involve greater risk. Below investment-grade and unrated securities are
especially subject to adverse changes in general economic conditions, to changes
in the financial condition of their issuers and to price fluctuation in response
to changes in interest rates. During periods of economic downturn or rising
interest rates, issuers of below-investment-grade and unrated instruments may
experience financial stress that could adversely affect their ability to make
payments of principal and interest, to meet projected business goals and to
obtain additional financing. If the issuer of a bond defaults, a Portfolio may
incur additional expenses to seek recovery. A foreign issuer may not be willing
or able to repay the principal or interest of such obligations when it becomes
due, due to factors such as debt service, cash flow situation, the extent of its
foreign reserves, and the availability of sufficient foreign exchange on the
date a payment is due. The risk of loss due to default by the issuer is
significantly greater for the holders of below-investment-grade and unrated debt
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer. In addition, in recent years some Latin American
countries have defaulted on their sovereign debt.
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A Portfolio may have difficulty disposing of certain high yield, high
risk securities because there may be a thin trading market for such securities.
The secondary trading market for high yield, high risk securities is generally
not as liquid as the secondary market for higher rated securities. Reduced
secondary market liquidity may have an adverse impact on market price and a
Portfolio's ability to dispose of particular issues when necessary to meet
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Below investment-grade and unrated debt securities frequently have
call or redemption features which would permit an issuer to repurchase the
security from a Portfolio. If a call were exercised by the issuer during a
period of declining interest rates, the Portfolio likely would have to replace
such called security with a lower yielding security, thus decreasing the net
investment income to the Portfolio and dividends to shareholders.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of below
investment-grade and unrated securities especially in a market characterized by
low trading volume. Factors adversely affecting the market value of high yield,
high risk securities are likely to adversely affect a Portfolio's net asset
value ("NAV"). In addition, a Portfolio may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of an obligation.
An economic downturn could severely affect the ability of highly
leveraged issuers of below investment-grade securities to service their debt
obligations or to repay their obligations upon maturity. Factors having an
adverse impact on the market value of below-investment-grade bonds will have an
adverse effect on a Portfolio's NAV 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 below investment-grade bonds, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for investment grade 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 below investment-grade 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 below-investment-grade or
comparable unrated securities, under such circumstances, may be less than the
prices used in calculating the Portfolio's NAV.
Since investors generally perceive that there are greater risks
associated with the medium-rated and below investment-grade securities, the
yields and prices of such securities may tend to fluctuate more than those for
highly rated securities because changes in the perception of these 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
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securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Portfolio's NAV.
Medium rated, below investment-grade and comparable unrated 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 these
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. A Portfolio may 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.
Downgraded Debt Securities. Subsequent to its purchase by a
--------------------------
Portfolio, a debt issue may cease to be rated or its rating may be reduced below
the minimum required for purchase. Neither event will require the sale of such
securities by a Portfolio, but the Advisers will consider such event in
determining whether the Portfolio should continue to hold the securities. To
the extent that the ratings given by Moody's, S&P, Fitch IBCA or Duff & Phelps
Credit Rating Co. ("Duff") may change as a result of changes in such
organizations or their rating systems, a Portfolio will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this SAI.
Options on Securities. A 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, a Portfolio
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities to the purchaser against receipt of the
exercise price. When a Portfolio writes a call option, it 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.
A Portfolio may purchase call options on securities in order to fix
the cost of a future purchase. A Portfolio also may purchase call options as a
means of enhancing returns by, for example, participating in an anticipated
price increase of a security on a more limited risk basis than would be possible
if the security itself were purchased. In the event of a decline in the price of
the underlying security, use of this strategy would serve to limit a Portfolio's
potential loss to the option premium paid; conversely, if the market price of
the underlying security increases above the exercise price and the Portfolio
either sells or exercises the option, any profit eventually realized will be
reduced by the premium paid.
The 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, a Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
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<PAGE>
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.
A Portfolio may purchase put options on securities in order to attempt
to hedge against a decline in the market value of securities it holds. A put
option would enable a Portfolio to sell the underlying security at a
predetermined exercise price; thus the potential for loss to the Portfolio below
the exercise price would be limited to the option premium paid. If the market
price of the underlying security were higher than the exercise price of the put
option, any profit a Portfolio realizes on the sale of the security would be
reduced by the premium paid for the put option less any amount for which the put
option may be sold.
The 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.
A 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 the
Advisers expect will have a high degree of positive correlation to the values of
such portfolio securities. If the Advisers' 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 the Advisers' 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.
A 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 the Advisers
expect 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 acquired.
A Portfolio may write options on securities in connection with buy-
and-write transactions; that is, it 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 security's purchase
price 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
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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, a
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the security's
purchase price 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 a 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 a 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 a 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, the Portfolio may not be able to liquidate an
OTC option at a favorable price at any time prior to expiration. Until a
Portfolio is able to effect a closing purchase transaction in a covered OTC call
option, 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."
OTC options purchased by a 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 a 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."
A 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
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the option a segregated account consisting of cash or other liquid securities,
marked-to-market daily, having a value equal to or greater than the exercise
price of the option.
Options on Securities Indices. A 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, a
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 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 a 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 a 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.
Options Straddles. A Portfolio may purchase and write covered
-----------------
straddles on securities or bond indices. A long straddle is a combination of a
call and a put option purchased on the same security where the exercise price of
the put is less than or equal to the exercise price of the call. A Portfolio
would enter into a long straddle when the Adviser believes that it is likely
that the price of the underlying security will be more volatile during the term
of the options than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the exercise
price of the put is less than or equal to the exercise price of the call and
where the same issue of security or currency is considered cover for both the
put and the call. A Portfolio would enter into a short straddle when the Adviser
believes that it is unlikely that the price of the underlying security will be
as volatile during the term of the options as the option pricing implies. In the
case of a straddle written by a Portfolio, the amount maintained in the
segregated account will equal the amount, if any, by which the put is "in-the-
money."
Special Characteristics and Risks of Options Trading. A Portfolio may
----------------------------------------------------
effectively terminate its right or obligation under an option by entering into a
closing transaction. If a Portfolio wishes to terminate its obligation to
purchase or sell securities under a put or call option it has written, it may
purchase a put or call option of the same series (i.e., an option identical in
its terms to the option previously written); this is known as a closing purchase
transaction. Conversely, in order to terminate its
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right to purchase or sell specified securities or currencies under a call or put
option it has purchased, a Portfolio may write an option of the same series as
the option held; this is known as a closing sale transaction. Closing
transactions essentially permit a Portfolio to realize profits or limit losses
on its options positions prior to the exercise or expiration of the option.
Whether a profit or loss is realized from a closing transaction depends on the
price movement of the underlying security or currency and the market value of
the option.
The following considerations are important in deciding whether to use
options to enhance income or to hedge a Portfolio's investments:
(1) The value of an option position will reflect, among other things,
the current market price of the underlying security, or bond index, the time
remaining until expiration, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security, or bond index
and general market conditions. For this reason, the successful use of options as
a hedging strategy depends upon the Adviser's ability to forecast the direction
of price fluctuations in the underlying securities or, in the case of bond index
options, fluctuations in the market sector represented by the selected
index.
(2) Exchange-traded options normally have expiration dates of up to
90 days and OTC options normally have expiration dates up to one year. The
exercise price of the options may be below, equal to or above the current market
value of the underlying securities, bond index or currencies. Purchased options
that expire unexercised have no value. Unless an option purchased by a Portfolio
is exercised or unless a closing transaction is effected with respect to that
position, the Portfolio will realize a loss in the amount of the premium paid
and any transaction costs.
(3) A position in an exchange-listed option may be closed out only on
an exchange that provides a secondary market for identical options. Although a
Portfolio intends to purchase or write only those options for which there
appears to be an active secondary market, a liquid secondary market may not
exist for any particular option at any specific time because of: (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.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.C. as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms.
Closing transactions may be effected with respect to options traded in
the OTC markets (currently the primary markets for options on debt securities)
only by negotiating directly with the other party to the option contract, or in
a secondary market for the option if such a market exists. Although a Portfolio
will enter into OTC options only with dealers that are expected to be capable of
entering into closing transactions with the Portfolio, the Portfolio may not be
able to liquidate an OTC option at a favorable price at any time prior to
expiration.
In the event of the bankruptcy of a broker through which a 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. In the
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event of insolvency of the counter-party, the Portfolio may be unable to
liquidate an OTC option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that a Portfolio
would have to exercise those options which it has purchased in order to realize
any profit. Transactions are entered into by a Portfolio only with brokers or
financial institutions that the Adviser deems to be creditworthy.
With respect to options written by a Portfolio, the inability to enter
into a closing transaction may result in material losses to the Portfolio. For
example, because a Portfolio must maintain a covered position with respect to
any call option it writes on a security, securities index or currency, the
Portfolio may not sell the underlying security or currency (or invest any cash,
or liquid securities used to cover a securities index option) during the period
it is obligated under the option. This requirement may impair the Portfolio's
ability to sell the underlying security or make an investment at a time when
such a sale or investment might be advantageous.
(4) Securities index options are settled exclusively in cash. If a
Portfolio writes a call option on an index, the Portfolio will not know in
advance the difference, if any, between the closing value of the index on the
exercise date and the exercise price of the call option itself and thus will not
know the amount of cash payable upon settlement. In addition, a holder of a
securities index option who exercises it before the closing index value for that
day is available runs the risk that the level of the underlying index may
subsequently change.
(5) A Portfolio's activities in the options markets may result in
higher portfolio turnover rates and additional brokerage costs; however, the
Portfolio may also save on commissions by using options as a hedge rather than
buying or selling individual securities in anticipation or as a result of market
movements.
(6) 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. A Portfolio may enter into
-------------------------------------
futures contracts for the purchase or sale of securities and financial indices
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
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<PAGE>
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 a 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."
A Portfolio's ability to establish and close out positions in futures
contracts and options on futures contracts would be affected by the liquidity of
these markets. Although a Portfolio generally would purchase or sell only those
futures contracts and options thereon for which there appeared to be a liquid
market, a liquid market on an exchange may not 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 a Portfolio had written and which it was unable to close, it 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 the Advisers' 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 a 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 in "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 futures contracts and options
thereon when the Advisers' expectations are not met, assuming proper adherence
to the segregation requirement, the volatility of the investment 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 a 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 a 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.
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Pursuant to the requirements of 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, a liquid market may not exist for a particular contract
at a particular time. In the case of options on futures, if such a market does
not exist, a 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, a 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
existing futures and premiums paid for options on futures exceed 5% of the
liquidation value of the 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 a Portfolio enters into
futures contracts, the SEC requires it 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 and liquid securities 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 a Portfolio. However,
written options, since they involve potential obligations of the Portfolio, may
require segregation of its assets if the options are not "covered" as described
under "Options on Futures Contracts." If a 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 a
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.
Securities, currencies or other options or futures positions used for
cover and securities held in a segregated account cannot be sold or closed out
while the option or futures strategy is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that the use of cover
or segregation involving a large percentage of a Portfolio's assets could impede
fund management or the Portfolio's ability to meet current obligations.
Uses of Futures Contracts. Futures contracts will be used for bona
-------------------------
fide hedging, risk management and return enhancement purposes.
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Position Hedging. A Portfolio might sell futures contracts to protect
against a decrease in the market value of its securities. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if market values are expected to decline, a Portfolio might
sell futures contracts on securities, the values of which historically have
correlated closely or are expected to correlate closely to the values of its
portfolio securities. Such a sale would have an effect similar to selling an
equivalent value of portfolio securities. If market values decrease, the value
of a Portfolio's securities will decline, but the value of the futures contracts
will increase at approximately an equivalent rate, thereby keeping the
Portfolio's NAV from declining as much as it otherwise would have. In the case
of debt securities, a Portfolio could accomplish similar results by selling
securities with longer maturities and investing in securities with shorter
maturities. 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 market values rise rather than fall, the value of the
futures contract will fall but the value of the securities should rise and
should offset all or part of the loss. If futures contracts are used to hedge
100% of the securities position and correlate precisely with the securities
position, there should be no loss or gain with a rise (or fall) in market
values. However, if only 50% of the securities position is hedged with futures,
then the value of the remaining 50% of the securities position would be subject
to change because of market fluctuations. Whether securities positions and
futures contracts correlate precisely is a significant risk factor.
Anticipatory Position Hedging. When a Portfolio expects that market
values may decline and it intends to acquire securities, a Portfolio might
purchase futures contracts. The purchase of futures contracts for this purpose
would constitute an anticipatory hedge against increases in the price of the
securities which a 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
securities that would be purchased, a Portfolio could take advantage of the
anticipated rise in the cost of the securities without actually buying them. The
Portfolio could therefore make the intended purchases of the securities in the
cash market and concurrently liquidate the futures positions.
Risk Management and Return Enhancement -- Debt Securities. A 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.
A 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.
A Portfolio may use interest rate futures contracts to hedge its fund
against changes in the general level of interest rates and in other
circumstances permitted by the CFTC. A Portfolio may purchase an interest rate
futures contract when it intends to purchase debt securities but has not yet
done
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so. This strategy may minimize the effect of all or part of an increase in the
market price of the debt securities that the Portfolio intends to purchase in
the future. A rise in the price of the debt securities prior to their purchase
may be either offset by an increase in the value of the futures contract
purchased by a Portfolio or avoided by taking delivery of the debt securities
under the futures contract. Conversely, a fall in the market price of the
underlying debt securities may result in a corresponding decrease in the value
of the futures position. A Portfolio may sell an interest rate futures contract
in order to continue to receive the income from a debt security, while
endeavoring to avoid part or all of the decline in market value of that security
that would accompany an increase in interest rates.
A Portfolio may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of the Portfolio's securities. To the extent that a portion of a
Portfolio's portfolio correlates with a given index, the sale of futures
contracts on that index could reduce the risks associated with a market decline
and thus provide an alternative to the liquidation of securities positions. For
example, if a Portfolio correctly anticipates a general market decline and sells
bond index futures to hedge against this risk, the gain in the futures position
should offset some or all of the decline in the value of the Portfolio. A
Portfolio may purchase bond index futures contracts if a significant market or
market sector advance is anticipated. Such a purchase of a futures contract
would serve as a temporary substitute for the purchase of individual debt
securities, which debt securities may then be purchased in an orderly fashion.
This strategy may minimize the effect of all or part of an increase in the
market price of securities that a Portfolio intends to purchase. A rise in the
price of the securities should be partly or wholly offset by gains in the
futures position.
The settlement price of a futures contract is generally a function of
the spot market price of the underlying security and a cost of financing,
adjusted for any interest, dividends or other income received on the underlying
instrument over the life of the contract. It is therefore possible to earn a
return approximating that of debt securities of a similar tenor to that of a
forward contract by security or basket of securities and selling a futures
contract for such security or basket. A Portfolio may enter into such future
strategies, using securities other than debt obligations, in cases where (a)
government regulations restrict foreign investment in fixed income securities
but not in other securities, such as common stocks, or commodities; and (b) in
the Adviser's opinion both the cash and futures markets are sufficiently
liquid.
Options on Futures Contracts. A 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 a 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. The 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
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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. A
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 a 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. A 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 a 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 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. A Portfolio may purchase put options on interest
rate, currency or other financial index futures contracts to hedge its portfolio
against the risk of a decline in the market value of the securities it owns.
Anticipatory Hedging. A Portfolio may also purchase call options on
futures contracts as a hedge against an increase in the value of securities it
intends to acquire.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of securities a Portfolio
intends to acquire. If the futures price at expiration of the option is above
the exercise price, a 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 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, a Portfolio would incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities it intends 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 a Portfolio intends to acquire would be a return
enhancement strategy which would result in a loss if market values fall.
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, a
Portfolio would retain the full amount of the option premium,
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increasing its income. If the futures price when the option is exercised is
above the exercise price, however, a 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
portfolio securities. The amount of the premium received acts as a partial hedge
against any decline that may have occurred in the market value of a Portfolio's
securities.
A Portfolio's use of futures contracts and related options may not be
successful and it may incur losses in connection with its purchase and sale of
future contracts and related options.
Futures Straddles. A Portfolio may also purchase and write covered
-----------------
straddles on interest rate, foreign currency or bond index futures contracts. A
long straddle is a combination of a call and a put purchased on the same futures
contract where the exercise price of the put option is less than the exercise
price of the call option. A Portfolio would enter into a long straddle when it
believes that it is likely that interest rates or foreign currency exchange
rates will be more volatile during the term of the options than the option
pricing implies. A short straddle is a combination of a call and put written on
the same futures contract where the exercise price of the put option is less
than the exercise price of the call option and where the same security or
futures contract is considered for both the put and the call. The Portfolio
would enter into a short straddle when it believes that it is unlikely that
interest rates or foreign currency exchange rates will be as volatile during the
term of the options as the option pricing implies.
Special Characteristics and Risks of Futures Trading. No price is
----------------------------------------------------
paid upon entering into a futures contract. Instead, upon entering into a
futures contract, a Portfolio will be required to deposit with its custodian the
initial margin. Unlike margin in securities transactions, margin on futures
contracts a Portfolio has written does not involve borrowing to finance the
futures transactions. Rather, initial margin on futures contracts or on such
options is in the nature of a performance bond or good-faith deposit on the
contract that will be returned to the Portfolio upon termination of the
transaction, assuming all contractual obligations have been satisfied.
Similarly, variation margin does not involve borrowing to finance the futures,
but rather represents a daily settlement of a Portfolio's obligations to or from
a clearing organization.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures. A Portfolio will
incur brokerage fees and related transaction costs when it purchases or sells
futures contracts and premiums.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract may vary either up or
down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and, therefore, does not limit potential losses because
futures prices could move to the daily limit for several consecutive trading
days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Portfolio to close a
position and, in the event of adverse price movements, the Portfolio would have
to make daily cash payments of variation margin (except in the case of purchased
options). However, in the event futures contracts have been used to hedge fund
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures
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contract. However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.
The following considerations are important in deciding whether to use
futures contracts:
(1) Successful use by a Portfolio of futures contracts will depend
upon the Adviser's ability to predict movements in the direction of the overall
securities, currency and interest rate markets, which requires skills and
techniques that are different from those needed to predict changes in the prices
of individual securities. Moreover, futures contracts relate not to the current
price level of the underlying instrument or currency but to the anticipated
levels at some point in the future. There is, in addition, the risk that the
movements in the price of the futures contract will not correlate with the
movements in prices of the securities or currencies being hedged. For example,
if the price of the futures contract moves less than the price of the securities
or currencies that are the subject of the hedge, the hedge will not be fully
effective; however, if the price of securities or currencies being hedged has
moved in an unfavorable direction, a Portfolio would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, the advantage may be partially offset by
losses on the futures position. In addition, if a Portfolio has insufficient
cash, it may have to sell portfolio investments to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market. Consequently, the Portfolio may need to sell assets
at a time when such sales are disadvantageous to the Portfolio. If the price of
the futures contract moves more than the price of the underlying securities or
currencies, a Portfolio will experience either a loss or a gain on the futures
contract that may or may not be completely offset by movements in the price of
the securities or currencies that are the subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(3) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Although each Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it may not be possible to close a futures position, and in the event
of adverse price movements, a Portfolio would continue to be required to make
variation margin payments.
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(4) As is the case with options, a Portfolio's activities in the
futures markets may result in higher fund turnover rates and additional
transaction costs in the form of added brokerage commissions; however, the
Portfolio may save on commissions by using futures contracts or options thereon
as a hedge rather than buying or selling individual securities or currencies in
anticipation or as a result of market movements.
Guideline for Futures. No Portfolio will purchase or sell futures
---------------------
contracts if, immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing futures positions and initial margin
deposits would exceed 5% of the market value of the Portfolio's total assets.
This guideline may be modified by the board without shareholder vote. Adoption
of this guideline will not limit the percentage of the Portfolio's assets at
risk to 5%.
Forward Foreign Currency Contracts. A Portfolio may engage in foreign
----------------------------------
currency hedging strategies, including among others, settlement hedging,
transaction hedging, position hedging, proxy hedging and cross-hedging. A
"settlement hedge" or "transaction hedge" is designed to protect the Portfolio
against an adverse change in foreign currency values between the date a security
is purchased or sold and the date on which payment is made or received. Entering
into a forward contract for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction for a fixed amount of
U.S. dollars "locks in" the U.S. dollar price of the security. A Portfolio may
also use forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the Adviser has not yet selected the specific investments.
A Portfolio may also use forward contracts to hedge against a decline
in the value of existing investments denominated in a foreign currency. For
example, if a Portfolio owns securities denominated in a particular currency, it
could enter into a forward contract to sell that particular currency in return
for U.S. dollars to hedge against possible declines in the particular currency's
value. Such a hedge, sometimes referred to as a "position hedge," would tend to
offset both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. A Portfolio could also hedge
the position by selling another currency (or basket of currencies) expected to
perform similarly to a particular currency. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a direct hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated. With regard to a Portfolio's use of proxy
hedges, historical correlations between the movement of certain foreign
currencies relating to the U.S. dollar may not 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.
A Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if a
Portfolio had sold a security denominated in one currency and purchased an
equivalent security denominated in another. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause a Portfolio to
assume the risk of fluctuations in the value of the currency it purchases.
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Successful use of currency management strategies will depend on the
Adviser's skill in analyzing currency values. Currency management strategies may
substantially change a Portfolio's investment exposure to changes in currency
exchange rates and could result in losses to the Portfolio if currencies do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged a Portfolio by selling that currency in
exchange for dollars, the Portfolio would not participate in the currency's
appreciation. If the Adviser hedges currency exposure through proxy hedges, a
Portfolio could realize currency losses from both the hedge and the security
position if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Portfolio's exposure to a foreign currency and that currency's value
declines, the Portfolio will realize a loss. The Adviser's use of currency
management strategies may not be advantageous to a Portfolio and the Adviser may
not hedge at appropriate times.
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, a Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
A Portfolio may enter into forward currency contracts to purchase or
sell foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. For example, a Portfolio may purchase a
forward currency contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the Portfolio intends to acquire. In
addition, a Portfolio may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
The cost to 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.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, a Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
A Portfolio may also enter into forward contracts to enhance return if
the Advisers anticipate a change in a foreign currency's value. When entered
into to seek to enhance return, forward contracts are considered
speculative.
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A Portfolio may also create non-speculative "synthetic" positions. A
synthetic position is deemed not to be speculative if the position is covered by
segregation of short-term liquid assets. A synthetic position is the duplication
of a cash market transaction when the Adviser deems it to be advantageous for
cost liquidity or transactional efficiency reasons. A cash market transaction is
the purchase or sale of a security or other asset for cash. For example, a
Portfolio may experience large cash inflows which may be redeemed from the
Portfolio in a relatively short period. In this case, the Portfolio can leave
the amounts uninvested in anticipation of the redemption or the Portfolio can
invest in securities for a relatively short period, incurring transaction costs
on the purchase and subsequent sale. Alternatively, the Portfolio could create a
synthetic position by investing in a futures contract on a security, such as a
bond denominated in a foreign currency or on a securities index gaining
investment exposure to the relevant market while incurring lower overall
transaction costs. Since the financial markets in emerging countries are not as
developed as in the United States, these financial investments may not be
available to a Portfolio and the Portfolio may be unable to hedge certain risks
or enter into certain transactions. A Portfolio would enter into such
transactions if the markets for these instruments were sufficiently liquid and
there was an acceptable degree of correlation to the cash market. By segregating
cash, a Portfolio's futures contract position would generally be no more
leveraged or riskier than if it had invested in the cash market i.e., purchased
securities.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, a Portfolio may not 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, a
Portfolio might be unable to close out a forward currency contract at any time
prior to maturity. In either event, the Portfolio would continue to be subject
to market risk with respect to the position, and would continue to be required
to maintain a position in securities denominated in the foreign currency or to
maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency contract has been established. Thus, a Portfolio might
need to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Unless a Portfolio engages in currency hedging transactions, it will
be subject to the risk of changes in relation to the U.S. dollar of the value of
the currencies in which its assets are denominated. A Portfolio may from time to
time seek to protect, during the period prior to the remittance, the value of
the amount of interest, dividends and net realized capital gains received or to
be received in a local currency that it intends to remit out of the foreign
country by investing in high-quality short-term U.S. dollar-denominated debt
securities of such country and/or participating in the forward currency market
for the purchase of U.S. dollars in the country. Suitable U.S. dollar-
denominated investments may not be available at the time the Adviser wishes to
use them to hedge amounts to be remitted. In addition, dollar-denominated
securities may not be available in some or all emerging countries, that the
forward currency market for the purchase of U.S. dollars in many emerging
countries
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is not highly developed and that in certain emerging countries no forward market
for foreign currencies currently exists or that such market may be closed to
investment by a Portfolio.
A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts, when required under applicable laws, will be
established with the Portfolio's Custodian. For the purpose of determining the
adequacy of the assets in the account, the deposited assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional cash or assets will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the Portfolio. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate these contracts. In such event, a Portfolio's
ability to utilize forward foreign currency exchange contracts may be
restricted.
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the Portfolio security if
its market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transaction costs. A
Portfolio may enter into a forward contract and maintain a net exposure on such
contract only if (1) the consummation of the contract would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency or (2) the
Portfolio maintains cash or liquid assets in a segregated account in an amount
not less than the value of the Portfolio's total assets committed to the
consummation of the contract which value must be marked to market daily. Each
Portfolio will comply with guidelines established by the SEC with respect to
coverage of forward contracts entered into by the Portfolio (including SEC
guidelines in respect of forward contracts subject to netting arrangements) and,
if such guidelines so require, will set aside liquid assets in a segregated
account with its custodian in the amount prescribed. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the Adviser believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of a Portfolio will be served.
At or before the maturity date of a forward contract requiring a
Portfolio to sell a currency, the Portfolio may either sell the portfolio
security and use the sale proceeds to make delivery of the currency or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency that it is obligated to
deliver. Similarly, a Portfolio may close out a forward contract requiring it to
purchase a specified currency by entering into a second contract entitling it to
sell the same amount of the same currency on the maturity date of the first
contract. A Portfolio would realize a gain or loss as a result of entering into
such an offsetting forward currency contract under
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either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The cost to a Portfolio of engaging in forward currency contracts will
vary with factors such as the currencies involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. The use of forward currency contracts will not eliminate
fluctuations in the prices of the underlying securities a Portfolio owns or
intends to acquire, but it will fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although a Portfolio will value its assets daily in terms of U.S.
dollars, the Portfolio does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. A Portfolio may convert foreign
currency from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency to
the dealer.
A Portfolio generally will not enter into a forward contract with a
term of greater than one year.
Swaps, Caps, Floors and Collars. A Portfolio may enter into currency
-------------------------------
swaps, mortgage swaps, index swaps and interest rate swaps, caps, floors and
collars. A Portfolio may enter into currency swaps for both hedging purposes and
to seek to increase total return. In addition, a Portfolio may 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 a
Portfolio with another party of their respective rights to make or receive
payments in specified currencies. Interest rate swaps involve the exchange by a
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 a 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.
A 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 a Portfolio is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap
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defaults, a 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 a 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; the Adviser 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.
A 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 the Adviser. If there is a
default by the other party to a swap transaction, a Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
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 the Adviser is incorrect in
its forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Portfolio would be less favorable than it would have
been if this investment technique were not used. The SEC currently takes the
position that swaps, caps, floors and collars are illiquid and thus subject to a
Portfolio's 15% limitation on investments in illiquid securities.
Lending Portfolio Securities. A 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 Portfolio's
investment standards to be the equivalent of cash. From time to time, a
Portfolio may return to the borrower (or a third party that is unaffiliated with
such Portfolio) and that is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the lender 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 lender must be able to terminate the loan at any time;
(4) the lender 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 lender 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 Board must terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs. The Portfolios (other than the EMD Portfolio) have
appointed Custodial Trust Company ("CTC"), an affiliate of BSAM, as Lending
Agent. CTC receives a transaction fee for its services.
Non-Diversified Status. A non-diversified fund, within the meaning of
----------------------
the 1940 Act, means that the fund is not limited by such Act in the proportion
of its assets that it may invest in securities of a single issuer. The Adviser
intends to limit a non-diversified Portfolio's investments,
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however, in order to qualify as a "regulated investment company" for the
purposes of Subchapter M of the Code. See "Taxes." To qualify, a non-diversified
Portfolio must comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the value of the Portfolio's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the value of
its total assets, not more than 5% of the value of the Portfolio's total assets
will be invested in the securities of a single issuer and the Portfolio will not
own more than 10% of the outstanding voting securities of a single issuer. To
the extent that a non-diversified Portfolio assumes large positions in the
securities of a small number of issuers, the Portfolio's return may fluctuate to
a greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
Short Selling. 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, a 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 SEC.
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.
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." A Portfolio may make short sales
------------------------------
"against the box," a transaction in which a Portfolio enters into a short sale
of a security which the Portfolio owns. The proceeds of the short sale will be
held by a broker until the settlement date, at which time a Portfolio
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delivers be security to close the short position. A Portfolio receives the net
proceeds from the short sales. The Large Cap Portfolio, Small Cap Portfolio, S&P
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.
Investment Restrictions. Each Portfolio has adopted certain
-----------------------
investment restrictions as fundamental policies. These restrictions cannot be
changed without the approval of a majority of the Portfolio's outstanding voting
shares, as defined in the 1940 Act). Investment restrictions that are not
fundamental policies may be changed by vote of a majority of the Trustees at any
time. 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.
Fundamental Restrictions
1. Concentration
The Money Market Portfolio may not 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.
The Income Portfolio, High Yield Portfolio, S&P STARS Portfolio,
Insiders Select Fund, Large Cap Portfolio, Small Cap Portfolio, Focus List
Portfolio, Balanced Portfolio and International Equity Portfolio each may not
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.
The EMD Portfolio may not invest more than 25% of the value of its
total assets in the securities of one or more issuers conducting their principal
business activities in the same industry. This limitation is not applicable to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities. For purposes of the EMD Portfolio's Investment Restriction
relating to Concentration, as long as the staff of the SEC considers securities
issued or guaranteed as to principal and interest by any single foreign
government or any supranational organization in the aggregate to be securities
of issuers in the same industry, the Portfolio intends to comply with such SEC
staff position.
2. Diversification
The Money Market Portfolio may not 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.
The Income Portfolio, Large Cap Portfolio and Small Cap Portfolio each
may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of
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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. Single Issuer
The Income Portfolio, Large Cap Portfolio and Small Cap Portfolio each
may not 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. Commodities
The Money Market Portfolio may not purchase or sell commodities
contracts, or invest in oil, gas or mineral exploration or development programs
or in mineral leases.
The EMD Portfolio may not purchase or sell commodities or commodity
contracts, except that the Portfolio may (a) purchase and sell futures
contracts, including those relating to securities, currencies and indices, and
(b) purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not invest in commodities, except that each such Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
5. Real Estate
The Money Market Portfolio may not 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.
The EMD Portfolio may not purchase, hold or deal in real estate,
including limited partnership interests, or oil, gas or other mineral leases,
although the Portfolio may purchase and sell securities that are secured by real
estate or interests therein and may purchase mortgage-related securities and may
hold and sell real estate acquired by the Portfolio as a result of the ownership
of securities.
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not 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 such 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. Borrowing
The Money Market Portfolio may not 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).
The EMD Portfolio may not borrow money, except from banks, and only if
after such borrowing there is asset coverage of at least 300% for all borrowings
of the Portfolio; or mortgage,
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pledge or hypothecate its assets except in connection with such borrowings. This
restriction shall not prevent the Portfolio from entering into reverse
repurchase agreements, provided that reverse repurchase agreements and any other
transactions constituting borrowing by the Portfolio may not exceed 10% of the
Portfolio's total assets. In the event that the asset coverage for the
Portfolio's borrowings falls below 300%, the Portfolio will reduce within three
days the amount of its borrowings in order to provide for 300% asset coverage.
(For the purpose of this restriction, collateral arrangements with respect to
the writing of options, and, if applicable, futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase or sale of
futures are deemed to be the issuance of a senior security for purposes of the
Investment Limitation related to Senior Securities.)
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not 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. Lending
The Money Market Portfolio may not 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.
The EMD Portfolio may not make loans, except that the Portfolio may
(a) purchase and hold debt instruments (including bonds, debentures or other
debt instruments or interests therein, government obligations, short-term
commercial paper, certificates of deposit and bankers acceptances) in accordance
with its investment objectives and policies, (b) invest in emerging country
loans, participations and assignments, (c) enter into repurchase agreements with
respect to portfolio securities, and (d) make loans of portfolio
securities.
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each such
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 SEC and the Board.
8. Underwriting
The Money Market Portfolio may not act as an underwriter of
securities, except insofar as the Portfolio may be deemed an underwriter under
applicable securities laws in selling portfolio securities.
The EMD Portfolio may not underwrite securities of other issuers,
except insofar as the Portfolio may be deemed to be an underwriter under the
Securities Act in selling portfolio securities.
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Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not act as an underwriter of securities of other issuers, except
to the extent each such Portfolio may be deemed an underwriter under the
Securities Act, by virtue of disposing of portfolio securities.
9. Senior Securities
The Money Market Portfolio, High Yield Portfolio, Focus List
Portfolio, Balanced Portfolio and International Equity Portfolio each may not
issue any senior security (as such term is defined in Section 18(f) of the 1940
Act) except that (a) each such 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) each such 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; and (c) subject
to the Investment Restriction related to Borrowing, each such Portfolio may
borrow money as authorized by the 1940 Act.
The Income Portfolio, S&P STARS Portfolio, Insiders Select Fund, Large
Cap Portfolio and Small Cap Portfolio each may not issue any senior security (as
such term is defined in Section 18(f) of the 1940 Act).
The EMD Portfolio may not issue any senior security (as such term is
defined in Section 18(f) of the 1940 Act) except as otherwise permitted in the
Investment Restrictions related to Borrowing, Short Sales and Lending; and, in
the case of the Investment Restrictions related to Short Sales and Lending,
provided the coverage requirements enunciated by the SEC are followed.
10. Margin
The Income Portfolio, S&P STARS Portfolio, Large Cap Portfolio, Small
Cap Portfolio and Insiders Select Fund each may not purchase securities on
margin, but each such 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.
11. Unseasoned Issuers
The S&P STARS Portfolio may not 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.
12. Management or Control
The S&P STARS Portfolio may not 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.
Non-Fundamental Restrictions.
1. Pledging Assets
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio may not pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings
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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.
2. Options
The Money Market Portfolio may not write or sell puts, calls,
straddles, spreads or combinations thereof.
The Income Portfolio, S&P STARS Portfolio, Insiders Select Fund, Large
Cap Portfolio and Small Cap Portfolio may not purchase, sell or write puts,
calls or combinations thereof, except as described in the Prospectus and
SAI.
3. Other Investment Companies
The Money Market Portfolio may not purchase securities of other
investment companies except as permitted under the 1940 Act or in connection
with a merger, consolidation, acquisition, or reorganization.
Each Portfolio, other than the Money Market Portfolio and EMD
Portfolio, may not purchase securities of other investment companies, except to
the extent permitted under the 1940 Act.
4. Unseasoned Issuers
The EMD Portfolio may not invest more than 10% of the value of its
total assets in securities of issuers having a record, together with
predecessors, of less then three years of continuous operation.
The Insiders Select Fund and the Large Cap Portfolio each may not
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.
5. Management or Control
The EMD Portfolio may not make investments for the purpose of
exercising control or management. Investments by the Portfolio in wholly-owned
investment entities created under the laws of certain countries will not be
deemed the making of investments for the purpose of exercising control or
management.
The Large Cap Portfolio, Small Cap Portfolio and Insiders Select Fund
each may not invest in the securities of a company for the purpose of exercising
management or control, but each such Portfolio will vote the securities it owns
in its portfolio as a shareholder in accordance with its views.
6. Illiquid Securities
The Money Market Portfolio may not knowingly invest more than 10% of
the value of its 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.
49
<PAGE>
The Income Portfolio, S&P STARS Portfolio, Insiders Select Fund, Large
Cap Portfolio and Small Cap Portfolio each may not 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.
The High Yield Portfolio, Focus List Portfolio, Balanced Portfolio and
International Equity Portfolio each may not knowingly invest more than 15% of
the value of its 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.
7. Margin
The Money Market Portfolio may not purchase securities on margin, make
short sales of securities, or maintain a short position.
The High Yield Portfolio, Focus List Portfolio, Balanced Portfolio and
International Equity Portfolio each may not purchase securities on margin, but
each such 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.
8. Short Sales
The EMD Portfolio may not make short sales of securities, except short
sales against-the-box, or maintain a short position. (The Portfolio does not
currently intend to make short sales against-the-box.)
The Focus List Portfolio, Balanced Portfolio and International Equity
Portfolio each may not make short sales of securities, other than short sales
"against the box."
9. Investments while Borrowing.
The Money Market Portfolio, High Yield Portfolio, Focus List
Portfolio, Balanced Portfolio and International Equity Portfolio each may not
make additional investments when borrowing exceeds 5% of Portfolio assets.
10. Warrants
The Money Market Portfolio may not invest in warrants.
MANAGEMENT OF THE TRUST
Trustees and officers of the Trust, 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 Trust, as
defined in the 1940 Act, is indicated by an asterisk.
50
<PAGE>
<TABLE>
<CAPTION>
Position
Name, address (and age) with Trust Principal Occupation
- ----------------------- ---------- --------------------
<S> <C> <C>
Peter M. Bren (65) Trustee Since 1969, President of The Bren Co. (realty); until
126 East 56th Street 1969, President of Koll, Bren Realty Advisors and
New York, NY 10021 Senior Partner of Lincoln Properties.
Alan J. Dixon (71) * Trustee Since 1993, Partner, Bryan Cave (St. Louis law firm);
7535 Claymont Court, from 1981 to 1992, United States Senator from
Apt. #2 Illinois.
Belleville, IL 62223
John R. McKernan, Jr. (51) Trustee Since 1995, Chairman and Chief Executive Officer of
P.O. Box 15213 McKernan Enterprises; until 1995, Governor of Maine.
Portland, ME 02110
M.B. Oglesby, Jr. (57) Trustee Since 1997, President and Chief Executive Officer,
700 13th Street, N.W., Association of American Railroads; from 1996 to 1997,
Suite 400 Vice Chairman of Cassidy & Associates; from 1989 to
Washington, D.C. 20005 1996, Senior Vice President of RJR Nabisco, Inc.;
from 1988 to 1989, White House Deputy Chief of Staff.
Michael Minikes (56) * Trustee, Senior Managing Director of Bear Stearns; since 1997,
245 Park Avenue Chairman of the Chairman of BSFM; Treasurer of Bear Stearns;
New York, NY 10167 Board Treasurer of The Bear Stearns Companies Inc.;
Director of The Bear Stearns Companies Inc.
Doni L. Fordyce (40) President Since 1996, Senior Managing Director of Bear Stearns;
575 Lexington Avenue until 1996, Vice President, Asset Management Group,
New York, NY 10022 Goldman, Sachs & Co.
Barry Sommers (30) Executive Vice Since 1997, Managing Director and Head of Marketing
575 Lexington Avenue President and Sales for Bear Stearns Funds; from 1995 to 1997,
New York, NY 10022 Vice President, Mutual Fund Sales, Goldman, Sachs &
Co.
Stephen A. Bornstein (56) Vice President Managing Director of Bear Stearns, Legal Department;
575 Lexington Avenue and Secretary General Counsel, BSAM.
New York, NY 10022
Frank J. Maresca (40) Vice President Managing Director of Bear Stearns; since 1997, Chief
575 Lexington Avenue and Treasurer Executive Officer and President of BSFM.
New York, NY 10022
Vincent L. Pereira (34) Assistant Since 1995, Associate Director of Bear Stearns; since
575 Lexington Avenue Treasurer 1997, Treasurer and Secretary of BSFM; until 1995,
New York, NY 10022 Vice President of Bear Stearns.
</TABLE>
The Trust pays its Board members who are not employees of BSAM or its
affiliates an annual retainer of $5,000 and a per meeting fee of $500 and
reimburses them for their expenses. The Trust does not compensate its officers.
Prior to July 29, 1999, the EMD Portfolio was a series of Bear Stearns
Investment Trust ("BSIT"), another registered investment company advised by
BSAM. For the
51
<PAGE>
fiscal year ended March 31, 1999, Messrs. Bren, McKernan and Oglesby also served
as a trustee of BSIT. Accordingly, the following table shows the aggregate
amount of compensation paid to each Trustee by the Trust and BSIT, where
applicable, for the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual the Trust and BSIT
Name of Board Compensation from Accrued as Part of Benefits from Paid to
Member Trust * Trust'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
Michael Minikes None None None None
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $5,750 for the Trustees, as a group.
Board members and officers of the Trust, as a group, owned less than
1% of any Portfolio's shares outstanding on July 12, 1999.
For so long as the Plan described in the section entitled "Management
Arrangements-Distribution Plans" remains in effect, the Trustees who are not
"interested persons" of the Trust, as defined in the 1940 Act, will be selected
and nominated by the Trustees who are not "interested persons" of the Trust.
No meetings of shareholders of the Trust 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 Trust 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 Trust'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
Trust's outstanding shares.
52
<PAGE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Management of the
Portfolios." Information in this section relating to fees and expenses paid by
the EMD Portfolio as of March 31, 1999 represent amounts paid by the Portfolio's
predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
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 Trust and other affiliated and non-affiliated
investment companies.
S&P STARS Portfolio. 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 the Portfolio. At a meeting held on
June 18, 1997, a majority of the shareholders of the Portfolio approved an
investment advisory contract between BSAM and the Portfolio and BSAM began
active management of the Portfolio's investments. 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 each Portfolio pursuant to Investment Advisory Agreements with the
Trust (each an "Advisory Agreement") dated as shown in the following table.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Portfolios Advisory Agreement Date(s)
------------------------------------------------------------------------
<S> <C>
Income, Large Cap, Small Cap February 22, 1995, as revised
Portfolios May 4, 1995
------------------------------------------------------------------------
Money Market Portfolio June 2, 1997
------------------------------------------------------------------------
S&P STARS Portfolio June 25, 1997
------------------------------------------------------------------------
Balanced, High Yield,
International Equity Portfolios September 8, 1997
------------------------------------------------------------------------
Focus List Portfolio December 29, 1997
------------------------------------------------------------------------
Insiders Select Fund January 20, 1998
------------------------------------------------------------------------
EMD Portfolio July 29, 1999
------------------------------------------------------------------------
</TABLE>
As to each Portfolio, the Advisory Agreement is subject to annual
approval by (i) the Board or (ii) the vote of a majority (as defined in the 1940
Act) of the Portfolio's outstanding voting securities, provided that in either
event the continuance also is approved by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust or BSAM, by vote
cast in
53
<PAGE>
person at a meeting called for the purpose of voting on such approval. The
Trustees, including a majority of the Trustees who are not "interested persons"
of any party to the Agreement, last approved the Advisory Agreements at a
meeting held on February 10, 1999. Each Advisory Agreement is terminable, as to
a Portfolio, without penalty, on 60 days' notice, by the Board 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 Advisory 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; Doni L. Fordyce, Vice President, Chief
Operating Officer and Director; Stephen A. Bornstein, Secretary; and Warren J.
Spector and Robert M. Steinberg, Directors.
Portfolio Managers. BSAM provides investment advisory services to each
Portfolio in accordance with its stated policies, subject to the approval of the
Board. BSAM provides each Portfolio with a portfolio management team authorized
by the Board to execute purchases and sales of securities. All purchases and
sales are reported for the Board of Trustees' review at the meeting subsequent
to such transactions.
Advisory Fees. The following table shows the monthly fees that the
Trust has agreed to pay BSAM for advisory services to the Portfolios, at the
indicated annual percentage of the value of a Portfolio's average daily net
assets.
<TABLE>
<S> <C>
Portfolio Advisory Fee
Money Market Portfolio 0.20%
Income Portfolio 0.45%
High Yield Portfolio 0.60%
EMD Portfolio 1.00% of assets up to $50 million, 0.85% of
assets between $50 million and $100 million
and 0.55% of assets above $100 million
S&P STARS Portfolio 0.75%
Focus List Portfolio 0.65%
Large Cap Portfolio 0.75%
Small Cap Portfolio 0.75%
Insiders Select Fund 1.00%
Balanced Portfolio 0.65%
International Equity 1.00%
Portfolio
</TABLE>
54
<PAGE>
Insiders Select Fund. The monthly fee that the Insiders Select Fund
will pay BSAM will be adjusted monthly if the Portfolio's performance
outperforms or underperforms the S&P MidCap 400 Index. This adjustment may
increase or decrease the total advisory fee payable to BSAM by an annual rate of
up to 0.50% of the value of the Portfolio's average daily net assets. The
following table details this adjustment.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Percentage Point Difference Between Designated Class Performance Basic Performance Total
(Net of Expenses Including Advisory Fees) and Fee Adjustment Fee
Percentage Change in the S&P MidCap 400 Index (%) Rate (%) (%)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more 1.00% 0.50% 1.50%
- -----------------------------------------------------------------------------------------------------------------------
+2.75 percentage points or more but less than + 3.00 percentage points 1.00% 0.40% 1.40%
- -----------------------------------------------------------------------------------------------------------------------
+2.50 percentage points or more but less than + 2.75 percentage points 1.00% 0.30% 1.30%
- -----------------------------------------------------------------------------------------------------------------------
+2.25 percentage points or more but less than + 2.50 percentage points 1.00% 0.20% 1.20%
- -----------------------------------------------------------------------------------------------------------------------
+2.00 percentage points or more but less than + 2.25 percentage points 1.00% 0.10% 1.10%
- -----------------------------------------------------------------------------------------------------------------------
Less than + 2.00 percentage points but more than -2.00 percentage points 1.00% 00.0% 1.00%
- -----------------------------------------------------------------------------------------------------------------------
- -2.00 percentage points or less but more than -2.25 percentage points 1.00% -0.10% 0.90%
- -----------------------------------------------------------------------------------------------------------------------
- -2.25 percentage points or less but more than -2.50 percentage points 1.00% -0.20% 0.80%
- -----------------------------------------------------------------------------------------------------------------------
- -2.50 percentage points or less but more than -2.75 percentage points 1.00% -0.30% 0.70%
- -----------------------------------------------------------------------------------------------------------------------
- -2.75 percentage points or less but more than -3.00 percentage points 1.00% -0.40% 0.60%
- -----------------------------------------------------------------------------------------------------------------------
- -3.00 percentage points or less 1.00% -0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the investment advisory fees that the
Portfolios paid to BSAM and the amounts that BSAM waived for the last three
fiscal years ended March 31.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Paid Waived Paid Waived Paid Waived
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market $ 33,827 $400,797 $ 0 $ 120,582* N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Income $ 0 $ 50,882 $ 0 $ 91,715 $ 0 $ 98,957
- --------------------------------------------------------------------------------------------------------------------------
High Yield $ 25,136 $416,687 $ 0 $ 28,723** N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
EMD $ 88,623 $335,209 $208,721 $ 227,031+ $118,207 $260,294+
- --------------------------------------------------------------------------------------------------------------------------
S&P STARS $1,291,152 $716,763 $617,316 $ 645,637 $ 47,973 $ 699,997
- --------------------------------------------------------------------------------------------------------------------------
Insiders
Select Fund $ 759 $321,688 $ 0 $ 157,031 $ 0 $ 182,313
- --------------------------------------------------------------------------------------------------------------------------
Large Cap $ 0 $165,850 $ 0 $ 140,641 $ 0 $ 151,578
- --------------------------------------------------------------------------------------------------------------------------
Small Cap $ 67,550 $400,694 $ 0 $ 425,409 $ 0 $ 285,539
- --------------------------------------------------------------------------------------------------------------------------
Focus List $ 0 $ 63,550 $ 0 $ 6,748*** N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Balanced $ 0 $101,976 $ 0 $12,178*** N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
International $ 0 $114,148 $ 0 $14,726*** N/A N/A
Equity
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
+ This amount includes an administration fee that BSAM paid to BSFM.
In addition, BSAM reimbursed the following amounts for the last three
fiscal years ended March 31, in order to maintain applicable voluntary expense
limitations.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $142,863 $ 191,174* N/A
- -------------------------------------------------------------------------------------------------------
Income $299,061 $ 275,119 $280,261
- -------------------------------------------------------------------------------------------------------
High Yield $121,391 $ 41,870** N/A
- -------------------------------------------------------------------------------------------------------
EMD $137,134 $ 158,832 $ 0
- -------------------------------------------------------------------------------------------------------
Insiders Select Fund $ 42,908 $ 164,325 $243,945
- -------------------------------------------------------------------------------------------------------
Large Cap $157,111 $ 185,275 $161,196
- -------------------------------------------------------------------------------------------------------
Small Cap $ 28,865 $ 20,648 $ 86,666
- -------------------------------------------------------------------------------------------------------
Focus List $218,241 $46,255*** N/A
- -------------------------------------------------------------------------------------------------------
Balanced $224,243 $46,910*** N/A
- -------------------------------------------------------------------------------------------------------
International Equity $157,011 $44,515*** N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
Sub-Investment Advisory Agreement. Marvin & Palmer Associates, Inc.
---------------------------------
(the "Sub-Adviser") provides investment advisory services to the International
Equity Portfolio pursuant to the Sub-Investment Advisory Agreement with BSAM
dated September 8, 1997. The Sub-Advisory Agreement had an initial term of one
year from the date of execution and will continue automatically for successive
annual periods ending on September 8th of each year, provided such continuance
is specifically approved at least annually by (i) the Board or (ii) a vote of a
majority of the Portfolio's outstanding voting securities(as defined in the 1940
Act), provided that in either case its continuance also is approved by a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust, BSAM or the Sub-Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Board most
recently approved the Sub-Advisory Agreement on February 10, 1999. The Sub-
Advisory Agreement may be terminated without penalty, (i) by BSAM upon 60 days'
notice to the Sub-Adviser, (ii) by the Board 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 Trust and
BSAM. The Sub-Advisory Agreement will terminate automatically in the event
56
<PAGE>
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 Trust pursuant to the Administration Agreement with the Trust
dated February 22, 1995, as revised April 11, 1995, June 2, 1997, September 8,
1997, February 4, 1998 and July 29, 1999. The Administration Agreement was last
approved as of February 10, 1999 and thereafter will be subject to annual
approval by (i) the Board or (ii) vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Portfolio, provided that in
either event its continuance also is approved by a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust or BSFM,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement may be terminated without penalty on 60
days' notice by the 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. As to each
Portfolio, the Administration Agreement will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
For administrative services, the Trust has agreed to pay BSFM a
monthly fee at the annual rate of 0.15% of the average daily net assets of each
Portfolio other than the Money Market Portfolio. The Trust has agreed to pay
BSFM a monthly fee at the annual rate of 0.05% of the average daily net assets
of the Money Market Portfolio. The following table shows the administration
fees that the Portfolios paid to BSFM for the last three fiscal years ended
March 31.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $108,656 $ 30,167* N/A
- -----------------------------------------------------------------------------------------------------
Income $ 16,960 $ 30,572 $ 32,986
- -----------------------------------------------------------------------------------------------------
High Yield $110,456 $ 7,181** N/A
- -----------------------------------------------------------------------------------------------------
EMD+ $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------
S&P STARS $401,582 $ 252,557 $149,100
- -----------------------------------------------------------------------------------------------------
Insiders Select Fund $ 68,666 $ 35,492 $ 35,873
- -----------------------------------------------------------------------------------------------------
Large Cap $ 33,079 $ 28,128 $ 30,232
- -----------------------------------------------------------------------------------------------------
Small Cap $ 99,413 $ 85,085 $ 57,108
- -----------------------------------------------------------------------------------------------------
Focus List $ 14,665 $1,557*** N/A
- -----------------------------------------------------------------------------------------------------
Balanced $ 23,533 $2,810*** N/A
- -----------------------------------------------------------------------------------------------------
International Equity $ 17,122 $2,209*** N/A
- -----------------------------------------------------------------------------------------------------
</TABLE>
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
+ Prior to July 29, 1999, BSAM paid BSFM this fee from its management
fee.
57
<PAGE>
Administrative Services Agreement. PFPC provides certain
---------------------------------
administrative services to the Portfolios pursuant to the Administrative
Services Agreement with the Trust dated February 22, 1995, as revised September
8, 1997 and July 29, 1999. The Administrative Services Agreement may be
terminated upon 60 days' notice by the Trust 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 Trust 30 days' notice; (ii) the
delegate (or assignee) agrees with PFPC and the Trust to comply with all
relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or
assignee) promptly provide information requested by the Trust in connection with
such delegation.
For administrative and accounting services, the Trust has agreed to
pay PFPC a monthly fee, on behalf of each Portfolio (other than the Money Market
Portfolio), equal to an annual rate of 0.10% of the Portfolio's average daily
net assets up to $200 million, 0.075% of the next $200 million, 0.05% of the
next $200 million and 0.03% of net assets above $600 million, subject to a
minimum annual fee of $150,000 per Portfolio (other than the Money Market
Portfolio). The Trust has agreed to pay PFPC a monthly fee, on behalf of the
Money Market Portfolio, equal to an annual rate of 0.075% of the Portfolio's
average daily net assets up to $150 million, 0.04% of the next $150 million,
0.02% of the next $300 million and 0.0125% of net assets above $600 million,
subject to a minimum monthly fee of $6,250. The following table shows the
administrative services fees that the Portfolios paid to PFPC for the last three
fiscal years ended March 31.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $139,740 $ 39,813* N/A
- -----------------------------------------------------------------------------------------------------
Income $103,612 $ 98,944 $ 99,469
- -----------------------------------------------------------------------------------------------------
High Yield $105,728 $ 5,468** N/A
- -----------------------------------------------------------------------------------------------------
EMD $ 92,305 $ 80,121 $ 85,124
- -----------------------------------------------------------------------------------------------------
S&P STARS $256,593 $ 197,706 $ 65,999
- -----------------------------------------------------------------------------------------------------
Insiders Select Fund $127,397 $ 123,259 $107,174
- -----------------------------------------------------------------------------------------------------
Large Cap $100,173 $ 100,107 $ 99,570
- -----------------------------------------------------------------------------------------------------
Small Cap $147,784 $ 134,255 $119,822
- -----------------------------------------------------------------------------------------------------
Focus List $ 50,847 $5,214*** N/A
- -----------------------------------------------------------------------------------------------------
Balanced $ 64,618 $5,367*** N/A
- -----------------------------------------------------------------------------------------------------
International Equity $ 55,768 $5,215*** N/A
- -----------------------------------------------------------------------------------------------------
</TABLE>
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
Distribution Plans. Rule 12b-1 adopted by the SEC under Section 12 of
------------------
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 Board has adopted a distribution plan with respect
to Class A, Class B and Class C shares (the "Distribution Plans"). The Board
believes that
58
<PAGE>
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.
The Board reviews a quarterly report of the amounts expended under the
Distribution Plans, and the purposes for which such expenditures were incurred.
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, and by the
Trustees who are neither "interested persons" (as defined in the 1940 Act) of
the Trust 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
Trust is required by a SEC 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 agreement is subject to annual approval by such
vote cast in person at a meeting called for the purpose of voting on such Plan.
An amended and restated distribution plan was most recently approved on February
10, 1999. Each Distribution Plan may be terminated at any time 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 may be terminated 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 in the event of its assignment (as
defined in the 1940 Act).
The following tables show the amounts that Class A, Class B and Class
C shares of each Portfolio paid under (a) the relevant Distribution Plan,
including amounts paid to (i) broker-dealers, (ii) underwriters and (iii), if
applicable, for advertising, printing, mailing prospectuses to prospective
shareholders, compensation to sales personnel, and interest, carrying, or other
financing charges ("Other Distribution"); and (b) the Shareholder Servicing Plan
for personal services rendered to shareholders (see "Shareholder Servicing
Plan"), for the fiscal year ended March 31, 1999.
Class A*
<TABLE>
<CAPTION>
Other
Total Payments Broker-dealers Distribution
-------------- ------------- ------------
<S> <C> <C> <C>
Income $ 15,836 $ 11,276 $ 4,560
High Yield $138,476 $ 13,924 $124,552
EMD $113,931 $ 86,913 $ 27,018
S&P STARS $682,524 $489,767 $192,757
Insiders Select Fund $124,069 $ 83,259 $ 40,810
Large Cap $ 46,716 $ 33,523 $ 13,193
Small Cap $111,413 $ 87,549 $ 40,810
Focus List $ 21,863 $ 2,435 $ 19,428
Balanced $ 23,454 $ 2,672 $ 20,782
International Equity $ 30,684 $ 3,611 $ 27,073
</TABLE>
* Class A shares made no payments to underwriters.
59
<PAGE>
<TABLE>
<CAPTION>
Class B*
Total Payments Broker-dealers Underwriters
-------------- -------------- ------------
<S> <C> <C> <C>
Income $ 4,599 $ 36 $ 4,563
High Yield $148,999 $1,881 $147,118
EMD $ 12,295 $ 185 $ 12,110
S&P STARS $193,055 $2,594 $190,461
Insiders Select Fund $ 68,310 $ 602 $ 67,708
Large Cap $ 12,841 $ 134 $ 12,707
Small Cap $ 21,972 $ 179 $ 21,793
Focus List $ 31,426 $ 896 $ 30,530
Balanced $ 14,094 $ 559 $ 13,535
International Equity $ 26,946 $1,337 $ 25,609
</TABLE>
* Class B shares made no payments for other distribution.
<TABLE>
<CAPTION>
Class C*
Total Payments Broker-dealers Underwriters
-------------- -------------- ------------
<S> <C> <C> <C>
Income $ 17,360 $ 11,983 $ 5,377
High Yield $183,211 $ 11,093 $172,118
EMD $ 33,433 $ 21,054 $ 12,379
S&P STARS $714,370 $510,458 $203,912
Insiders Select Fund $130,390 $ 85,454 $ 44,936
Large Cap $ 55,531 $ 42,660 $ 12,871
Small Cap $151,596 $115,051 $ 36,545
Focus List $ 22,616 $ 3,367 $ 19,249
Balanced $ 9,368 $ 2,286 $ 7,082
International Equity $ 25,834 $ 6,123 $ 19,711
</TABLE>
* Class C shares made no payments for other distribution.
Shareholder Servicing Plan. The Trust has adopted a shareholder
--------------------------
servicing plan on behalf of Class A, Class B and Class C shares of the
Portfolios (the "Shareholder Servicing Plan"). In accordance with the
Shareholder Servicing Plan, the Trust may enter into agreements under which a
Portfolio pays fees of up to 0.25% of the average daily net assets of a share
Class for expenses incurred in connection with the personal service and
maintenance of Portfolio shareholder accounts, 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. Prior to February 1999, service fees were paid through the
distribution plan of Class A and Class C shares of the Income, Large Cap and
Small Cap Portfolios.
Expenses. The Trust bears all expenses incurred in its operation,
--------
except to the extent that BSAM specifically assumes them. The Trust bears the
following expenses, among others:
60
<PAGE>
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,
SEC fees, state Blue Sky qualification fees, advisory, administrative and Trust
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 Trust'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 Trust 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 Limitations. BSAM has agreed in writing to limit the expenses
-------------------
of each Portfolio to the amounts indicated in the Prospectus until March 31,
2000. These limits do not include any taxes, brokerage commissions, interest on
borrowings and extraordinary expenses.
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 Prospectus entitled "How to Buy Shares" and
"How to Sell Shares." Information in this section relating to sales and
redemption charges retained by Bear Stearns with respect to the EMD Portfolio as
of March 31, 1999 represent amounts related to sales and redemptions of the
Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of
BSIT.
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, February 4, 1998 and July 29, 1999, which is renewable
annually.
The following table shows the approximate amounts that Bear Stearns
retained from sales loads on Class A Shares ("FESL") and on contingent deferred
sales charges ("CDSC") on Class B and Class C Shares for the three fiscal years
ended March 31. In some states, banks or other institutions effecting
transactions in Portfolio shares may be required to register as dealers pursuant
to state law.
61
<PAGE>
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Income
- ------
FESL -- A $ 35,200 $ 11,400 $ 17,600
CDSC -- B $ 600 $ 0 N/A
CDSC -- C $ 2,000 $ 100 $ 100
- ------------------------------------------------------------------------------
High Yield
- ----------
FESL -- A $ 525,500 $ 155,700* N/A
CDSC -- A $ 9,000 $ 0
CDSC -- B $ 58,800 $ 0
CDSC -- C $ 33,700 $ 0
- ------------------------------------------------------------------------------
EMD
- ---
FESL -- A $ 46,300 $ 88,900 $110,800
CDSC -- B $ 13,000 $ 0 N/A
CDSC -- C $ 2,200 $ 1,900 $ 2,400
- ------------------------------------------------------------------------------
S&P STARS
- ---------
FESL -- A $2,061,000 $1,022,800 $904,000
CDSC -- B $ 24,500 $ 0 N/A
CDSC -- C $ 68,300 $ 25,800 $ 30,000
- ------------------------------------------------------------------------------
Insiders Select Fund
- --------------------
FESL -- A $ 389,100 $ 236,000 $163,000
CDSC -- B $ 69,800 $ 0 N/A
CDSC -- C $ 14,400 $ 2,600 $ 14,300
- ------------------------------------------------------------------------------
Large Cap
- ---------
FESL -- A $ 86,200 $ 68,300 $ 43,100
CDSC -- B $ 9,000 $ 0 N/A
CDSC -- C $ 4,500 $ 600 $ 3,200
- ------------------------------------------------------------------------------
Small Cap
- ---------
FESL -- A $ 165,300 $ 214,800 $227,500
CDSC -- B $ 14,200 $ 0 N/A
CDSC -- C $ 7,600 $ 4,100 $ 2,700
- ------------------------------------------------------------------------------
Focus List
- ----------
FESL -- A $ 111,800 $ 71600** N/A
CDSC -- B $ 30,300 $ 0
CDSC -- C $ 700 $ 0
- ------------------------------------------------------------------------------
Balanced
- --------
FESL -- A $ 43,000 $ 32,300** N/A
CDSC -- B $ 1,500 $ 0
CDSC -- C $ 0 $ 0
- ------------------------------------------------------------------------------
62
<PAGE>
- ----------------------------------------------------------------------------
International Equity
- --------------------
FESL -- A $ 92,700 $58,100** N/A
CDSC -- B $ 6,700 $ 0
CDSC -- C $ 700 $ 0
- ----------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31,
1998.
** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
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.
-------------------
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 NAV of that class plus a sales load, which is imposed in accordance with
the following schedules.
<TABLE>
<CAPTION>
Fixed Income Portfolios
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SALES LOAD
----------------------------------------------
Amount of Transaction As a % of offering As a % of NAV Dealer concessions as
price per share a % of offering
price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to less than $100,000 4.25 4.44 4.00
$100,000 to less than $250,000 3.25 3.36 3.00
$250,000 to less than $500,000 2.50 2.56 2.25
$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>
<TABLE>
<CAPTION>
Equity Portfolios
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SALES LOAD
----------------------------------------------
Amount of Transaction As a % of offering As a % of NAV Dealer concessions
price per share as % 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 up to one year after the date of purchase, a CDSC of
1.00% will be
63
<PAGE>
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.
As described in the Prospectus, an investor may buy Class A shares of
a Portfolio at NAV if the purchase is (a) for $1,000,000 or more or (b) made
within 60 days of selling sells a mutual fund that charges a sales load or is
subject to a CDSC and not distributed by Bear. In connection with such
purchases, Bear Stearns will offer to pay dealers, from its own resources, up to
1.25% of the amount purchased. However, Bear Stearns will not pay this amount if
the investor is a managed account over which BSAM has investment discretion, or
if BSAM is responsible for the asset allocation with respect to such managed
account.
In addition, Class A shares of a Portfolio at NAV by the following
customers of a broker that operates a master account for purchasing and
redeeming, and otherwise provides shareholder services in respect of Portfolio
shares pursuant to agreements with the Trust or Bear Stearns: (i) investment
advisers and financial planners who place trades for their own accounts or for
the accounts of their clients and who charge a management, consulting or other
fee, (ii) clients of such investment advisers and financial planners if such
clients place trades through accounts linked to master accounts of such
investment advisers or financial planners on the books and records of such
broker, and (iii) retirement and deferred compensation plans, and trusts used to
fund such plans, including, but not limited to, plans or trusts defined in
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.
Set forth below is an example of the method of computing the offering
price per share 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 NAV of
the Class A shares on March 31, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Fixed Income Portfolios Income High Yield EMD
<S> <C> <C> <C>
NAV $12.15 $11.36 $9.27
Sales Charge - 4.50% (4.71% of NAV) 0.57 0.54 0.44
------ ------ -----
Offering Price $12.72 $11.90 $9.71
====== ====== =====
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Equity Portfolios Insiders
S&P Select Large Cap Small Cap Focus List
STARS Fund
<S> <C> <C> <C> <C> <C>
NAV $24.39 $17.02 $19.74 $17.93 $17.32
Sales Charge - 5.50%
(5.82% of
NAV) 1.42 0.99 1.15 1.04 1.01
------ ------ ------ ------ ------
Offering Price $25.81 $18.01 $20.89 $18.97 $18.33
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Int'l
Balanced Equity
<S> <C> <C>
NAV $13.11 $15.14
Sales Charge - 5.50%
(5.82% of
NAV) 0.76 0.88
------ ------
Offering Price $13.87 $16.02
====== ======
- ------------------------------------------------------------
</TABLE>
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 SEC. In the case of requests for
redemption in excess of such amount, the Board 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.
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 NAV (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 A,
Class B and Class C shares and the dividends payable on these shares will be
reduced by incremental expenses borne solely by that class, including the asset-
based sales charge to which these Classes are subject.
The methodology for calculating the NAV, 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
65
<PAGE>
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 SAI
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.
Money Market Portfolio. The regulations of the Comptroller of the
----------------------
Currency 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 Trust believes that the purchase of Money Market Portfolio shares 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.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. A Portfolio's NAV 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" a Portfolio consist of
the consideration received upon the issuance of Portfolio shares together with
all income, earnings, profits and 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 Trust not belonging to a particular Portfolio. Assets belonging to
a Portfolio are charged with the direct liabilities of the Portfolio and with a
share of the general liabilities of the Trust allocated on a daily basis in
proportion to the relative net assets of the Portfolio and the Trust's other
portfolios. Determinations made in good faith and in accordance with generally
accepted accounting principles by the Board as to the allocation of any assets
or liabilities with respect to a Portfolio are conclusive.
Money Market Portfolio. The Money Market Portfolio uses the amortized
cost method of valuation to compute the NAV of its shares for purposes of sales
and redemptions. 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 NAV 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 that are
higher or lower than the market value of such securities.
In connection with its use of amortized cost valuation, the Money
Market 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
Board has also established procedures pursuant to rules promulgated by the SEC
that
66
<PAGE>
are intended to stabilize the Portfolio's NAV 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 NAV 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.
Fixed Income Portfolios. Substantially all Fixed Income Portfolio
investments (including short-term investments) are valued each business day by
one or more independent pricing services (the "Pricing Services") approved by
the Board. Securities valued by the Pricing Services for which quoted bid prices
in the judgment of the Pricing Services 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 Pricing Services from dealers in such
securities) and asked prices (as calculated by a Pricing 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 NAV. 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 NAV does
not take place contemporaneously with the determination of prices of such
securities. Other investments valued by a Pricing Service are carried at fair
value as determined by the Pricing 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 a Pricing Service are
carried at amortized cost, which approximate value. Other investments that are
not valued by a Pricing 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 NAV of a Fixed Income Portfolio's shares.
Because of the differences in operating expenses incurred by each class, the per
share NAV of each class will differ.
Foreign currency exchange rates are generally determined prior to the
close of the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of the NYSE, which events will not be reflected in a
computation of a Portfolio's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board. The foreign
currency exchange transactions of a Portfolio conducted on a spot basis will be
valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market.
All cash, receivables and current payables are carried on a
Portfolio's books at their face value.
67
<PAGE>
Equity Portfolio securities, including written covered call options,
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 NAV. 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 NAV 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 Board. Expenses and fees,
including the investment advisory, administration and distribution fees, are
accrued daily and taken into account for the purpose of determining the NAV of
an Equity Portfolio's shares. Because of the differences in operating expenses
incurred by each class, the per share NAV of each class will differ.
General. 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, are valued at fair value as determined in
good faith by the Board. The Board will review the method of valuation on a
current basis. In making their good faith valuation of restricted securities,
the Board 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 (the Board
will revise this discount periodically if it believes that the discount 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.
New York Stock Exchange Closings. The holidays (as observed) on which
--------------------------------
the New York Stock Exchange is closed currently are: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
TAXES
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Dividends,
Distributions and Taxes."
Information set forth in the Prospectus and this SAI that relates to
federal taxation is only a summary of certain key federal tax considerations
generally affecting purchasers of shares of the Portfolios. The following is
only a summary of certain additional tax considerations generally affecting each
Portfolio and its shareholders that are not described in the Prospectus. No
attempt has been made to present a complete explanation of the federal tax
treatment of the Portfolios or the implications to shareholders, and the
discussions here and in each Portfolio's prospectus are not intended as
substitutes for careful tax planning. Accordingly, potential purchasers of
shares of the Portfolios are urged to consult their tax advisers with specific
reference to their own tax circumstances. In addition, the tax discussion in the
Prospectus and this SAI is based on tax law in effect on the date of the
Prospectuses and
68
<PAGE>
this SAI; such laws and regulations may be changed by legislative, judicial, or
administrative action, sometimes with retroactive effect.
Qualification as a Regulated Investment Company. Each Portfolio has
-----------------------------------------------
elected to be taxed as a regulated investment company under Subchapter M of 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) and at least 90% of
its tax-exempt income (net of expenses allocable thereto) 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
for the taxable year and will therefore count toward satisfaction of the
Distribution Requirement.
If a Portfolio has a net capital loss (i.e., an excess of capital
losses over capital gains) for any year, the amount thereof may be carried
forward up to eight years and treated as a short-term capital loss which can be
used to offset capital gains in such future years. As of March 31, 1999, the EMD
Portfolio, High Yield Portfolio, Money Market Portfolio, Focus List Portfolio
and Balanced Portfolio had capital loss carryforwards of $780,615, $175,885,
$34,543, $653,420 and $5,846, respectively, each of which expire in 2007. Under
Code Sections 382 and 383, if a Portfolio has an ownership change, then the
Portfolio's use of its capital loss carryforwards in any year following the
ownership change will be limited to an amount equal to the net asset value of
the Portfolio immediately prior to the ownership change multiplied by the long-
term tax-exempt rate (which is published monthly by the Internal Revenue Service
(the "IRS")) in effect for the month in which the ownership change occurs (the
rate for May, 1999 is 4.82%). The Portfolios will use their best efforts to
avoid having an ownership change. However, because of circumstances which may be
beyond the control or knowledge of a Portfolio, there can be no assurance that a
Portfolio will not have, or has not already had, an ownership change. If a
Portfolio has or has had an ownership change, then any capital gain net income
for any year following the ownership change in excess of the annual limitation
on the capital loss carryforwards will have to be distributed by the Portfolio
and will be taxable to shareholders as described under "Portfolio
Distributions," below.
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 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
(including municipal obligations) 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 while 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
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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), generally will 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 such gain that is treated as ordinary
income 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 on the type of
instrument at issue, reduced by the sum of: (1) prior inclusions of ordinary
income items from the conversion transaction and (2) the capitalized interest on
acquisition indebtedness under Code Section 263(g). However, if a Portfolio has
a built-in loss with respect to a position that becomes a part of a conversion
transaction, the character of such loss will be preserved upon a subsequent
disposition or termination of the position. No authority exists that indicates
that the character of the income treated as ordinary under this rule will not
pass through to the Portfolios' 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 (as applicable, depending
on the type of the Portfolio involved) 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 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 a 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 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 Section 1256 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 previously was
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
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year-end deemed sale of such Section 1256 Contracts) generally is 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 enter into notional principal contracts, including
interest rate swaps, caps, floors, and collars. Treasury Regulations provide,
in general, that the net income or net deduction from a notional principal
contract for a taxable year is included in or deducted from gross income for
that taxable year. The net income or deduction from a notional principal
contract for a taxable year equals the total of all of the periodic payments
(generally, payments that are payable or receivable at fixed periodic intervals
of one year or less during the entire term of the contract) that are recognized
from that contract for the taxable year and all of the non-periodic payments
(including premiums for caps, floors, and collars) that are recognized from that
contract for the taxable year. No portion of a payment by a party to a notional
principal contract is recognized prior to the first year to which any portion of
a payment by the counterparty relates. A periodic payment is recognized ratably
over the period to which it relates. In general, a non-periodic payment must be
recognized over the term of the notional principal contract in a manner that
reflects the economic substance of the contract. A non-periodic payment that
relates to an interest rate swap, cap, floor, or collar is recognized over the
term of the contract by allocating it in accordance with the values of a series
of cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or, in the case of a swap, under an alternative method contained in the
proposed regulations and, in the case of a cap or floor, under an alternative
method which the IRS may provide in a revenue procedure).
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 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 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 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
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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, a
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 (provided
that, as to each issuer, the Portfolio has not invested more than 5% of the
value of the Portfolio's total assets in securities of each such issuer and the
Portfolio does not hold more than 10% of the outstanding voting securities of
each 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. For purposes of asset diversification testing, obligations
issued or guaranteed by certain 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 a 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
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible
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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 taxable income for
the 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 )). (Tax-exempt interest on
municipal obligations is not subject to the excise tax.) The balance
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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 calculating the excise tax, a regulated investment
company: (1) reduces 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)
excludes 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 the company's
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 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. Distributions
attributable to dividends received by a Portfolio from domestic corporations
will qualify for the 70% dividends-received deduction for corporate shareholders
only to the extent discussed below. Distributions attributable to interest
received by the Portfolios will not, and distributions attributable to dividends
paid by a foreign corporation generally should not, qualify for the dividend-
received deduction.
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): (i) any day more than 45 days (or 90 days in the case of
certain preferred stock) after the date on which the stock becomes ex-dividend
and (ii) 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 the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. 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). With respect to the
Money Market Portfolio, International Equity Portfolio and the EMD Portfolio,
only an insignificant
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portion of the Portfolio will be invested in stock of domestic corporations;
therefore the ordinary dividends distributed by the Portfolio generally will not
qualify for the dividends-received deduction for corporate shareholders.
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. If net capital gain is distributed and designated
as a capital gain dividend, it will be taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder has held his or
her 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% of the capital gain recognized upon a
Portfolio's disposition of domestic qualified small business stock will be
subject to tax.
Conversely, if a Portfolio elects to retain its net capital gain, the
Portfolio will be subject to tax 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.
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 non-corporate 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, corporate shareholders generally will be required to take the
full amount of any dividend received from a Portfolio into account (without a
dividends-received deduction) in determining their adjusted current earnings.
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 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 the
Portfolio's 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 credit rules.
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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 Portfolio (or of 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, recognized net capital gain, 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 such
distributions 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 a month will be
deemed to have been received by the shareholders (and made by a 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.
Each 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 report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the Portfolio that
it is not subject to backup withholding or is an exempt recipient (such as a
corporation).
Sale or Redemption of Shares. The Prime Money Market Portfolio seeks
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to maintain a stable net asset value of $1.00 per share; however, there can be
no assurance that the Money Market Portfolios will be able to maintain such
value. If the net asset value varies from $1.00 per share, and for all the
Portfolios other than the Prime Money Market Portfolio, 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 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 a 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. However, any capital loss arising from the sale or redemption of
shares held for six months or less will be 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 Portfolio or another fund at a
reduced sales load pursuant to a right acquired in connection with the
acquisition of
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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 such shares but
shall be treated as incurred on the acquisition of the subsequently acquired
shares.
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 a 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 such 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 a foreign shareholder in the International
Equity Portfolio, S&P STARS Portfolio or Focus List Portfolio 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 such gross income or a credit against the U.S. withholding tax for the
foreign shareholder's pro rata share of such foreign taxes which it is treated
as having paid. Such a 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 the 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 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, a Portfolio may be
required to withhold U.S. federal income tax at a 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.
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 SAI. 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.
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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.
DIVIDENDS -- MONEY MARKET PORTFOLIO
The Money Market 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 Trust 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 Trust uses its best efforts to maintain the NAV of the Money
Market Portfolio at $1.00. As a result of a significant expense or realized or
unrealized loss incurred by the Portfolio, the Portfolio's NAV may fall below
$1.00.
PORTFOLIO TRANSACTIONS
Information in this section relating to the portfolio turnover of, and
brokerage commissions paid by, the EMD Portfolio as of March 31, 1999 represent
the portfolio turnover of, and brokerage commissions paid by, the Portfolio's
predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
Money Market Portfolio. Subject to the general control of the Board,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Money Market
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 Trust 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 Money Market 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 Board 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 Money Market Portfolio are made
independently from those for another of the other Portfolios or other investment
company series or accounts managed by the
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Adviser. Such other accounts 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 accounts, 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 account, 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 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 accounts in order to obtain best execution.
The Money Market 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 of their
affiliated persons (as defined in the 1940 Act), except as permitted by the SEC.
In addition, with respect to such transactions, securities, deposits and
agreements, the Portfolio will not give preference to service providers with
which the Portfolio enters into agreements.
The Money Market 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.
Fixed Income Portfolios. BSAM assumes general supervision over
placing orders on behalf of each Portfolio for the purchase or sale of
investment securities. Purchases and sales of portfolio securities usually are
principal transactions. Fixed Income Portfolio securities ordinarily are
purchased directly from the issuer or from an underwriter or a market maker for
the securities. Usually no brokerage commissions are paid by the Fixed Income
Portfolios 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. Fixed Income Portfolio
transactions are allocated to various dealers by its portfolio managers in their
best judgment.
Equity Portfolios. The Adviser 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 the Adviser'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 the Adviser'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 the Adviser and the Adviser'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 the Adviser
determines in good faith that such commission is reasonable in terms of the
transaction or the overall responsibility of the Adviser to a 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 the Adviser 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 the Adviser 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
78
<PAGE>
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 the Adviser being engaged simultaneously in the purchase or sale
of the same security. Certain of the Adviser'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
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. Portfolio turnover may vary from year to year as
well as within a year. The following table shows the portfolio turnover rate
for each Portfolio for the last three fiscal years ended March 31.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income 107% 245% 263%
- ---------------------------------------------------------------------------------------------------------------
High Yield 102% 140%* N/A
- ---------------------------------------------------------------------------------------------------------------
EMD 82% 129% 223%
- ---------------------------------------------------------------------------------------------------------------
S&P STARS 76% 173% 220%
- ---------------------------------------------------------------------------------------------------------------
Insiders Select Fund 100% 116% 128%
- ---------------------------------------------------------------------------------------------------------------
Large Cap 38% 62% 137%
- ---------------------------------------------------------------------------------------------------------------
Small Cap 84% 90% 57%
- ---------------------------------------------------------------------------------------------------------------
Focus List 84% 29%** N/A
- ---------------------------------------------------------------------------------------------------------------
Balanced 46% 13%** N/A
- ---------------------------------------------------------------------------------------------------------------
International Equity 115% 3%** N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* From January 2, 1998 (commencement of investment operations) to March 31,
1998.
** From December 27, 1997 (commencement of investment operations) to March 31,
1998.
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 portfolio 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 SEC thereunder, the Board has
determined that transactions for each Portfolio may be executed through Bear
Stearns if, in the judgment of the Adviser, 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, Bear Stearns may directly execute such
transactions for each Portfolio on the floor of any national securities
exchange, provided (i) the Board has expressly authorized Bear Stearns to effect
such transactions, and (ii) Bear Stearns annually advises the Board of the
aggregate compensation it earned on such transactions. Over-the-counter
purchases and
79
<PAGE>
sales are transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere.
The following table shows the total brokerage commissions that each
Portfolio paid during the last three fiscal years ended March 31 (including the
amount paid to Bear Stearns) For the fiscal year ended March 31, 1999, the
table also shows the percentage of total commissions paid to Bear Stearns and
commissions paid as a percentage of total transactions. No brokerage
commissions were paid by the Money Market or Income Portfolios for the following
periods.
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
% paid to % of total
Bear Stearns transactions
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Yield
Total $ 3,600 $ 0 N/A
----- ---------
(Paid to Bear Stearns) ($900) 25.00% 0.44% ($0)
- ---------------------------------------------------------------------------------------------------------------------------
EMD
Total $ 2,972 $ 0 $ 0
-----
(Paid to Bear Stearns) ($0) 0% 0.26% ($0) ($0)
- ---------------------------------------------------------------------------------------------------------------------------
S&P STARS
Total $ 780,970 $ 521,114 $ 474,679
-----
(Paid to Bear Stearns) ($500,570) 64.10% 0.18% ($305,271) ($368,764)
- ---------------------------------------------------------------------------------------------------------------------------
Insiders Select
Total $ 161,821 $ 59,364 $ 39,790
-----
(Paid to Bear Stearns) ($15,902) 9.83% 0.19% ($12,445) ($8,925)
- ---------------------------------------------------------------------------------------------------------------------------
Large Cap
Total $ 23,164 $ 26,799 $ 59,523
-----
(Paid to Bear Stearns) ($1,602) 6.92% 0.14% ($522) ($1,300)
- ---------------------------------------------------------------------------------------------------------------------------
Small Cap
Total $ 120,832 $ 302,476 $ 102,411
-----
(Paid to Bear Stearns) ($3,540) 2.93% 0.27% ($1,728) ($9,000)
- ---------------------------------------------------------------------------------------------------------------------------
Focus List
Total $ 23,472 $ 8,274* N/A
-----
(Paid to Bear Stearns) ($23,472) 100.00% 0.16% ($8,238)
- ---------------------------------------------------------------------------------------------------------------------------
Balanced
Total $ 12,605 $ 5,528* N/A
-----
(Paid to Bear Stearns) ($5,688) 45.12% 0.16% ($2,598)
- ---------------------------------------------------------------------------------------------------------------------------
International Equity
Total $ 67,305 $ 16,474* N/A
-----
(Paid to Bear Stearns) ($259) 0.38% 0.24% ($0)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
- -------------------------------------------------------------------------------
* From December 29, 1997 (commencement of investment operations) to March 31,
1998.
The following table shows the percentage of commissions for which a
Portfolio received research services during the fiscal year ended March 31,
1999.
<TABLE>
<CAPTION>
1999
<S> <C>
- ------------------------------------------------
S&P STARS 20%
- ------------------------------------------------
Insiders Select Fund 83%
- ------------------------------------------------
Large Cap 66%
- ------------------------------------------------
Small Cap 87%
- ------------------------------------------------
Focus List 100%
- ------------------------------------------------
Balanced 14%
- ------------------------------------------------
International Equity 80%
- ------------------------------------------------
</TABLE>
* From December 27, 1997 (commencement of investment operations) to March 31,
1998.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Risk/Return Summary --
Performance." Performance information in this section relating to the EMD
Portfolio as of March 31, 1999 represents the performance information of the
Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of
BSIT.
Money Market Portfolio. The "yield" and "effective yield" of the
Money Market Portfolio are calculated separately for each class of shares 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, according to the
following formula:
81
<PAGE>
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1
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
Money Market 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, Massachusetts 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 Money Market Portfolio's yield will fluctuate, and any quotation
of yield should not be considered as indicative of its future performance.
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.
Current Yield. The current yield for each class reflects the waiver
and reimbursement of certain fees and expenses by the investment adviser. The
current yield of a Fixed Income Portfolio is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD =2[(a - b + 1)6 - 1]
-----
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The following table shows the current yield for the 30-day period
ended March 31, 1999 for each class of shares of the Fixed Income Portfolios,
with and without waivers.
<TABLE>
<CAPTION>
Income High Yield EMD
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
With waivers Without With waivers Without With waivers Without
waivers waivers waivers
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 5.90% 2.78% 9.51% 8.73% 12.68% 6.14%
- ---------------------------------------------------------------------------------------------------------------
Class B 5.40% 2.11% 9.30% 8.49% 12.00% 5.46%
- ---------------------------------------------------------------------------------------------------------------
Class C 5.40% 2.11% 9.30% 8.49% 12.00% 5.46%
- ---------------------------------------------------------------------------------------------------------------
Class Y 6.40% 3.11% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Average annual total return of each Portfolio for the 1-, 5-, and 10-
year periods (or for periods of the Portfolio's operations) would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)/n/ = ERV
Where
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion).
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 NAV (maximum offering price in the case of Class A) per share
at the beginning of a stated period from the NAV 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 NAV (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 NAV 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.
83
<PAGE>
CODE OF ETHICS
BSAM, the Sub-Adviser (collectively the "Advisers") and the Trust, on
behalf of each Portfolio, has adopted a Code of Ethics, that establishes
standards by which certain access persons of the Trust must abide relating to
personal securities trading conduct. Under each Adviser's Code of Ethics,
access persons which include, among others, trustees and officers of the Trust
and employees of the Advisers, 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 Trust or the applicable Adviser, as the
case may be, 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 Trust or the applicable Adviser, as the
case may be. Certain transactions are exempt from item (1) of the previous
sentence, including: (1) in the case of BSAM's Code of Ethics, 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 of BSAM are required by the Code of Ethics to file quarterly reports of
personal securities investment transactions. Access persons of the Sub-Adviser
are required to preclear securities transactions for all non-exempt securities
and transactions. 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 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 TRUST
S&P STARS Portfolio.
BSAM has the right to use the S&P, Standard & Poor's and STARS
trademarks for a fee in connection with the management of mutual funds and
access to STARS through S&P's publicly available subscription service. Bear
Stearns and S&P entered into a License Agreement dated October 1, 1994 that,
among other things, (i) grants Bear Stearns the non-exclusive right 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) gives S&P the right to
terminate the Agreement if Bear Stearns breaches its material terms, S&P ceases
to publish STARS, legislative or regulatory changes negatively affect S&P's
ability to license its trade names or trademarks, or certain litigation, (iii)
provides that Bear Stearns will pay to
84
<PAGE>
S&P annual license fees based on a percentage of the net assets of any
investment companies subject to the Agreement and (iv) provides for a partial
reduction of the license fees to offset certain marketing expenses incurred by
Bear Stearns in connection with the Portfolio.
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, including industry and macroeconomic conditions
and a company's operations, balance sheet, ability to finance growth,
competitive market advantages, earnings per share growth and strength of
management.
"Standard & Poor's(R)," "S&P(R)," and "STARS(R)" are trademarks of
Standard & Poor's and have been licensed for use by Bear Stearns. The S&P STARS
Portfolio is not sponsored, managed, advised, sold or promoted by S&P.
Focus List Portfolio.
The Adviser may be prohibited from buying an attractive stock in the
Focus List for legal reasons and thus miss an investment opportunity.
Current members of the Focus List Committee are Kathryn Booth and
Elizabeth Mackay, CFA. Ms. Booth is the Director of Global Equity Research and
a Senior Managing Director of Bear Stearns. She is a member of the Investment
Committee and co-chairperson of the Stock Selection Committee. Ms. Booth also
manages the Bear Stearns research department's Model Portfolio. Ms. Mackay is a
Managing Director and the Chief Investment Strategist for Bear Stearns. Her
focus is domestic financial markets. Ms. Mackay determines Bear Stearns'
overall asset allocation and advises on market trends and specific investment
themes.
General.
The Trust 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 Trust 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 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. Shareholders will vote in the
aggregate and not by class, except as otherwise required by law. Portfolio
shares have no preemptive, subscription or conversion rights and are freely
transferable.
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 Trust 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
85
<PAGE>
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations, a possibility which the Adviser
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 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 Trust," 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 Board has authorized the
creation of eleven Portfolios. All consideration received by the Trust for
shares of a Portfolio and all assets in which such consideration is invested
will belong to that Portfolio (subject only to the rights of creditors of the
Trust) and will be subject to the liabilities related thereto. The assets
attributable to, and the expenses of, a Portfolio (and as to classes within the
Portfolio) are treated separately from those of the other Portfolios (and
classes). The Trust has the ability to create, from time to time, new
Portfolios 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 Trust, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
Portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, Rule 18f-2 exempts the
selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The term "majority of the outstanding shares" of a 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.
The Trust will send annual and semi-annual financial statements to all
its shareholders.
As of July 2, 1999, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of Portfolio shares. Unless
otherwise noted, the Trust believes that the following information reflects
record ownership only. 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. Accordingly,
Bear Stearns may be deemed to be a control person of the following Portfolio
classes, because it beneficially owns more than 25% of that Portfolio class's
voting securities: Balanced Portfolio, Class B and C; and International Equity
Portfolio, Class B and C.
86
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio and class Name and address Percentage
owned
- --------------------------------------------------------------------------------------------------------
Money Market Portfolio, Bear Stearns Securities Corp. 19.93%
Class Y FBO FBO 049-4 1205-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 15.94%
FBO FBO 049-41206-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Custodial Trust Company 12.43%
101 Carnegie Center
Princeton, NJ 08540
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.97%
FBO FBO 320-17266-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.09%
FBO 0494122013
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Income Portfolio, Class A Bear Stearns Securities Corp. 17.49%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Dorothy J. Pintar 5.65% (beneficial
140 Country View Drive ownership)
Robinson Twp, PA 15136-1251
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.29%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11291-3859
- --------------------------------------------------------------------------------------------------------
Income Portfolio, Class B Bear Stearns Securities Corp. 13.59%
FBO 130-45003-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
First Albany Corporation 11.25%
A C 5976-5265 (beneficial
FBO James A. Moran Jr. ownership)
30 South Pearl Street
Albany, NY 12207
- --------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
<TABLE>
<S> <C> <C>
Wexford Clearing Services Corp. FBO 5.30% (beneficial
Enid M. Frandzel Trustee ownership)
Frandzel Family Trust
UA DTD 03/07/96
22960 Cass Avenue
Woodland Hills, CA 91364-3917
- --------------------------------------------------------------------------------------------------------
Income Portfolio, Class C Bear Stearns Securities Corp. 8.56%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.40%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Income Portfolio, Class Y Bear Stearns Securities Corp. 15.79%
FBO 049-40863-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 11.59%
FBO FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 11.32%
FBO FBO 051-98474-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 9.93%
FBO 051-35282-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 9.18%
FBO 046-03216-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.56%
FBO 049-40716-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE>
<TABLE>
<S> <C> <C>
High Yield Portfolio, Class A Mark Pinto 9.42%
Trust Fox & Co (beneficial
DTD 12/16/67 ownership)
P.O. Box 976
New York, NY 10268
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.18%
FBO 220-23312-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
High Yield Portfolio, Class C Bear Stearns Securities Corp. 6.19%
FBO 720-57204-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
EMD Portfolio, Class A Bear Stearns Securities Corp. 12.79%
FBO 220-23312-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Northern Trust Co. 9.20%
FBO HFLP
PO Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.68%
FBO 820-11116-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.53%
FBO 102-00500-25
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 5.36%
FBO Spec. A/C. for Benefit of Customers,
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------
EMD Portfolio, Class B Lewco Securities Corp. 11.57%
FBO AC. H10-684246-1-01
34 Exchange Place, 4th Floor
Jersey City, NJ 07311
- --------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
<TABLE>
<S> <C> <C>
Dain Rauscher Custodian 5.32% (beneficial
Paul C. Goldsmith ownership
A/C. 3608-2770
Rollover IRA Account
10 Kent Way
Mill Valley, CA 94941
Dain Rauscher Inc. FBO 5.53% (beneficial
Wilbert E. Kellner Trustee ownership)
The Wilbert E. Kellner Trust
U A DTD 07-26-1990
863 Oracle Oak
Sunnyvale, CA 94086
- --------------------------------------------------------------------------------------------------------
S&P STARS Portfolio, Class Y Custodial Trust Company 79.98%
Attn: Jonathan Brown Acct./Ctrl
101 Carnegie Center
Princeton, NJ 08540
- --------------------------------------------------------------------------------------------------------
Insiders Select Fund, Class Y Bear Stearns Securities Corp. 10.67%
FBO 048-33878-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 8.10%
FBO 722-90359-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.62%
FBO 748-51026-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.50%
FBO 048-151146-28
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.01%
FBO 748-51683-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Large Cap Portfolio, Class A Bear Stearns Securities Corp. 18.79%
FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
<TABLE>
<S> <C> <C>
Large Cap Portfolio, Class B Raymond James Assoc. Inc. CSDN 7.71% (beneficial
Larry A. Lafranchi IRA ownership)
14 Wabanaki Way
Andover, MA 01810
- --------------------------------------------------------------------------------------------------------
Raymond James Assoc. Inc. CSDN 5.46% (beneficial
Edward D. Walsh Jr. IRA ownership)
6 Standish Circle
Andover, MA 01810
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.14%
FBO 905-98627-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Large Cap Portfolio, Class C Bear Stearns Securities Corp 7.12%
FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Large Cap Value, Class Y Strafe & Co. FAO Trust 15.91%
FBO Danielle Young (beneficial
DTD 8/21/90 6863471800 ownership)
PO Box 160
Westerville, OH 43086
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 7.91%
FBO FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 7.29%
FBO 051-37142-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 6.03%
FBO 049-41202-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.97%
FBO FBO 039-54877-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
<TABLE>
<S> <C> <C>
Small Cap Portfolio, Class Y Custodial Trust Company 24.12%
Attn: Jonathan Brown Acct/Cntrl
101 Carnegie Center
Princeton, NJ 08540
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.89%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Focus List Portfolio, Class A Bear Stearns Securities Corp 8.32%
FBO 001-00279-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Focus List Portfolio, Class B Bear Stearns Securities Corp 14.09%
FBO 001-00279-10 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Ed Blakey Investments LLC 10.61%
1314 Bay Ridge Drive (beneficial
Benton, LA 71006-3482 ownership)
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.43%
FBO 610-49812-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Focus List Portfolio, Class C Bear Stearns Securities Corp 18.80%
FBO 001-00279-10 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio, Class A Bear Stearns Securities Corp 17.06%
FBO 051-26132-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 16.07%
FBO 028-29991-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 15.27%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
<TABLE>
<S> <C> <C>
Balanced Portfolio, Class B Bear Stearns Securities Corp 33.72%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio, Class C Bear Stearns Securities Corp 48.00%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
First Clearing Corporation 12.90%
A C 4113-3712
Joe A. Dewberry
4265 County Road 268
Five Points, AL 36855-2801
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio Class Y Bear Stearns Securities Corp 18.08%
FBO 049-40122-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 13.94%
FBO 049-40474-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 13.75%
FBO 051-32810-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 10.48%
FBO 049-40526-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 9.93%
FBO 051-37445-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.74%
FBO FBO 051-37549-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
<TABLE>
<S> <C> <C>
International Equity Portfolio, Bear Stearns Securities Corp 24.76%
Class A FBO 037-13145-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 17.13% (beneficial
FBO 001-00317-14 ownership)
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 12.88%
FBO 049-40985-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 9.35%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.19%
FBO 226-00040-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.62%
FBO 037-13788-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
International Equity Portfolio, Bear Stearns Securities Corp 59.57%
Class B FBO 001-00317-14 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
International Equity Portfolio, Bear Stearns Securities Corp 65.73%
Class C FBO 001-00317-14 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- --------------------------------------------------------------------------------------------------------
</TABLE>
94
<PAGE>
CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT,
COUNSEL AND INDEPENDENT AUDITORS
CTC, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of
Bear Stearns, is the custodian for each Portfolio other than the EMD Portfolio.
Under a custody agreement, CTC holds each Portfolio's securities and keeps all
necessary accounts and records. For its services, each Portfolio pays CTC 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 that are payable
monthly.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, is the custodian of the EMD Portfolio's securities and cash and also
maintains the Portfolio's accounting records. Brown Brothers Harriman & Co. has
appointed sub-custodians from time to time to hold certain securities purchased
by the Portfolio in foreign countries and to hold cash and currencies for the
Portfolio.
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 participates in determining the investment
policies of any Portfolio or which securities are to be purchased or sold by any
Portfolio.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Trust.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, are the independent auditors of the Trust.
FINANCIAL STATEMENTS
The Trust's annual report to shareholders, and the annual report of
BSIT, with respect to the EMD Portfolio, for the fiscal year ended March 31,
1999 are separate documents supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference into this SAI.
95
<PAGE>
APPENDIX
The following describes ratings assigned to debt securities by S&P,
Moody's, Fitch IBCA, Duff and Thomson BankWatch.
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.
BB, B, CCC, CC and C. Debt rated in these categories is regarded, on
--------------------
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation, and C the highest degree of speculation. While
such debt likely will have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI. The rating CI is reserved for income bonds on which no interest
--
is being paid.
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. The D rating will also be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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.
S&P Commercial Paper Ratings
A-1. The designation A-1 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 an A-2 designation is
---
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
A-1
<PAGE>
Moody's Bond Ratings
Aaa. Bonds rated Aaa are judged to be of the best quality. They
---
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa. Bonds 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 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 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 that 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 characterizes bonds in this class.
B. Bonds that are rated B generally lack characteristics of the
-
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds which are rated Caa are of poor standing. Such is- sues
---
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 a 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 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.
A-2
<PAGE>
Moody's Commercial Paper Ratings
P-1. 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.
P-2. 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.
Fitch IBCA International Credit Ratings
Fitch IBCA's international credit ratings are applied to the spectrum
of corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and short-
term ratings assess its general creditworthiness on a senior basis. When applied
to specific issues and programs, these ratings take into account the relative
preferential position of the holder of the security and reflect the terms,
conditions, and covenants attaching to that security.
International credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
Fitch IBCA International Long-Term Credit Ratings
Investment Grade
----------------
AAA Highest credit quality. `AAA' ratings denote the lowest
---
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
--
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
-
credit risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
ratings.
A-3
<PAGE>
BBB Good credit quality. `BBB' ratings indicate that there is
---
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
-----------------
BB Speculative, "BB' ratings indicate that there is a possibility of
--
credit risk developing particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B Highly speculative, `B' ratings indicate that significant credit
-
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility.
----------
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates that
default of some king appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category
--------------
are based on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values are
highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated `DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.
Fitch IBCA International Short-Term Credit Ratings
A short term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
--
timely payment of financial commitments; they may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
--
of financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
--
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
-
commitments, plus vulnerability to near-term adverse changes in financial and
economic obligations.
A-4
<PAGE>
C High default risk. Default is a real possibility. Capacity for
-
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
-
Notes:
"+" or "-" may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the `AAA' long-
term rating category, to categories below `CCC', or to short-term ratings other
than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
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.
BB, B, CCC, DD, and DP. Debt that possesses one of these ratings is
----------------------
considered to be below investment grade. Although below investment 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 may be in default or have considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
A-5
<PAGE>
Duff Commercial Paper Ratings
Duff-1. 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.
Duff-2. 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.
Thomson BankWatch Bond Ratings
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.
BBB. The lowest investment-grade category; indicates an acceptable
---
capacity to repay principal and interest. "BBB" issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
BB. While not investment grade, the "BB" rating suggests that the
--
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B. Issues rated "B" show a higher degree of uncertainty and therefore
-
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
CCC. Issues rated "CCC" clearly have a high likelihood of default,
---
with little capacity to address further adverse changes in financial
circumstances.
CC. "CC" is applied to issues that are subordinate to other
--
obligations rated "CCC" and are afforded less protection in the event of
bankruptcy or reorganization.
D. In default
-
A-6
<PAGE>
PLUS (+) or MINUS (-). The ratings may include a plus or minus sign
---------------------
designation which indicates where within the respective category the issue is
placed.
Thomson BankWatch Short-Term Ratings
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:
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.
A-7
