<PAGE>
As filed via EDGAR with the Securities and Exchange Commission on May 14, 1999
Registration Nos. 33-84842
ICA No. 811-8798
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ________ [ ]
Post-Effective Amendment No. 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22 [X]
(Check appropriate box or boxes)
THE BEAR STEARNS FUNDS
(Exact Name of Registrant as Specified in Charter)
575 Lexington Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 272-2000
copy to:
Stephen A. Bornstein, Esq. Jay G. Baris, Esq.
Bear, Stearns & Co. Inc. Kramer Levin Naftalis & Frankel LLP
575 Lexington Avenue 919 Third Avenue
New York, New York 10022 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
THE BEAR STEARNS FUNDS
CROSS REFERENCE SHEET
Pursuant to Rule 485(a)
under the Securities Act of 1933
N-1A Item No. Location
- ------------ --------
Part A Prospectus Caption
- ------ ------------------
Item 1. Front and Back Cover Pages Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risk/Return Summary
Risks and Performance
Item 3. Risk/Return Summary: Fee Table Risk/Return Summary: Fees
and Expenses
Item 4. Investment Objectives, Principal Investments; Risk Factors
Investment Strategies and Related
Risks
Item 5. Management's Discussion of Fund's Not Applicable
Performance
Item 6. Management, Organization and Capital Management of the Portfolios
Structure
Item 7. Shareholder Information How the Portfolios Value
their Shares; Investing in
the Portfolios
Item 8. Distribution Arrangements Investing in the Portfolios;
Distribution Fees and
Shareholder Servicing Fees
Item 9. Financial Highlights Information Financial Highlights
- ii -
<PAGE>
Statement of Additional
Part B Information Caption
- ------ -----------------------
Item 10. Cover Page and Table of Contents Cover Page
Item 11. Fund History Table of Contents
Item 12. Description of the Fund and its Information About the Fund
Investments and Risks
Item 13. Management of the Fund Investment Objective and
Management Policies;
Appendix
Item 14. Control Persons and Principal Management of the Fund
Holders of Securities
Item 15. Investment Advisory and Other Information About the Fund
Services
Item 16. Brokerage Allocation and Other Management Arrangements;
Practices Custodian, Transfer and
Dividend Disbursing Agent,
Counsel and Independent
Auditors
Item 17. Capital Stock and Other Portfolio Transactions
Securities
Item 18. Purchase, Redemption and Pricing Not Applicable
of Shares
Item 19. Taxation of the Fund Management of the Fund;
Purchase and Redemption of
Shares; Determination of Net
Asset Value
Item 20. Underwriters Dividends, Distributions and
Taxes
Item 21. Calculation of Performance Data Cover Page
Item 22. Financial Statements Performance Information
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
- iii -
<PAGE>
THE BEAR STEARNS FUNDS
575 LEXINGTON AVENUE NEW YORK, NY 10022 1-800-447-1139
The Bear Stearns Funds
Fixed Income Funds
. Income Portfolio
. High Yield Total Return Portfolio
. Emerging Markets Debt Portfolio
Class A, B and C Shares
PROSPECTUS
_______, 1999
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 as an investment or determined
whether this Prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
<PAGE>
Each Portfolio described in this Prospectus is a series of The Bear Stearns
Funds, a registered open-end management investment company (the "Trust").
Table of Contents
RISK/RETURN SUMMARIES
Income Portfolio
High Yield Total Return Portfolio
Emerging Markets Debt Portfolio
Investments
Risk FACTORS
Management of the Portfolios
Investment Adviser
Portfolio Management Team
How the Portfolios Value THEIR Shares
Investing In The PORTFOLIOS
Investment Requirements
Choosing a Class of Shares
How the Trust Calculates Sales Charges
Sales Charge Reductions and Waivers
How to Buy Shares
How to Sell Shares
Exchanges
Shareholder Services
Dividends, Distributions and Taxes
Distribution Fees and Shareholder Servicing Fees
Additional Information
Financial Highlights
It is important to keep in mind that mutual fund shares are:
. not deposits or obligations of any bank
. not insured by the FDIC
. subject to investment risk, including possible loss of the amount invested
2
<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. and foreign companies and governments or their
political subdivisions, agencies or instrumentalities. The Income Portfolio may
invest in:
. Bonds, debentures and notes
. Money market instruments (including bank obligations, commercial
paper, other short-term corporate debt, and repurchase agreements)
. Mortgage-related securities (including interest-only and principal-
only stripped securities)
. Asset-backed securities
. Convertible debt obligations
. Municipal obligations (up to 25% of assets)
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 and having a minimum of $50 million in debt
outstanding at the time of inclusion in the 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. The Income Portfolio usually invests in a portfolio of
securities with a dollar-weighted average maturity ranging from four to thirteen
years and a duration between 65% and 135% of that of the Salomon BIG Index.
The Income Portfolio may, but is not required to, use derivatives to reduce risk
and enhance return, including futures contracts and related options (including
interest rate futures contracts and related options), and options on securities
and financial indices.
Quality
. Investment-Grade Securities. The Income Portfolio must invest at least 75%
---------------------------
of its net assets in investment-grade securities, that is, they must be rated
no lower than Baa by Moody's Investors Service ("Moody's"), BBB by Standard &
Poor's ("S&P"), or the equivalent by other nationally recognized statistical
ratings organizations ("NRSROs"), or, if unrated, deemed to be comparable by
Bear Stearns Asset Management Inc., each Portfolio's investment adviser
("BSAM" or the "Adviser").
3
<PAGE>
. Below-Investment-Grade Securities ("Junk Bonds"). The Income Portfolio may
------------------------------------------------
Invest up to 25% of its net assets in securities that are rated no lower than
B by Moody's or S&P, or the equivalent by any other NRSRO, or, if unrated,
deemed to be comparable by the Adviser. These securities may be considered
speculative and subject to higher risk of default than investment-grade
securities.
. Short-Term Obligations. 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 Investors Service or Duff & Phelps.
See "Risk Factors - Risks of debt securities" in this Prospectus and the
Appendix to the Statement of Additional Information ("SAI").
Principal Risks
The Income Portfolio is subject to the following principal risks, more fully
described in "Risk Factors." All or some of these risks may adversely affect
the Income Portfolio's net asset value, yield and/or total return:
. The rate of inflation increases and interest rates may rise, causing the
Income Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or is not
executed effectively
. An issuer's credit quality may be downgraded
. Below-investment-grade securities are more likely to decline in value due
to defaults or bankruptcies than investment-grade securities
. The Income Portfolio may have to reinvest interest or sale proceeds at
lower rates
. The average life of a mortgage-related security may change
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks, lack
of reliable information, and the risks that a foreign government may take
over assets
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions as
expected
Who may want to invest in the Income Portfolio
The Income Portfolio may be appropriate for investors who:
. seek relatively high current income
. want to diversify an equity portfolio
. are willing to accept share price and dividend fluctuations
The Income Portfolio may not be appropriate for investors who:
---
. are not willing to take any risk that they may lose money on their
investment
. want potential growth over time
4
<PAGE>
PERFORMANCE
The bar chart and table below show the risks of investing in the Income
Portfolio by showing changes in the performance of its Class A shares as of
December 31, 1998 from year to year since inception. 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 table
also compares the Income Portfolio's performance to that of the Lipper A-Rated
Corporate Bond Index, a measure of the performance of the 30 largest fixed
income mutual funds that invest in debt rated no lower than A. The figures
shown assume reinvestment of dividends and distributions. 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 chart and the table do 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 less than those shown.
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 were managed to realize high current income.
***Past performance is not necessarily an indication of future results.***
Bar Chart
1995: ___.__% (1)
1996: ___.__%
1997: ___.__%
1998: ___.__% (2)
(1) Commenced investment operations on April 5, 1995. Return is not annualized.
(2) The Income Portfolio's year-to-date return as of June 30, 1999 was ___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception
<S> <C> <C>
Income Portfolio - Class A ___.__% ___.__%*
Income Portfolio - Class B ___.__% ___.__%*
Income Portfolio - Class C ___.__% ___.__%**
- ------------------------------------------------------------------------------------------------
Salomon BIG Index ___.__% ___.__%
Lipper A-Rated Corporate Bond Index ___.__% ___.__%
</TABLE>
* Class A and B shares commenced operations on April 5, 1995.
** Class C shares commenced operations on February 2, 1998.
5
<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
- -------------------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
- -------------------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None None None
- -------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge
(load) (as a percentage of offering price) None (1) 5.00% (2) 1.00%
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
(1) Although there is no initial sales charge for purchases of $1 million or
more of Class A shares, the Trust charges you a CDSC of 1% if you sell your
shares within one year of purchase.
(2) The Class B deferred sales charge declines over time. See "How the Trust
Calculates Sales Charges --Class B Shares."
The Annual Portfolio Operating Expenses table below illustrates the net
operating expenses that you will incur as a shareholder of the Income Portfolio.
The Income Portfolio pays these expenses from its assets.
Annual Portfolio Operating Expenses
<TABLE>
<CAPTION>
Class A Class B Class C
------------------- ------------------- -------------------
<S> <C> <C> <C>
Management Fees 0.45% 0.45% 0.45%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses (1) __.___% __.___% __.___%
Total Portfolio Operating Expenses __.___% __.___% __.___%
Fee Waiver and Expense Reimbursement (__.___%) (__.___%) (__.___%)
Net Expenses (2) 0.80% 1.45% 1.45%
==== ==== ====
</TABLE>
(1) Includes a shareholder servicing fee of 0.25%.
(2) The expenses shown are based on historical expenses of the Income Portfolio
adjusted to reflect current expenses. The Adviser has agreed to waive its
fee and/or reimburse certain expenses until at least March 31, 2000 so that
the Income Portfolio's net expenses do not exceed the amounts 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:
. you invest $10,000 in the Income Portfolio
. your investment returns 5% each year
. the Income Portfolio's operating expenses remain the same*
6
<PAGE>
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 --
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
If you do not sell your shares at the end of each period --
---
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
* This Example assumes that net portfolio operating expenses will equal 0.80%
for Class A and 1.45% for Class B and C shares until March 31, 2000 and
thereafter will equal __.___% for Class A, __.___% for Class B and __.___%
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.
7
<PAGE>
HIGH YIELD TOTAL RETURN PORTFOLIO
RISK/RETURN SUMMARY
Investment Objective
Total return through high current income and capital appreciation.
Principal Strategies
The High Yield Total Return Portfolio (the "High Yield Portfolio") will invest
in high yield securities and issuers that the Adviser believes to be positioned
for gradual or substantial credit improvement through a process that
. uses Bear Stearns' "High Yield Query System" to screen more than
2,000 issuers for companies that meet initial investment criteria
. identifies positive catalysts affecting the issuer's financial
condition that may lead to price appreciation
. includes communicating with senior management to assess its
commitment to improving credit quality
. identifies securities whose issuers have above-average prospects for
superior returns
Under normal market conditions, 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):
. 25% in foreign securities
. 25% in zero-coupon securities, pay-in-kind bonds or discount
obligations
. 20% in distressed securities
. 20% in mortgage-related securities
. 15% in loans and participations
. 10% in convertible securities
The High Yield Portfolio may invest the remaining 20% of its total assets in any
other securities consistent with its objective, including higher-rated fixed-
income securities, common stocks and other equity securities.
Generally, the High Yield Portfolio's average weighted maturity will range from
three to twelve years.
The High Yield Portfolio may, but is not required to, use derivatives to reduce
risk and enhance return, including futures contracts and related options
(including interest rate futures contracts and related options) and options on
securities and financial indices.
8
<PAGE>
Quality
. "High yield fixed-income securities" ("junk bonds") are those
securities that are rated Ba or lower by Moody's, or BB or lower by
S&P or comparably rated by any other NRSRO, or unrated securities
that the Adviser determines to be comparable. Securities rated in
this category are considered speculative and subject to higher risk
of default than higher-rated securities.
. 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. High yield securities in this category are
highly speculative and may be in default of principal and/or interest
payments at the time of purchase.
See "Risk Factors - Risks of debt securities" in this Prospectus and the
Appendix to the SAI.
Principal Risks
The High Yield Portfolio is subject to the following principal risks, more fully
described in "Risk Factors." All or some of these risks may adversely affect
the High Yield Portfolio's net asset value, yield and/or total return:
. High yield securities may decline in value due to defaults or
bankruptcies
. Portfolio investments that are already in default when acquired may
experience further market value declines or become worthless
. The rate of inflation increases and interest rates may rise, causing
the High Yield Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or may not
be executed effectively
. An issuer's credit quality may be downgraded
. The High Yield Portfolio may have to reinvest interest or sale
proceeds at lower rates
. The average life of a mortgage-related security may change
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, and the risks that a foreign government
may take over assets
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions
as expected
9
<PAGE>
Who may want to invest in the High Yield Portfolio
The High Yield Portfolio may be appropriate for investors who:
. seek high current income coupled with investment growth
. are willing to accept the greater risks associated with high yield
issues in exchange for their higher yield and total return potential
when compared to higher-rated corporate and U.S. Government bonds
The High Yield Portfolio may not be appropriate for investors who:
---
. are seeking a market-timing vehicle
. are not willing to take any risk that they may lose money on their
investment
. seek stability of the value of their investment
PERFORMANCE
The bar chart and table below show the risks of investing in the High Yield
Portfolio by showing changes in the performance of its Class A shares as of
December 31, 1998 since inception. The table shows how the High Yield
Portfolio's average annual total return for one year and since the date of
inception compared to the Credit Suisse First Boston High Yield Bond 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 assume reinvestment of dividends and distributions. 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 chart and the table do 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 less than those shown.
***Past performance is not necessarily an indication of future results.***
Bar Chart
1998: ___.__% (1) (2)
(1) Commenced investment operations on January 2, 1998. Return is not
annualized.
(2) The High Yield Portfolio's year-to-date return as of June 30, 1999 was
___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
10
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
<S> <C> <C>
High Yield Portfolio - Class A ___.__% ___.__%
- -----------------------------------------------------------------------------------------
High Yield Portfolio - Class B ___.__% ___.__%
- -----------------------------------------------------------------------------------------
High Yield Portfolio - Class C ___.__% ___.__%
- -----------------------------------------------------------------------------------------
Credit Suisse First Boston High Yield Bond Index ___.__% ___.__%
- -----------------------------------------------------------------------------------------
Lipper High Yield Bond Fund Index ___.__% ___.__%
</TABLE>
Class A, B and C commenced operations on January 2, 1998.
11
<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
- -------------------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
- -------------------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None None None
- -------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge
(load) (as a percentage of offering price) None (1) 5.00% (2) 1.00%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
(1) Although there is no initial sales charge for purchases of $1 million or
more of Class A shares, the Trust charges you a CDSC of 1% if you sell your
shares within one year of purchase.
(2) The Class B deferred sales charge declines over time. See "How the Trust
Calculates Sales Charges --Class B Shares."
The Annual Portfolio Operating Expenses table below illustrates the net
operating expenses that you will incur as a shareholder of the High Yield
Portfolio. The High Yield Portfolio pays these expenses from its assets.
Annual Portfolio Operating Expenses
<TABLE>
<CAPTION>
Class A Class B Class C
------------------- ------------------- -------------------
<S> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses (1) __.___% __.___% __.___%
Total Portfolio Operating Expenses __.___% __.___% __.___%
Fee Waiver and Expense Reimbursement (__.___%) (__.___%) (__.___%)
---- ---- ----
Net Expenses (2) 1.00% 1.65% 1.65%
==== ==== ====
</TABLE>
(1) Includes a shareholder servicing fee of 0.25%.
(2) The expenses shown are based on historical expenses of the High Yield
Portfolio adjusted to reflect current expenses. The Adviser has agreed to
waive its fee and/or 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.
12
<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:
. you invest $10,000 in the High Yield Portfolio
. your investment returns 5% each year
. 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 --
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
If you do not sell your shares at the end of each period --
---
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
* This Example assumes that net portfolio operating expenses will equal 1.00%
for Class A and 1.65% for Class B and C shares until March 31, 2000 and
thereafter will equal __.___% for Class A, __.___% for Class B and __.___%
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.
13
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
RISK/RETURN SUMMARY
Investment Objective
High current income by investing primarily in Debt Obligations (as defined
below) of issuers located in Emerging Countries (as defined below). The
Emerging Markets Debt Portfolio's secondary objective is capital appreciation.
Principal Strategies
Under normal market conditions, the Emerging Markets Debt Portfolio ("Emerging
Markets 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 Emerging Markets Portfolio may invest up to
10% of its total assets in convertible securities.
The Emerging Markets 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 Emerging Markets 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 Emerging Markets Portfolio, the Adviser will
emphasize investments in countries that are making the most progress toward
sustainable economic growth with lower inflation.
The Emerging Markets Portfolio
. will invest at least 70% of its total assets in at least three
Emerging Countries
. may invest up to 40% of its total assets in any one country
. may invest up to 20% of its total assets in loans and participations
. may invest at least 30% of its total assets in Central and Latin
America
. may invest up to 20% of its total assets in issuers that are not
---
considered to be in Emerging Countries
The Emerging Markets Portfolio may, but is not required to, use derivatives to
reduce risk and enhance return, including futures contracts and related options
(including interest rate futures contracts and related
14
<PAGE>
options), options on securities, financial indices and currencies, and forward
currency exchange contracts.
Currency. The Emerging Markets Portfolio primarily invests in a combination of
(a) high-yield U.S. dollar-denominated instruments and (b) local currency
instruments in Emerging Countries where the relationship between interest rates
and anticipated foreign exchange movements relative to the U.S. dollar are
expected to result in a high dollar rate of return. In addition to current
income, the Emerging Markets Portfolio also seeks capital appreciation from
interest rate and currency exchange fluctuations and improving credit quality.
The Emerging Markets Portfolio will invest at least 70% of its total assets in
U.S. dollar-denominated instruments. The Emerging Markets Portfolio may invest
up to 30% of its assets in Debt Obligations denominated in local currencies,
although the Emerging Markets 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 Emerging Markets 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 Emerging Markets
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Emerging Markets 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. See "Risk Factors - Risks of debt
securities" in this Prospectus and the Appendix to the SAI.
Principal Risks
The Emerging Markets Portfolio is subject to the following principal risks, more
fully described in "Risk Factors." All or some of these risks may adversely
affect the Emerging Markets Portfolio's net asset value, yield and/or total
return:
. Foreign securities issued in Emerging Countries generally experience
less liquidity and more volatility because the securities markets in
these countries have less trading volume and fewer participants than
established markets
. Inefficient settlement procedures in Emerging Countries may cause the
Emerging Markets Portfolio to miss investment opportunities or be
exposed to liability for failure to deliver securities
. The Emerging Markets Portfolio may experiences losses from improper
trading activities in Emerging Countries that are subject to less
government regulation than in the United States
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, fluctuations in currency exchange
rates, and the risks that a foreign government may take over assets,
restrict the ability to exchange currency or restrict the delivery of
securities
. The rate of inflation increases and interest rates may rise, causing
the Emerging Markets Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or may not
be executed effectively
. The Emerging Markets Portfolio may have to reinvest interest or sale
proceeds at lower rates
15
<PAGE>
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions
as expected
. 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
In addition, the Emerging Markets Portfolio is a non-diversified mutual fund.
As a non-diversified fund, the Emerging Markets Portfolio may devote a larger
portion of its assets to the securities of a single issuer than if it were
diversified.
Who may want to invest in the Emerging Markets Portfolio
The Emerging Markets Portfolio may be appropriate for investors who:
. seek high current income
. want to add an emerging markets fixed income component to an existing
portfolio
. are willing to accept the relatively greater price volatility of
investments in these markets in exchange for their potentially higher
returns compared to other fixed income investments
The Emerging Markets Portfolio may not be appropriate for investors who:
---
. are not willing to accept the risks associated with foreign
securities markets or currency fluctuation
. are investing for the short term or need current income
. are not willing to take any risk that they may lose money on their
investment
. want a diversified portfolio
. seek stability of the value of their investment
PERFORMANCE
The bar chart and table below show the risks of investing in the Emerging
Markets Portfolio by showing changes in the performance of its Class A shares as
of December 31, 1998 from year to year since inception. The table shows how the
Emerging Markets 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, a broad-based unmanaged index that represents the general
performance of emerging market debt mutual funds. The figures shown assume
reinvestment of dividends and distributions. 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
chart and the table do 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 less than those shown.
Each of the Portfolios is a series of the Trust, a series-type registered
investment company. Prior to __________ ___, 1999, the Emerging Markets
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 Emerging Markets Portfolio during the time that it was a
series of Bear Stearns Investment Trust and BSAM served as its investment
adviser.
16
<PAGE>
***Past performance is not necessarily an indication of future results.***
Bar Chart
1995: ___.__% (1)
1996: ___.__%
1997: ___.__%
1998: ___.__% (2)
(1) Return is not annualized. The Emerging Markets Portfolio's performance
prior to May 4, 1995 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 4, 1995.
(2) The Emerging Markets Portfolio's year-to-date return as of June 30, 1999
was ___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Portfolio - Class A ___.__% ___.__%*
- ----------------------------------------------------------------------------------------------------
Emerging Markets Portfolio - Class B ___.__% ___.__%**
- ----------------------------------------------------------------------------------------------------
Emerging Markets Portfolio - Class C ___.__% ___.__%+
- ----------------------------------------------------------------------------------------------------
Salomon Smith Barney Emerging Markets Debt Mutual Fund Index ___.__% ___.__%
</TABLE>
* The Adviser began managing Class A shares on May 4, 1995.
** Class B shares commenced operations on January 12, 1998.
+ Class C shares commenced operations on July 26, 1995.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Emerging Markets 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
- -------------------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None None None
- -------------------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None None None
- -------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge
(load) (as a percentage of offering price) None (1) 5.00% (2) 1.00%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* A broker or agent may charge additional fees on the purchase, sale or
exchange of Portfolio shares.
(1) Although there is no initial sales charge for purchases of $1 million or
more of Class A shares, the Trust charges you a CDSC of 1% if you sell your
shares within one year of purchase.
(2) The Class B deferred sales charge declines over time. See "How the Trust
Calculates Sales Charges --Class B Shares."
17
<PAGE>
The Annual Portfolio Operating Expenses table below illustrates the operating
expenses that you will incur as a shareholder of the Emerging Markets Portfolio.
The Emerging Markets Portfolio pays these expenses from its assets.
Annual Portfolio Operating Expenses
<TABLE>
<CAPTION>
Class A Class B Class C
------------------- ------------------- -------------------
<S> <C> <C> <C>
Management Fees (1) 1.00% 1.00% 1.00%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses (2) __.___% __.___% __.___%
Total Portfolio Operating Expenses __.___% __.___% __.___%
Fee Waiver and Expense Reimbursement (__.___%) (__.___%) (__.___%)
Net Expenses (3) 1.75% 2.40% 2.40%
==== ==== ====
</TABLE>
(1) Management fees are based on the Emerging Markets 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) Includes a shareholder servicing fee of 0.25%.
(3) The expenses shown are based on historical expenses of the Emerging Markets
Portfolio adjusted to reflect current expenses. The Adviser has agreed to
waive its fee and/or reimburse certain expenses until at least March 31,
2000 so that the Emerging Markets Portfolio's net expenses do not exceed the
amounts indicated above.
18
<PAGE>
EXAMPLE
This Example illustrates the cost of investing in the Emerging Markets Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Emerging Markets Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
. you invest $10,000 in the Emerging Markets Portfolio
. your investment returns 5% each year
. the Emerging Markets 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 --
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
If you do not sell your shares at the end of each period --
---
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A $_______ $_______ $_______ $_______
Class B $_______ $_______ $_______ $_____**
Class C $_______ $_______ $_______ $_______
</TABLE>
* This Example assumes that net portfolio operating expenses will equal 1.75%
for Class A and 2.40% for Class B and C shares until March 31, 2000 and
thereafter will equal __.___% for Class A, __.___% for Class B and __.___%
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.
19
<PAGE>
INVESTMENTS
Principal Investment Strategies
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, which measures the average
time in which a security will receive the present value of all interest and
principal payments as opposed to its term to maturity, which measures only the
time until final payment is due and does not take into account the security's
cash flows over time, including the effect of prepayments and interest rate
changes. 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.
High Yield Portfolio
Securities offering high current yield are generally issued by (1) rapidly
growing companies incurring debt to fund plant expansion or pay for acquisitions
and (2) 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.
Emerging Markets Portfolio
The Emerging Markets 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.
exhibit signs of improving economic fundamentals, e.g.,
development and expansion of local securities markets, stabilized or decreased
inflation rates, increased levels of exports, reversal of flight capital, de-
nationalization of state-controlled industries and infrastructure development.
The Emerging Markets 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 Emerging Markets 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 Emerging Markets Portfolio to
take advantage of changes in prevailing interest rates.
20
<PAGE>
Investments
This table summarizes some of the investments, described below, that each
Portfolio may use to achieve its investment objective.
<TABLE>
<CAPTION>
Income High Yield Emerging Markets
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-backed securities X X X
- ----------------------------------------------------------------------------------------------------
Brady bonds X X
- ----------------------------------------------------------------------------------------------------
Convertible securities X X X
- ----------------------------------------------------------------------------------------------------
Discount securities X X X
- ----------------------------------------------------------------------------------------------------
Distressed securities X X
- ----------------------------------------------------------------------------------------------------
Equity securities X X
- ----------------------------------------------------------------------------------------------------
Indexed securities X X
- ----------------------------------------------------------------------------------------------------
Loans X X
- ----------------------------------------------------------------------------------------------------
Mortgage-related securities X X X
- ----------------------------------------------------------------------------------------------------
Municipal obligations X
- ----------------------------------------------------------------------------------------------------
Repurchase agreements X X X
- ----------------------------------------------------------------------------------------------------
When-issued securities and X X X
forward commitments
- ----------------------------------------------------------------------------------------------------
</TABLE>
. 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.
. Brady bonds are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging
Countries in connection with sovereign debt restructurings, under a
plan introduced by former U.S. Treasury Secretary Nicholas Brady.
. 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 (1) higher
yields than common stocks, but lower yields than comparable non-
convertible securities, (2) less price fluctuation than the
underlying stock since they have fixed income characteristics, and
(3) potential for capital appreciation if the market price of the
underlying stock increases.
. 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
21
<PAGE>
are ordinary interest-paying debt securities with similar maturities.
. 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.
. Equity securities include foreign and domestic common or preferred
stocks, rights and warrants, and convertible or exchangeable debt
securities or preferred stock. To the extent a Portfolio invests in
equity securities, the Portfolio's overall yield may diminish.
. 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.
. 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.
. Mortgage-related securities represent interests in pools of mortgage
loans made by lenders like savings and loan institutions, mortgage
bankers, commercial banks and others.
. Municipal obligations are debt obligations issued by states,
territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and
instrumentalities. These securities also include industrial
development bonds issued by or on behalf of public authorities.
. 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 a week or less).
The difference between the purchase and resale prices generally
reflects the market interest rate for the term of the agreement.
. 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.
22
<PAGE>
Other Investment Strategies
[***Each Portfolio may invest defensively or hedge investments to protect
against a downturn.***]
. 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 or U.S. or foreign money market instruments.
For cash management, each Portfolio temporarily may hold cash (U.S.
dollars) and may invest all of its assets in high-quality U.S. or
foreign money market instruments.
For temporary defensive purposes or cash management, the Emerging
Markets Portfolio may hold foreign currencies or multinational
currency units.
. 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.
. Securities Lending. Each Portfolio may lend a portion of its
securities to financial institutions, which will generate income for
the Portfolio. The Income and High Yield Portfolios have appointed
Custodial Trust Company ("CTC"), an affiliate of the Adviser, as
securities lending agent, for which CTC receives a transaction fee.
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.
23
<PAGE>
Each Portfolio is subject to the following principal risks, except as noted.
General risks
. 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, a particular sector, or the entire
economy.
. 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.
. 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
. 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.
. 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.
. 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.
. 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, or
Moody's.
. Below-investment-grade securities ("junk bonds") may be more
susceptible to real or perceived adverse economic conditions, less
liquid, 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. 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.
24
<PAGE>
Risks of hedging or leverage transactions
. Correlation risk. Futures and options contracts 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 created 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 futures or
options contract hedge may not generate gains sufficient to offset
losses and may actually generate losses.
. Leverage risk is the risk associated with those techniques in which a
relatively small amount of money invested - through borrowing or
futures trading, for example - puts a much larger amount of money at
risk. 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.
. Derivatives risk is the risk that the derivatives that a Portfolio
invests in do not achieve the intended result. If a hedge works
properly, the gains produced will offset losses on the securities
hedged. Hedging also may reduce gains because a Portfolio may forgo
"upside" potential.
Risks of foreign securities
. Foreign issuer risk. Compared to U.S. and Canadian companies, less
information is generally available to the public about foreign
companies. Foreign stock exchanges, brokers, and listed companies may
be subject to less regulation and supervision by foreign governments
or other agencies. Foreign issuers may not be subject to the uniform
accounting, auditing, and financial reporting standards and practices
used by U.S. issuers. In addition, foreign securities markets may be
less liquid, more volatile, and less subject to governmental
supervision than 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.
. Currency risk (Emerging Markets 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 will
become components of the euro. Political and economic risks, along
with other factors, such as the introduction of the euro, could
adversely affect the value of the Emerging Markets Portfolio's
securities.
. Emerging markets risk (Emerging Markets 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
25
<PAGE>
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 Emerging Markets Portfolio's
investment in certain securities. The Emerging Markets Portfolio may
need governmental approval for the repatriation of investment income,
capital or sales proceeds. An Emerging Country government may impose
temporary restrictions on capital flows.
Risks of mortgage-related securities (Income and High Yield Portfolios only)
. 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.
. 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 equity securities (High Yield and Emerging Markets Portfolios only)
. 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 preference 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 preference to the company's assets in the event of bankruptcy.
Risks of distressed securities (High Yield and Emerging Markets Portfolios only)
. 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.
26
<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 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 United States and foreign
corporations, governments and institutional and individual investors. The
Adviser is a registered investment adviser and offers, either directly or
through affiliates, investment advisory and administrative services to open-end
and closed-end investment funds and other managed pooled investment vehicles
with net assets at ________ __, 1999 of over $X.X billion. The Adviser is also
a registered broker-dealer.
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 [right arrow] _____%
High Yield Portfolio [right arrow] _____%
Emerging Markets Portfolio [right arrow] _____%
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 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 net asset value ("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 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.
27
<PAGE>
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:
. Non-Retirement Account: $1,000
. Retirement Account: $ 500
Minimum Subsequent Investment:
. Non-Retirement Account: $ 50
. 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.
. Class A shares have a front-end sales charge, which is added to the
Class A NAV to determine the offering price per share.
. 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:
. how much you intend to invest
. the length of time you expect to hold your investment
28
<PAGE>
Relative Advantages of Each Share Class
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Investor Characteristics Advantages
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A . Long-term investment horizon and/or plans . Lower expense structure and the amount of
to invest at least $250,000 the initial sales charge decreases as you
invest more money
Class B . Long-term investment horizon and/or plans . No front-end sales charge and the full
to invest less than $250,000 or buy shares at amount of your investment is put to work
regular intervals right away, and converts to Class A shares
after eight years
Class C . Short-term investment horizon . No front-end sales charge and the full
amount of your investment is put to work
right away, and the CDSC is lower than that
of Class B shares and declines 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 Sales Charge* 4.50% None None
- -------------------------------------------------------------------------------------------------------------------
CDSC None ** 5% to 0%, declining the 1%, if you sell shares
longer you hold your shares within one year of purchase
- -------------------------------------------------------------------------------------------------------------------
Annual Expenses Lower than Class B and C Higher than Class A shares Higher than Class A shares;
shares (Note: Class B shares same as Class B shares
convert to Class A shares 8
years after purchase)***
- -------------------------------------------------------------------------------------------------------------------
* There are several ways that you can reduce these charges, as described under "Sales Charge Reductions and
Waivers."
** Although there is no initial sales charge for purchases of $1 million or more of Class A shares, the Trust
charges you a CDSC of 1% if you sell your shares within one year of purchase.
*** 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.
</TABLE>
[***In general, Class A shares are the most beneficial for the investor who
qualifies for a waiver or reductions of the front-end sales charges.***]
29
<PAGE>
[***Class B and C shareholders pay no front-end sales charge. You invest your
entire purchase price immediately in shares of a Portfolio. Over time, however,
the expenses of Class B and C shares may exceed the cumulative expenses of Class
A shares due to their higher annual expenses.***]
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TOTAL SALES LOAD
----------------------------------------------------
Amount of Investment As a % of offering price
per share As a % of NAV
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
* For purchases of $1,000,000 or more, you will pay a CDSC of 1% if you sell
your shares within one year.
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.
Year Since Purchase CDSC as a % of Dollar Amount Subject to CDSC
- ------------------------------------------------------------------------------
First 5%
- ------------------------------------------------------------------------------
Second 4%
- ------------------------------------------------------------------------------
Third 3%
- ------------------------------------------------------------------------------
Fourth 3%
- ------------------------------------------------------------------------------
Fifth 2%
- ------------------------------------------------------------------------------
Sixth 1%
- ------------------------------------------------------------------------------
Seventh 0%
- ------------------------------------------------------------------------------
Eighth* 0%
</TABLE>
_________________
* 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 exchanged Portfolio. Class
30
<PAGE>
B shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The 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.
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 (1) the purchase price of the shares, or (2) 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:
. 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
. 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
. Trustees or directors of investment companies for which BSAM or an
affiliate acts as sponsor
. 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
. Institutional investment clients, including corporate-sponsored
pension and profit-sharing plans, other benefit plans and insurance
companies
. Pension funds, state and municipal governments or funds, Taft-Hartley
plans and qualified non-profit organizations, foundations and
endowments
. Trust institutions (including bank trust departments) investing on
their own behalf or on behalf of their clients
. Service providers to the Portfolios
. Accounts for which an Authorized Dealer or investment adviser charges
an asset management fee (including "wrap" fees)
. Current shareholders of other mutual funds not distributed by Bear,
Stearns & Co. Inc., the Portfolios' Distributor, that have paid a
sales charge, and that buy shares of a Portfolio within 60 days of
selling shares of the other mutual fund
31
<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:
. 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.
. 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:
. redemptions made within one year after the death or disability of a
shareholder
. redemptions by employees participating in eligible benefit plans
. redemptions as a result of a combination of any investment company
with a Portfolio by merger, acquisition of assets or otherwise
. a mandatory distribution under a tax-deferred retirement plan
. 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.
[***When you buy shares, you must specify the class of shares. Otherwise, the
Trust will assume that you wish to buy Class A shares.***]
32
<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
<TABLE>
<CAPTION>
Method of Purchase Instructions
<S> <C>
In person . Visit your account representative.
. Specify the name of the Portfolio, Class of shares and the number or
dollar amount of shares that you wish to buy.
By telephone . Call your account representative.
. Specify the name of the Portfolio, Class of shares and the number or
dollar amount of shares that you wish to buy.
By mail . Mail your purchase request to your account representative.
. Specify the name of the Portfolio, Class of shares and the number or
dollar amount of shares that you wish to buy.
By wire . Submit wiring instructions to your account representative.
. Specify the name of the Portfolio, Class of shares and number or dollar
amount of shares that you wish to buy.
</TABLE>
Purchase Through the Transfer Agent
By mail . Mail your purchase request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[name of Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
By telephone . Call the Transfer Agent at 1-800-447-1139.
. Specify the name of the Portfolio, class of
shares and number or dollar amount of shares that
you wish to buy.
33
<PAGE>
How To Sell Shares
. 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.
. When the Trust receives your redemption requests in proper form,
it will sell your shares at the next determined net asset value.
. The Trust will send you payment proceeds generally within seven
days after it receives your redemption request.
Additional Information About Redemptions
. 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.
. 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.
. 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 signature guarantee.
. 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.
. 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.
. 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.
34
<PAGE>
. 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
that (a) trading on the NYSE is restricted or (b) an emergency
prevents the sale or valuation of the Portfolio's securities
. when the SEC orders a suspension to protect the Portfolio's
shareholders
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:
. by a previous exchange from shares bought with a sales charge
. through reinvestment of dividends in distribution paid with
respect to either of the above categories
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:
. 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.
. 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.
. 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.
. Before you exchange your shares, you must review a copy of the
current prospectus of the Portfolio that you would like to buy.
. You may qualify for a reduced sales charge. See the SAI for
details, or call your account representative.
. The Trust may reject your exchange request. The Trust may modify
or terminate the exchange option at any time, upon 60 days'
notice.
35
<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.
. 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/$25 for retirement
accounts) monthly, bi-monthly, quarterly or annually and you can
terminate the program at any time.
. 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.
. Systematic withdrawal plan. You may withdraw a set amount ($25
minimum) monthly, bi-monthly, quarterly or annually, as long as
you must have an 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.
. 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.
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 daily and pays dividends from its net
investment income monthly on or about the twentieth of the month. 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:
. 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.
. Cash. The Trust will send you a check no later than seven days
after the payable date.
. 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
36
<PAGE>
will automatically reinvest your capital gain distributions and
send you your dividends in cash.
. 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.
. 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 Application.
If you would like to change the option you selected, please call your account
representative 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.
. Ordinary dividends from a Portfolio are taxable as ordinary
income; dividends from a Portfolio's long-term capital gains are
taxable as capital gain.
. 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.
. 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.
. Certain dividends paid to you in January will be taxable as if
they had been paid to you the previous December.
. The Trust will mail you tax statements every January showing the
amounts and tax status of distributions you received.
. When you sell (redeem) or exchange shares of a Portfolio, you
must recognize any gain or loss.
. 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.
. 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.
37
<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 Class of 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 pays 0.75% of its average daily net assets.
Keep in mind that:
. 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 a higher front-end or back-end
sales charges.
. 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 the Class 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.
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.
38
<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 at which 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
, 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-____-_____.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
DISTRI-
NET NET BUTIONS NET
ASSET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, NET UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT CAPITAL END OF
OF PERIOD INCOME*(4) INVESTMENTS*(5) INCOME GAINS PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Portfolio(2)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 12.03 0.76 0.36 (0.76) (0.02) 12.37
For the fiscal year ended March 31, 1997.. 12.26 0.73 (0.20) (0.73) (0.03) 12.03
For the period April 5, 1995 through
March 31, 1996............................ 12.00 0.71 0.30 (0.71) (0.04) 12.26
Class B
For the fiscal year ended March 31, 1999..
For the period February 2, 1998 through
March 31, 1998............................ 12.47 0.10 (0.10) (0.10) - 12.37
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 12.03 0.70 0.36 (0.70) (0.02) 12.37
For the fiscal year ended March 31, 1997.. 12.26 0.68 (0.20) (0.68) (0.03) 12.03
For the period April 5, 1995 through
March 31, 1996............................ 12.00 0.67 0.30 (0.67) (0.04) 12.26
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NET RATIO OF NET
ASSETS, RATIO OF INVESTMENT
TOTAL END OF EXPENSES TO INCOME
INVESTMENT PERIOD AVERAGE TO AVERAGE
RETURN(6) (000's omitted) NET ASSETS(4) NET ASSETS(4)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Portfolio(2)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 9.43 2,926 0.80 6.13
For the fiscal year ended March 31, 1997.. 4.40 3,367 0.80 5.99
For the period April 5, 1995 through
March 31, 1996............................ 8.54 4,467 0.85(8) 5.76(8)
Class B
For the fiscal year ended March 31, 1999..
For the period February 2, 1998 through
March 31, 1998............................ (0.04)(7) 18 1.45(8) 5.22(7)(8)
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 8.92 1,403 1.28 5.60
For the fiscal year ended March 31, 1997.. 3.99 1,018 1.20 5.57
For the period April 5, 1995 through
March 31, 1996............................ 8.13 1,775 1.25(8) 5.38(8)
<CAPTION>
- -------------------------------------------------------------------------------
INCREASE/(DECREASE)
REFLECTED IN
EXPENSE RATIOS AND NET
INVESTMENT INCOME
DUE TO WAIVERS AND PORTFOLIO
RELATED REIMBURSEMENTS TURNOVER RATE
- -------------------------------------------------------------------------------
<S> <C> <C>
Income Portfolio(2)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 1.86 244.78
For the fiscal year ended March 31, 1997.. 1.73 262.95
For the period April 5, 1995 through
March 31, 1996............................ 2.87(8) 107.35
Class B
For the fiscal year ended March 31, 1999..
For the period February 2, 1998 through
March 31, 1998............................ 0.48(7)(8) 244.78
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 1.80 244.78
For the fiscal year ended March 31, 1997.. 1.74 262.95
For the period April 5, 1995 through
March 31, 1996............................ 2.95(8) 107.35
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
(5) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods. For the Debt Portfolio net realized
and unrealized gain/(loss) on investments include forward foreign currency
exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
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 at which an investor would have
gained on an investment in the High Yield Portfolio (assuming reinvestment of
all dividends and distributions). This information has been audited by
, 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-____-_____.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
DISTRI-
NET NET BUTIONS NET
ASSET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, NET UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT CAPITAL END OF
OF PERIOD INCOME*(4) INVESTMENTS*(5) INCOME GAINS PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Total Return Portfolio(3)
Class A
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 12.00 0.26 0.73 (0.26) - 12.73
Class B
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 12.00 0.24 0.73 (0.24) - 12.73
Class C
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 12.00 0.24 0.73 (0.24) - 12.73
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NET RATIO OF NET
ASSETS, RATIO OF INVESTMENT
TOTAL END OF EXPENSES TO INCOME
INVESTMENT PERIOD AVERAGE TO AVERAGE
RETURN(6) (000's omitted) NET ASSETS(4) NET ASSETS(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Total Return Portfolio(3)
Class A
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 8.30 18,301 1.00(8) 9.14(8)
Class B
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 8.13 6,013 1.65(8) 8.46(8)
Class C
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 8.13 11,298 1.65(8) 8.46(8)
<CAPTION>
- -------------------------------------------------------------------------------
INCREASE/(DECREASE)
REFLECTED IN
EXPENSE RATIOS AND NET
INVESTMENT INCOME
DUE TO WAIVERS AND PORTFOLIO
RELATED REIMBURSEMENTS TURNOVER RATE
- -------------------------------------------------------------------------------
<S> <C> <C>
High Yield Total Return Portfolio(3)
Class A
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 1.67(8) 139.61
Class B
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 1.68(8) 139.61
Class C
For the fiscal year ended March 31, 1999..
For the period January 2, 1998 through
March 31, 1998............................ 1.67(8) 139.61
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
(5) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods. For the Debt Portfolio net realized
and unrealized gain/(loss) on investments include forward foreign currency
exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
40
<PAGE>
Financial Highlights - Emerging Markets Portfolio
The financial highlights table is intended to help you understand the financial
performance of the Emerging Markets Portfolio since its inception. This
information reflects financial results for a single share of the Emerging
Markets Portfolio. The total returns in the table represent the rate at which
an investor would have gained or lost on an investment in the Emerging Markets
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 Emerging Markets Portfolio. On ___________ ___,
1999, the predecessor fund was reorganized as a series of the Trust and the
Emerging Markets Portfolio assumed the financial history of the predecessor
fund. This information has been audited by , whose report,
-----------------
along with the Emerging Markets Portfolio's financial statements, are included
in the Emerging Markets Portfolio's annual report, which is available by calling
the Trust at 1-800-____-_____.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
DISTRI-
NET NET BUTIONS NET
ASSET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, NET UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT CAPITAL END OF
OF PERIOD INCOME*(4) INVESTMENTS*(5) INCOME GAINS PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Debt Portfolio(1)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. $11.14 $0.91 $1.17 $(0.92) $(0.30) $12.00
For the fiscal year ended March 31, 1997.. 9.02 0.85 2.10 (0.83) - 11.14
For the fiscal year ended March 31, 1996.. 6.90 0.91 2.13 (0.92) - 9.02
For the fiscal year ended March 31, 1995.. 8.98 0.79 (1.85) (0.77) (0.25) 6.90
Class B
For the fiscal year ended March 31, 1999..
For the period January 12, 1998 through
March 31, 1998............................ 11.33 0.21 0.61 (0.20) - 11.95
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 11.14 0.97 1.04 (0.90) (0.30) 11.95
For the fiscal year ended March 31, 1997.. 9.04 0.84 2.07 (0.81) - 11.14
For the period July 26, 1995 through
March 31, 1996............................ 7.81 0.59 1.32 (0.68) - 9.04
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NET RATIO OF NET
ASSETS, RATIO OF INVESTMENT
TOTAL END OF EXPENSES TO INCOME
INVESTMENT PERIOD AVERAGE TO AVERAGE
RETURN(6) (000's omitted) NET ASSETS(4) NET ASSETS(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Markets Debt Portfolio(1)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 19.31% $33,448 1.75% 7.70%
For the fiscal year ended March 31, 1997.. 33.48 33,185 2.00 7.95
For the fiscal year ended March 31, 1996.. 46.13 28,860 2.00 10.64
For the fiscal year ended March 31, 1995..(13.07) 28,049 2.00 8.86
Class B
For the fiscal year ended March 31, 1999..
For the period January 12, 1998 through
March 31, 1998............................ 7.29(7) 566 2.40(8) 7.13(7)(8)
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 18.66 4,317 2.40 7.31
For the fiscal year ended March 31, 1997.. 32.97 2,583 2.40 7.59
For the period July 26, 1995 through
March 31, 1996............................ 25.45(7) 202 2.40(7)(8 ) 8.72(7)(8)
<CAPTION>
- ------------------------------------------------------------------------------
INCREASE/(DECREASE)
REFLECTED IN
EXPENSE RATIOS AND NET
INVESTMENT INCOME
DUE TO WAIVERS AND PORTFOLIO
RELATED REIMBURSEMENTS TURNOVER RATE
- ------------------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Debt Portfolio(1)
Class A
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 1.01% 128.91%
For the fiscal year ended March 31, 1997.. 0.80 223.41
For the fiscal year ended March 31, 1996.. 1.18 266.46
For the fiscal year ended March 31, 1995.. 0.53 35.01
Class B
For the fiscal year ended March 31, 1999..
For the period January 12, 1998 through
March 31, 1998............................ 2.25(7)(8) 128.91
Class C
For the fiscal year ended March 31, 1999..
For the fiscal year ended March 31, 1998.. 1.05 128.91
For the fiscal year ended March 31, 1997.. 0.64 223.41
For the period July 26, 1995 through
March 31, 1996............................ 3.42(7)(8) 266.46
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
(5) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods. For the Debt Portfolio net realized
and unrealized gain/(loss) on investments include forward foreign currency
exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
41
<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.
. 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
. You may obtain copies of the SAI or financial reports
. for free by calling or writing broker-dealers or other
financial intermediaries that sell a Portfolio's shares
. for a fee by calling or writing the Public Reference Room
of the Securities Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-6009 (1-800-SEC-0330)
. for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.
------------------
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
42
<PAGE>
The Income Portfolio
Bear Stearns High Yield Total Return Portfolio
Funds Emerging Markets Debt Portfolio
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
- -----------
Bear, Stearns & Co. Inc.
575 Lexington Avenue
New York, NY 10022
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
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 - 8 0 0 - 4 4 7 - 1 1 3 9
The Bear Stearns Funds
Fixed Income Funds
. Income Portfolio
. High Yield Total Return Portfolio
. Emerging Markets Debt Portfolio
Class Y Shares
PROSPECTUS
_______, 1999
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 as an investment or determined
whether this Prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
<PAGE>
Each Portfolio described in this Prospectus is a series of The Bear Stearns
Funds, a registered open-end management investment company (the "Trust").
Table of Contents
RISK/RETURN SUMMARIES
Income Portfolio
High Yield Total Return Portfolio
Emerging Markets Debt Portfolio
INVESTMENTS
RISK FACTORS
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
Portfolio Management Team
HOW THE PORTFOLIOS VALUE THEIR SHARES
INVESTING IN THE PORTFOLIOS
Investment Requirements
How to Buy Shares
How to Sell Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
It is important to keep in mind that mutual fund shares are:
. not deposits or obligations of any bank
. not insured by the FDIC
. subject to investment risk, including possible loss of the amount invested
2
<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. and foreign companies and governments or their
political subdivisions, agencies or instrumentalities. The Income Portfolio may
invest in:
. Bonds, debentures and notes
. Money market instruments (including bank obligations, commercial paper,
other short-term corporate debt, and repurchase agreements)
. Mortgage-related securities (including interest-only and principal-only
stripped securities)
. Asset-backed securities
. Convertible debt obligations
. Municipal obligations (up to 25% of assets)
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 and having a minimum of $50 million in debt
outstanding at the time of inclusion in the 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. The Income Portfolio usually invests in a portfolio of
securities with a dollar-weighted average maturity ranging from four to thirteen
years and a duration between 65% and 135% of that of the Salomon BIG Index.
The Income Portfolio may, but is not required to, use derivatives to reduce risk
and enhance return, including futures contracts and related options (including
interest rate futures contracts and related options), and options on securities
and financial indices.
Quality
. Investment-Grade Securities. The Income Portfolio must invest at least 75%
---------------------------
of its net assets in investment-grade securities, that is, they must be rated no
lower than Baa by Moody's Investors Service ("Moody's"), BBB by Standard &
Poor's ("S&P"), or the equivalent by other nationally recognized statistical
ratings organizations ("NRSROs"), or, if unrated, deemed to be comparable by
Bear Stearns Asset Management Inc., each Portfolio's investment adviser ("BSAM"
or the "Adviser").
3
<PAGE>
. Below-Investment-Grade Securities ("Junk Bonds"). The Income Portfolio may
------------------------------------------------
invest up to 25% of its net assets in securities that are rated no lower than B
by Moody's or S&P, or the equivalent by any other NRSRO, or, if unrated, deemed
to be comparable by the Adviser. These securities may be considered speculative
and subject to higher risk of default than investment-grade securities.
. Short-Term Obligations. 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 Investors Service or Duff & Phelps.
See "Risk Factors - Risks of debt securities" in this Prospectus and the
Appendix to the Statement of Additional Information ("SAI").
Principal Risks
The Income Portfolio is subject to the following principal risks, more fully
described in "Risk Factors." All or some of these risks may adversely affect
the Income Portfolio's net asset value, yield and/or total return:
. The rate of inflation increases and interest rates may rise, causing the
Income Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or is not
executed effectively
. An issuer's credit quality may be downgraded
. Below-investment-grade securities are more likely to decline in value due
to defaults or bankruptcies than investment-grade securities
. The Income Portfolio may have to reinvest interest or sale proceeds at
lower rates
. The average life of a mortgage-related security may change
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, and the risks that a foreign government may
take over assets
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions as
expected
Who may want to invest in the Income Portfolio
The Income Portfolio may be appropriate for investors who:
. seek relatively high current income
. want to diversify an equity portfolio
. are willing to accept share price and dividend fluctuations
The Income Portfolio may not be appropriate for investors who:
---
. are not willing to take any risk that they may lose money on their
investment
. want potential growth over time
4
<PAGE>
PERFORMANCE
The bar chart and table below show the risks of investing in the Income
Portfolio by showing changes in the performance of its Class Y shares as of
December 31, 1998 from year to year since inception. 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 table
also compares the Income Portfolio's performance to that of the Lipper A-Rated
Corporate Bond Index, a measure of the performance of the 30 largest fixed
income mutual funds that invest in debt rated no lower than A. The figures
shown assume reinvestment of dividends and distributions.
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 were managed to realize high current income.
***Past performance is not necessarily an indication of future results.***
Bar Chart
1995: ___.__% (1)
1996: ___.__%
1997: ___.__%
1998: ___.__% (2)
(1) Commenced investment operations on September 8, 1995. Return is not
annualized.
(2) The Income Portfolio's year-to-date return as of June 30, 1999 was ___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
- --------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
- --------------------------------------------------------------------------------
Income Portfolio - Class Y ___.__% ___.__%
Salomon BIG Index ___.__% ___.__%
Lipper A-Rated Corporate Bond Index ___.__% ___.__%
- --------------------------------------------------------------------------------
* Class Y shares commenced operations on September 8, 1995.
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 Y
- -----------------------------------------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None
- -----------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None
- --------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage of offering price) None
- --------------------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares.
</TABLE>
The Annual Portfolio Operating Expenses table below illustrates the net
operating expenses that you will incur as a shareholder of the Income Portfolio.
The Income Portfolio pays these expenses from its assets.
Annual Portfolio Operating Expenses
- ------------------------------------------------------------------
Class Y
-------
- ------------------------------------------------------------------
Management Fees 0.45%
Distribution (12b-1) Fees 0.00%
Other Expenses . %
-------
Total Portfolio Operating Expenses __.__%
Fee Waiver and Expense Reimbursement ( . )%
-------
Net Expenses (1) 0.45%
=======
- ------------------------------------------------------------------
(1) The expenses shown are based on historical expenses of the Income Portfolio
adjusted to reflect current expenses. The Adviser has agreed to waive its
fee and/or reimburse certain expenses until at least March 31, 2000 so that
the Income Portfolio's net expenses do not exceed the amount indicated
above.
6
<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:
. you invest $10,000 in the Income Portfolio
. your investment returns 5% each year
. 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 Y $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --
---
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class Y $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.45%
until March 31, 2000 and thereafter will equal __.___%.
7
<PAGE>
HIGH YIELD TOTAL RETURN PORTFOLIO
RISK/RETURN SUMMARY
Investment Objective
Total return through high current income and capital appreciation.
Principal Strategies
The High Yield Total Return Portfolio (the "High Yield Portfolio") will invest
in high yield securities and issuers that the Adviser believes to be positioned
for gradual or substantial credit improvement through a process that
. uses Bear Stearns' "High Yield Query System" to screen more than 2,000
issuers for companies that meet initial investment criteria
. identifies positive catalysts affecting the issuer's financial condition
that may lead to price appreciation
. includes communicating with senior management to assess its commitment to
improving credit quality
. identifies securities whose issuers have above-average prospects for
superior returns
Under normal market conditions, 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):
. 25% in foreign securities
. 25% in zero-coupon securities, pay-in-kind bonds or discount obligations
. 20% in distressed securities
. 20% in mortgage-related securities
. 15% in loans and participations
. 10% in convertible securities
The High Yield Portfolio may invest the remaining 20% of its total assets in any
other securities consistent with its objective, including higher-rated fixed-
income securities, common stocks and other equity securities.
Generally, the High Yield Portfolio's average weighted maturity will range from
three to twelve years.
The High Yield Portfolio may, but is not required to, use derivatives to reduce
risk and enhance return, including futures contracts and related options
(including interest rate futures contracts and related options) and options on
securities and financial indices.
8
<PAGE>
Quality
. "High yield fixed-income securities" ("junk bonds") are those securities
that are rated Ba or lower by Moody's, or BB or lower by S&P or
comparably rated by any other NRSRO, or unrated securities that the
Adviser determines to be comparable. Securities rated in this category
are considered speculative and subject to higher risk of default than
higher-rated securities.
. 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. High yield securities in this category are
highly speculative and may be in default of principal and/or interest
payments at the time of purchase.
See "Risk Factors - Risks of debt securities" in this Prospectus and the
Appendix to the SAI.
Principal Risks
The High Yield Portfolio is subject to the following principal risks, more fully
described in "Risk Factors." All or some of these risks may adversely affect
the High Yield Portfolio's net asset value, yield and/or total return:
. High yield securities may decline in value due to defaults or
bankruptcies
. Portfolio investments that are already in default when acquired may
experience further market value declines or become worthless
. The rate of inflation increases and interest rates may rise, causing the
High Yield Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or may not be
executed effectively
. An issuer's credit quality may be downgraded
. The High Yield Portfolio may have to reinvest interest or sale proceeds
at lower rates
. The average life of a mortgage-related security may change
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, and the risks that a foreign government may
take over assets
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions as
expected
Who may want to invest in the High Yield Portfolio
The High Yield Portfolio may be appropriate for investors who:
. seek high current income coupled with investment growth
. are willing to accept the greater risks associated with high yield issues
in exchange for their higher yield and total return potential when
compared to higher-rated corporate and U.S. Government bonds
9
<PAGE>
The High Yield Portfolio may not be appropriate for investors who:
---
. are seeking a market-timing vehicle
. are not willing to take any risk that they may lose money on their
investment
. seek stability of the value of their investment
PERFORMANCE
Class Y shares of the High Yield Portfolio have not yet commenced operations.
The bar chart and table below show the risks of investing in the High Yield
Portfolio by showing changes in the performance of its Class A shares as of
December 31, 1998 since inception. The table shows how the High Yield
Portfolio's average annual total return for one year and since the date of
inception compared to the Credit Suisse First Boston High Yield Bond 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 assume reinvestment of dividends and distributions. 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, depending on the expenses of the Class Y shares.
***Past performance is not necessarily an indication of future results.***
Bar Chart
1998: ___.__% (1) (2)
(1) Class A shares commenced operations on January 2, 1998. Return is not
annualized.
(2) The High Yield Portfolio's year-to-date return as of June 30, 1999 was
___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
- --------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since
Inception*
- --------------------------------------------------------------------------------
High Yield Portfolio - Class A ___.__% ___.__%
Credit Suisse First Boston High Yield Bond Index ___.__% ___.__%
Lipper High Yield Bond Fund Index ___.__% ___.__%
- --------------------------------------------------------------------------------
* Class A commenced operations on January 2, 1998.
10
<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>
<S> <C>
- ----------------------------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)*
- ----------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None
- ----------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- ----------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None
- ----------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage of offering price) None
- ----------------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares.
</TABLE>
The Annual Portfolio Operating Expenses table below illustrates the net
operating expenses that you will incur as a shareholder of the High Yield
Portfolio. The High Yield Portfolio pays these expenses from its assets.
Annual Portfolio Operating Expenses
- ------------------------------------------------------------------
Class Y
-------
- ------------------------------------------------------------------
Management Fees 0.60%
Distribution (12b-1) Fees 0.00%
Other Expenses . %
------
Total Portfolio Operating Expenses __.__%
Fee Waiver and Expense Reimbursement ( . )%
-----
Net Expenses (1) 0.65%
=====
- ------------------------------------------------------------------
(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 its fee and/or 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.
11
<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:
. you invest $10,000 in the High Yield Portfolio
. your investment returns 5% each year
. 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 Y $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --
---
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class Y $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.65%
until March 31, 2000 and thereafter will equal __.___%.
12
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
RISK/RETURN SUMMARY
Investment Objective
High current income by investing primarily in Debt Obligations (as defined
below) of issuers located in Emerging Countries (as defined below). The
Emerging Markets Debt Portfolio's secondary objective is capital appreciation.
Principal Strategies
Under normal market conditions, the Emerging Markets Debt Portfolio ("Emerging
Markets 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 Emerging Markets Portfolio may invest up to
10% of its total assets in convertible securities.
The Emerging Markets 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 Emerging Markets 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 Emerging Markets Portfolio, the Adviser will
emphasize investments in countries that are making the most progress toward
sustainable economic growth with lower inflation.
The Emerging Markets Portfolio
. will invest at least 70% of its total assets in at least three Emerging
Countries
. may invest up to 40% of its total assets in any one country
. may invest up to 20% of its total assets in loans and participations
. may invest at least 30% of its total assets in Central and Latin America
. may invest up to 20% of its total assets in issuers that are not
---
considered to be in Emerging Countries
The Emerging Markets Portfolio may, but is not required to, use derivatives to
reduce risk and enhance return, including futures contracts and related
options (including interest rate futures contracts and related
13
<PAGE>
options), options on securities, financial indices and currencies, and forward
currency exchange contracts.
Currency. The Emerging Markets Portfolio primarily invests in a combination of
(a) high-yield U.S. dollar-denominated instruments and (b) local currency
instruments in Emerging Countries where the relationship between interest rates
and anticipated foreign exchange movements relative to the U.S. dollar are
expected to result in a high dollar rate of return. In addition to current
income, the Emerging Markets Portfolio also seeks capital appreciation from
interest rate and currency exchange fluctuations and improving credit quality.
The Emerging Markets Portfolio will invest at least 70% of its total assets in
U.S. dollar-denominated instruments. The Emerging Markets Portfolio may invest
up to 30% of its assets in Debt Obligations denominated in local currencies,
although the Emerging Markets 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 Emerging Markets 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 Emerging Markets
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Emerging Markets 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. See "Risk Factors - Risks of debt
securities" in this Prospectus and the Appendix to the SAI.
Principal Risks
The Emerging Markets Portfolio is subject to the following principal risks, more
fully described in "Risk Factors." All or some of these risks may adversely
affect the Emerging Markets Portfolio's net asset value, yield and/or total
return:
. Foreign securities issued in Emerging Countries generally experience less
liquidity and more volatility because the securities markets in these
countries have less trading volume and fewer participants than
established markets
. Inefficient settlement procedures in Emerging Countries may cause the
Emerging Markets Portfolio to miss investment opportunities or be exposed
to liability for failure to deliver securities
. The Emerging Markets Portfolio may experiences losses from improper
trading activities in Emerging Countries that are subject to less
government regulation than in the United States
. Foreign securities may experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, fluctuations in currency exchange rates,
and the risks that a foreign government may take over assets, restrict
the ability to exchange currency or restrict the delivery of securities
. The rate of inflation increases and interest rates may rise, causing the
Emerging Markets Portfolio's securities to decline in value
. A particular strategy may not produce the intended result or may not be
executed effectively
. The Emerging Markets Portfolio may have to reinvest interest or sale
proceeds at lower rates
14
<PAGE>
. Hedges created by using derivative instruments, including futures or
options contracts, may not respond to economic or market conditions as
expected
. 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
In addition, the Emerging Markets Portfolio is a non-diversified mutual fund.
As a non-diversified fund, the Emerging Markets Portfolio may devote a larger
portion of its assets to the securities of a single issuer than if it were
diversified.
Who may want to invest in the Emerging Markets Portfolio
The Emerging Markets Portfolio may be appropriate for investors who:
. seek high current income
. want to add an emerging markets fixed income component to an existing
portfolio
. are willing to accept the relatively greater price volatility of
investments in these markets in exchange for their potentially higher
returns compared to other fixed income investments
The Emerging Markets Portfolio may not be appropriate for investors who:
---
. are not willing to accept the risks associated with foreign securities
markets or currency fluctuation
. are investing for the short term or need current income
. are not willing to take any risk that they may lose money on their
investment
. want a diversified portfolio
. seek stability of the value of their investment
PERFORMANCE
Class Y shares of the Emerging Markets Portfolio have not yet commenced
operations. The bar chart and table below show the risks of investing in the
Emerging Markets Portfolio by showing changes in the performance of its Class A
shares as of December 31, 1998 from year to year since inception. The table
shows how the Emerging Markets 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, a broad measure of emerging market debt
mutual fund performance. The figures shown assume reinvestment of dividends and
distributions. 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, 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 __________ ___, 1999, the Emerging Markets
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 Emerging Markets Portfolio during the time that it was a
series of Bear Stearns Investment Trust and BSAM served as its investment
adviser.
***Past performance is not necessarily an indication of future results.***
15
<PAGE>
Bar Chart
1995: ___.__% (1)
1996: ___.__%
1997: ___.__%
1998: ___.__% (2)
(1) Return is not annualized. The Emerging Markets Portfolio's performance
prior to May 4, 1995 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 4, 1995.
(2) The Emerging Markets Portfolio's year-to-date return as of June 30, 1999
was ___.__%.
During the period shown in the bar chart, the highest quarterly return was XX%
(for the quarter ended ____ 19__) and the lowest quarterly return was YY% (for
the quarter ended _____19 __).
- --------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ended December 31, 1998) 1 Year Since Inception*
- --------------------------------------------------------------------------------
Emerging Markets Portfolio - Class A ___.__% ___.__%
- --------------------------------------------------------------------------------
Salomon Smith Barney Emerging Markets Debt Mutual
Fund Index ___.__% ___.__%
- --------------------------------------------------------------------------------
* The Adviser began managing Class A shares on May 4, 1995.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Emerging Markets Portfolio.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)* Class Y
- --------------------------------------------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------------------------------
Sales charge imposed on reinvested dividends None
- --------------------------------------------------------------------------------------------------------
Redemption fees and exchange fees None
- --------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage of offering price) None
- --------------------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares.
</TABLE>
The Annual Portfolio Operating Expenses table below illustrates the operating
expenses that you will incur as a shareholder of the Emerging Markets Portfolio.
The Emerging Markets Portfolio pays these expenses from its assets.
16
<PAGE>
Annual Portfolio Operating Expenses
- -------------------------------------------------------------------
Class Y
-------
- -------------------------------------------------------------------
Management Fees (1) 1.00%
Distribution (12b-1) Fees 0.00%
Other Expenses . %
----
Total Portfolio Operating Expenses _.__%
Fee Waiver and Expense Reimbursement ( . )%
---------
Net Expenses (2) 0.90%
======
- -------------------------------------------------------------------
(1) Management fees are based on the Emerging Markets 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 Emerging Markets
Portfolio for the fiscal year ending March 31, 2000. The Adviser has agreed
to waive its fee and/or reimburse certain expenses until at least March 31,
2000 so that the Emerging Markets Portfolio's net expenses do not exceed the
amount indicated above.
Example
This Example illustrates the cost of investing in the Emerging Markets Portfolio
over various time periods. It is intended to help you compare the cost of
investing in the Emerging Markets Portfolio with the cost of investing in other
mutual funds. The Example assumes that:
. you invest $10,000 in the Emerging Markets Portfolio
. your investment returns 5% each year
. the Emerging Markets 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 $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --
---
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class Y $_______ $_______ $_______ $_______
- --------------------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.40%
until March 31, 2000 and thereafter will equal __.___%.
17
<PAGE>
INVESTMENTS
Principal Investment Strategies
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, which measures the average
time in which a security will receive the present value of all interest and
principal payments as opposed to its term to maturity, which measures only the
time until final payment is due and does not take into account the security's
cash flows over time, including the effect of prepayments and interest rate
changes. 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.
High Yield Portfolio
Securities offering high current yield are generally issued by (1) rapidly
growing companies incurring debt to fund plant expansion or pay for acquisitions
and (2) 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.
Emerging Markets Portfolio
The Emerging Markets 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 Emerging Markets 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 Emerging Markets 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 Emerging Markets Portfolio to
take advantage of changes in prevailing interest rates.
18
<PAGE>
Investments
This table summarizes the investments, described below, that each Portfolio may
use to achieve its investment objective.
<TABLE>
<CAPTION>
Income High Yield Emerging Markets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Asset-backed securities X X X
- --------------------------------------------------------------------------------------------------
Brady bonds X X
- --------------------------------------------------------------------------------------------------
Convertible securities X X X
- --------------------------------------------------------------------------------------------------
Discount securities X X X
- --------------------------------------------------------------------------------------------------
Distressed securities X X
- --------------------------------------------------------------------------------------------------
Equity securities X X
- --------------------------------------------------------------------------------------------------
Indexed securities X X
- --------------------------------------------------------------------------------------------------
Loans X X
- --------------------------------------------------------------------------------------------------
Mortgage-related securities X X X
- --------------------------------------------------------------------------------------------------
Municipal obligations X
- --------------------------------------------------------------------------------------------------
Repurchase agreements X X X
- --------------------------------------------------------------------------------------------------
When-issued securities and X X X
forward commitments
- --------------------------------------------------------------------------------------------------
</TABLE>
. 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.
. Brady bonds are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging
Countries in connection with sovereign debt restructurings, under a plan
introduced by former U.S. Treasury Secretary Nicholas Brady.
. 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 (1) higher yields than
common stocks, but lower yields than comparable non-convertible
securities, (2) less price fluctuation than the underlying stock since
they have fixed income characteristics, and (3) potential for capital
appreciation if the market price of the underlying stock increases.
. 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
19
<PAGE>
are ordinary interest-paying debt securities with similar maturities.
. 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.
. Equity securities include foreign and domestic common or preferred
stocks, rights and warrants, and convertible or exchangeable debt
securities or preferred stock. To the extent a Portfolio invests in
equity securities, the Portfolio's overall yield may diminish.
. 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.
. 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.
. Mortgage-related securities represent interests in pools of mortgage
loans made by lenders like savings and loan institutions, mortgage
bankers, commercial banks and others.
. Municipal obligations are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities. These
securities also include industrial development bonds issued by or on
behalf of public authorities.
. 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 a week or less). The difference between the
purchase and resale prices generally reflects the market interest rate
for the term of the agreement.
. 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.
20
<PAGE>
Other Investment Strategies
[***Each Portfolio may invest defensively or hedge investments to protect
against a downturn.***]
. 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 or U.S. or foreign money market instruments.
For cash management, each Portfolio temporarily may hold cash (U.S.
dollars) and may invest all of its assets in high-quality U.S. or foreign
money market instruments.
For temporary defensive purposes or cash management, the Emerging Markets
Portfolio may hold foreign currencies or multinational currency units.
. 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.
. Securities Lending. Each Portfolio may lend a portion of its securities
to financial institutions, which will generate income for the Portfolio.
The Income and High Yield Portfolios have appointed Custodial Trust
Company ("CTC"), an affiliate of the Adviser, as securities lending
agent, for which CTC receives a transaction fee.
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.
21
<PAGE>
Each Portfolio is subject to the following principal risks, except as noted.
General risks
. 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, a particular sector, or the entire economy.
. 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.
. 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
. 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.
. 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.
. 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.
. 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, or Moody's.
. Below-investment-grade securities ("junk bonds") may be more susceptible
to real or perceived adverse economic conditions, less liquid, 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. 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.
22
<PAGE>
Risks of hedging or leverage transactions
. Correlation risk. Futures and options contracts 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 created 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 futures or options contract hedge may not
generate gains sufficient to offset losses and may actually generate
losses.
. Leverage risk is the risk associated with those techniques in which a
relatively small amount of money invested - through borrowing or futures
trading, for example - puts a much larger amount of money at risk. 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.
. Derivatives risk is the risk that the derivatives that a Portfolio invests
in do not achieve the intended result. If a hedge works properly, the
gains produced will offset losses on the securities hedged. Hedging also
may reduce gains because a Portfolio may forgo "upside" potential.
Risks of foreign securities
. Foreign issuer risk. Compared to U.S. and Canadian companies, less
information is generally available to the public about foreign companies.
Foreign stock exchanges, brokers, and listed companies may be subject to
less regulation and supervision by foreign governments or other agencies.
Foreign issuers may not be subject to the uniform accounting, auditing,
and financial reporting standards and practices used by U.S. issuers. In
addition, foreign securities markets may be less liquid, more volatile,
and less subject to governmental supervision than 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.
. Currency risk (Emerging Markets 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 will become components of the euro. Political and economic
risks, along with other factors, such as the introduction of the euro,
could adversely affect the value of the Emerging Markets Portfolio's
securities.
. Emerging markets risk (Emerging Markets 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
23
<PAGE>
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 Emerging Markets Portfolio's
investment in certain securities. The Emerging Markets Portfolio may need
governmental approval for the repatriation of investment income, capital
or sales proceeds. An Emerging Country government may impose temporary
restrictions on capital flows.
Risks of mortgage-related securities (Income and High Yield Portfolios only)
. 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.
. 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 equity securities (High Yield and Emerging Markets Portfolios only)
. 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 preference 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 preference to the
company's assets in the event of bankruptcy.
Risks of distressed securities (High Yield and Emerging Markets Porfolios only)
. 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.
24
<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 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 United States and foreign
corporations, governments and institutional and individual investors. The
Adviser is a registered investment adviser and offers, either directly or
through affiliates, investment advisory and administrative services to open-end
and closed-end investment funds and other managed pooled investment vehicles
with net assets at ________ __, 1999 of over $X.X billion. The Adviser is also
a registered broker-dealer.
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 _____%
High Yield Portfolio _____%
Emerging Markets Portfolio _____%
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 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 net asset value ("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 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.
25
<PAGE>
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 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:
A. 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.)
B. Instruct your bank to wire the specified amount to the Portfolio as follows:
PNC Bank, N.A.
ABA #031000053
Credit Account Number: #86-1030-3398
From: [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. An Account Information Form is
included with this Prospectus. The
26
<PAGE>
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
. You may sell shares on any business day through the Distributor,
Authorized Dealers or the Transfer Agent.
. When the Trust receives your redemption requests in proper form, it
will sell your shares at the next determined net asset value.
. The Trust will wire 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
. In person . Visit your account representative.
. Specify the name of the Portfolio, Class of shares
and the number or dollar amount of shares that you
wish to sell.
. By telephone . Call your account executive.
. Specify the name of the Portfolio and the dollar
amount of shares that you wish to sell.
. By mail . Mail your redemption request to your account
representative.
. Specify the name of the Portfolio and the dollar
amount of shares that you wish to sell.
. By wire . Submit wiring instructions to your account
representative.
. Specify the name of the Portfolio and dollar amount
of shares that you wish to sell.
Redemption Through the Transfer Agent
. By mail . Mail your redemption request to:
PFPC Inc.
Attention: The Bear Stearns Funds
[Name of the Portfolio]
P.O. Box 8960
Wilmington, Delaware 19899-8960
. By telephone . Call the Transfer Agent at 1-800-447-1139.
27
<PAGE>
. Specify the name of the Portfolio and dollar amount
of shares that you wish to sell.
Additional Information About Redemptions
. 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. Or, if you do not have a
brokerage account, call the Transfer Agent to wire funds to your bank
account.
. 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 signature guarantee.
. 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.
. 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.
. Automatic redemption; redemption in kind. If the value of your account
falls below $500,000 (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.
. 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 that
(a) trading on the NYSE is restricted or (b) an emergency prevents
the sale or valuation of the Portfolio's securities
. when the SEC orders a suspension to protect the Portfolio's
shareholders
28
<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 daily and pays dividends from its net
investment income monthly on or about the twentieth of the month. 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:
. 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.
. Cash. The Trust will send you a check no later than seven days after the
payable date.
. 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.
. 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.
. 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 Application.
If you would like to change the option you selected, please call your account
representative 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.
. Ordinary dividends from a Portfolio are taxable as ordinary income;
dividends from a Portfolio's long-term capital gains are taxable as
capital gain.
29
<PAGE>
. 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.
. 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.
. Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
. The Trust will mail you tax statements every January showing the amounts
and tax status of distributions you received.
. When you sell (redeem) or exchange shares of a Portfolio, you must
recognize any gain or loss.
. 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.
. 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.
30
<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 at which 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 _________
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-____-_____. Class Y shares of the High Yield Portfolio and
the Emerging Markets Portfolio have not yet commenced operations.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL FOR THE FISCAL FOR THE FISCAL SEPTEMBER 8, 1995
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
-------------- -------------- -------------- -----------------
CLASS Y CLASS Y CLASS Y CLASS Y
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Income Portfolio(1)
Per Share Operating Performance*
Net asset value, beginning of period......................... $ 12.03 $12.26 $12.35
-------------- -------------- -------------- -----------------
Net investment income(2)..................................... 0.80 0.77 0.41
Net realized and unrealized gain/(loss) on investments(3).... 0.36 (0.20) (0.05)
-------------- -------------- -------------- -----------------
Dividends and distributions to shareholders from
Net investment income........................................ (0.80) (0.77) (0.41)
Net realized capital gains................................... (0.02) (0.03) (0.04)
-------------- -------------- -------------- -----------------
(0.82) (0.80) (0.45)
-------------- -------------- -------------- -----------------
Net asset value, end of period............................... $12.37 $12.03 $12.26
============== ============== ============== =================
Total investment return(4)................................... 9.81% 4.77% 2.92%
============== ============== ============== =================
Ratios/Supplemental Data
Net assets, end of period (000's omitted).................... $4,339 $13,486 $12,199
Ratio of expenses to average net assets(2)................... 0.45% 0.45% 0.45%(5)
Ratio of net investment income to average net assets(2)...... 6.39% 6.34% 5.93%(5)
Increase/(Decrease) reflected in above expense ratios and net
investment income due to waivers and related reimbursements.. 1.78% 1.73% 2.89%(5)
Portfolio turnover rate...................................... 244.78% 262.95% 107.35%
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Class Y shares commenced its initial public offering on September 8, 1995.
(2) Reflects waivers and related reimbursements.
(3) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods.
(4) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, If any. Total investment return is not annualized.
(5) Annualized.
31
<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.
. 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
. You may obtain copies of the SAI or financial reports
. for free by calling or writing broker-dealers or other financial
intermediaries that sell a Portfolio's shares
. for a fee by calling or writing the Public Reference Room of the
Securities Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549-6009 (1-800-SEC-0330)
. for free by visiting the SEC's Worldwide Web site at http://www.sec.gov.
------------------
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
32
<PAGE>
The Income Portfolio
Bear Stearns High Yield Total Return Portfolio
Funds Emerging Markets Debt Portfolio
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
- -----------
Bear, Stearns & Co. Inc.
575 Lexington Avenue
New York, NY 10022
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
<PAGE>
THE BEAR STEARNS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES
___________ ___, 1999
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
prospectus (the "Prospectus") dated ______ ___, 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.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolios.
Bear Stearns, an affiliate of BSAM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Policies B-__
Management of the Trust B-__
Management Arrangements B-__
Purchase and Redemption of Shares B-__
Determination of Net Asset Value B-__
Taxes B-__
Dividends -- Money Market Portfolio B-__
Portfolio Transactions B-__
Performance Information B-__
Code of Ethics B-__
Information About the Trust B-__
Custodian[s], Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors B-__
Financial Statements B-__
Appendix B-__
<PAGE>
Each of the Portfolios described in this Statement of Additional
Information (the "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 ("Emerging Markets Portfolio")
Equity Portfolios:
-------------------
S&P STARS Portfolio ("STARS Portfolio")
The Insiders Select Fund ("Insiders Fund")
Large Cap Value Portfolio ("Large Cap Portfolio")
Small Cap Value Portfolio ("Small Cap Portfolio")
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio ("International 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 STARS
Portfolio, the Insiders Fund, the Focus List Portfolio and the Emerging Markets
Portfolio. The other Portfolios are diversified. See "Investments and
Management Policies -- Management Policies -- Non-Diversified Status."
INVESTMENTS 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 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.
B-2
<PAGE>
<TABLE>
<CAPTION>
Asset
Backed Currency Convertible Custodial Distressed
Securities Borrowing Swaps Securities Receipts Securities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market 33 1/3%
- ---------------------------------------------------------------------------------------------------------------
Income Can Invest 33 1/3% Can Invest No limit
- ---------------------------------------------------------------------------------------------------------------
High Yield 5% 33 1/3% 5% (net) 15% 20%
(hedging
and total
return)
- ---------------------------------------------------------------------------------------------------------------
Emerging Markets Can Invest 15% Can Invest
- ---------------------------------------------------------------------------------------------------------------
STARS 33 1/3%
- ---------------------------------------------------------------------------------------------------------------
Insiders Fund 33 1/3% Can Invest
- ---------------------------------------------------------------------------------------------------------------
Large Cap 33 1/3% Can Invest Can Invest
- ---------------------------------------------------------------------------------------------------------------
Small Cap 33 1/3% Can Invest Can Invest
- ---------------------------------------------------------------------------------------------------------------
Focus List 33 1/3%
- ---------------------------------------------------------------------------------------------------------------
Balanced 10% 33 1/3% 5% (net) 40 to 60% 5% (net)
(hedging
and total
return)
- ---------------------------------------------------------------------------------------------------------------
International Can Invest 33 1/3% Can Invest 5% (net)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
Futures
and
Foreign related Illiquid Loans and
Securities Options Securities Participations Lending
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market Can Invest 10%
- --------------------------------------------------------------------------------------------------
Income Can Invest Can Invest 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
High Yield 25% Can Invest 15% (net) 15% 30%
- --------------------------------------------------------------------------------------------------
Emerging Markets Can Invest 15% (net) 20% 33 1/3%
- --------------------------------------------------------------------------------------------------
STARS No limit 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
Insiders Fund Can Invest 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
Large Cap 10% Can Invest 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
Small Cap 10% Can Invest 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
Focus List Can Invest Can Invest 15% (net)
- --------------------------------------------------------------------------------------------------
Balanced 5% (net) 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
International No limit Can Invest 15% (net) 33 1/3%
- --------------------------------------------------------------------------------------------------
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
Mortgage Purchasing
Related Municipal Covered Puts Structured
Securities Bonds and Calls Securities
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market
- ---------------------------------------------------------------------------------
Income Can Invest 25% 20% (net)
- ---------------------------------------------------------------------------------
High Yield 20% 5% (net) 20% (net)
- ---------------------------------------------------------------------------------
Emerging Markets Can Invest 20% (net) Can Invest
- ---------------------------------------------------------------------------------
STARS 5%
- ---------------------------------------------------------------------------------
Insiders Fund 5%
- ---------------------------------------------------------------------------------
Large Cap 5%
- ---------------------------------------------------------------------------------
Small Cap 5%
- ---------------------------------------------------------------------------------
Focus List 5%
- ---------------------------------------------------------------------------------
Balanced 5% (net) 5% 5% (net)
- ---------------------------------------------------------------------------------
International Can Invest 5%
- ---------------------------------------------------------------------------------
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
Zero Coupon,
When-Issued and Writing Pay-in-Kind and
Forward Covered Puts Discount
Trade Claims Warrants Commitments and Calls Securities
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market 25%
- ---------------------------------------------------------------------------------------------------
Income 33 1/3% 20% (net) Can Invest
- ---------------------------------------------------------------------------------------------------
High Yield Can Invest 33 1/3% 20% (net) 25%
- ---------------------------------------------------------------------------------------------------
Emerging Markets Can Invest Can Invest 20% (net) Can Invest
(up to 10% in
when, as and
if issued
securities)
- ---------------------------------------------------------------------------------------------------
STARS 5% (net) 33 1/3% 20% (net)
- ---------------------------------------------------------------------------------------------------
Insiders Fund 33 1/3% 20% (net)
- ---------------------------------------------------------------------------------------------------
Large Cap 33 1/3% 20% (net)
- ---------------------------------------------------------------------------------------------------
Small Cap 33 1/3% 20% (net)
- ---------------------------------------------------------------------------------------------------
Focus List 33 1/3% 20% (net)
- ---------------------------------------------------------------------------------------------------
Balanced 5% (net) 33 1/3% 20% (net) Can Invest
- ---------------------------------------------------------------------------------------------------
International 5% (net) 20% 20% (net) Can Invest
- ---------------------------------------------------------------------------------------------------
</TABLE>
Balanced Portfolio. In addition to the instruments listed in the
------------------
tables above, the Balanced Portfolio may invest in the following:
. Inverse floating rate notes [arrow] 5% of net assets
. Mortgage dollar rolls [arrow] 20% of total assets
. Real estate investment trusts ("REITs") [arrow] 10% of total assets
Asset-Backed Securities. Asset-backed securities represent
-----------------------
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
Like mortgage-related securities, asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. 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.
B-6
<PAGE>
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 regulation designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. These foreign branches and subsidiaries are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and accounting,
auditing and financial record keeping requirements. In addition, less
information may be publicly available about a foreign branch of a domestic bank
or about a foreign bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by
B-7
<PAGE>
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, BSAM carefully evaluates 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 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, 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
B-8
<PAGE>
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
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. 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
B-9
<PAGE>
arrangements between the lender and the borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are redeemable
at face value, plus accrued interest, at any time. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, a Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with floating
and variable rate demand obligations, BSAM will consider, on an ongoing basis,
earning power, cash flow and other liquidity ratios of the borrower, and the
borrower's ability to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and a Portfolio may invest
in them only if at the time of an 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 is convertible at a stated exchange rate
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. An issuer of a convertible security 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 are equity investments for purposes of a Portfolio's investment
policies.
Corporate Debt Obligations. Corporate debt obligations include
--------------------------
obligations of industrial, utility and financial issuers. 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.
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 net asset value per share ("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 Adviser could find it difficult to sell these securities or may be
able to sell the securities only at
B-10
<PAGE>
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.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Portfolio's 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.
Custodial Receipts. Custodial 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.
Debt Ratings. 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 BSAM 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 Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch
Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff")
may change as a result of changes in such organizations or their rating systems,
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.
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 below investment grade are the equivalent of high yield, high risk
bonds, commonly known as "junk bonds." Investment grade debt is generally rated
"BBB" 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
B-11
<PAGE>
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 interest of such obligations and/or when it
becomes due, due to factors such as debt service, cash flow situation, the
extent of its foreign reserves, and the availability of sufficient foreign
exchange on the date a payment is due. The risk of loss due to default by the
issuer is significantly greater for the holders of 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.
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. 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 the obligation.
Distressed Securities. Distressed securities are issued by
---------------------
financially troubled or bankrupt companies ("financially troubled issuers")
companies whose securities are, in the view of BSAM, currently undervalued, out-
of-favor or price depressed relative to their long-term potential for growth and
income ("operationally troubled issuers").
B-12
<PAGE>
The securities of financially and operationally troubled issuers may
require active monitoring and at times may require BSAM to participate in
bankruptcy or reorganization proceedings on behalf of a Portfolio. To the
extent that BSAM 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 BSAM 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 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.
B-13
<PAGE>
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.
Emerging Market Securities. The securities markets of certain
--------------------------
emerging market countries are marked by a high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of ownership of
such securities by a limited number of investors. The markets for securities in
certain emerging market countries are in the earliest stages of their
development. Even the markets for relatively widely traded securities in
emerging markets may not be able to absorb, without price disruptions, a
significant increase in trading volume or trades of a size customarily
undertaken by institutional investors in the securities markets of developed
countries. 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 are often
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
B-14
<PAGE>
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 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 many emerging market
countries are heavily dependent upon international trade and are accordingly
affected by protective trade barriers and the economic conditions of their
trading partners. In addition, the economies of some emerging market countries
are vulnerable to weakness in world prices for their commodity exports.
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."
Equity Securities. Equity securities consist of common stocks,
-----------------
convertible securities and preferred stocks. Preferred stock generally receives
dividends before distributions are paid on common stock and ordinarily has a
priority claim over common stockholders if the issuer of the stock is
liquidated. Domestic and foreign stocks, and ADRs are eligible for inclusion of
the Focus List.
B-15
<PAGE>
Foreign Government Securities. Investment in sovereign debt
-----------------------------
obligations involves special risks not present in debt obligations of corporate
issuers. The issuer of the debt or the governmental authorities that control
the repayment of the debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt, and an investor may
have limited recourse in the event of a default. Periods of economic
uncertainty may result in the volatile sovereign debt market prices. A
sovereign debtor's willingness or ability to repay principal and pay interest in
a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward international lenders and the political constraints to which a sovereign
debtor may be subject. 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.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the Portfolio endeavors to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of the Portfolio's assets are uninvested and no
return is earned on such assets. The inability of a Portfolio to make intended
security purchases due to settlement problems
B-16
<PAGE>
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.
Securities issued by foreign companies, foreign branches of U.S.
banks, foreign banks, or other foreign issuers, may take the form of sponsored
and unsponsored American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs") and European Depositary Receipts ("EDRs"). An ADR is a
negotiable receipt, usually issued by a U.S. bank, that evidences ownership of a
specified number of foreign securities on deposit with a U.S. depository and
entities the shareholder to all dividends and capital gains of the underlying
securities. ADRs are traded on 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 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. Illiquid securities include repurchase
-------------------
agreements that have a maturity of longer than seven days and other securities
that are illiquid by virtue of the absence of a readily available market or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities 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.
B-17
<PAGE>
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. BSAM anticipates that the market for certain
restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. BSAM will monitor the liquidity of
such restricted securities subject to the supervision of the Board. In reaching
liquidity decisions, BSAM will consider, inter alia, the following factors: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it must be rated in one of the two highest rating categories by at
least two NRSROs, or if only one NRSRO rates the securities, by that NRSRO, or,
if unrated, be of comparable quality in the view of BSAM; and (ii) it must not
be "traded flat" (i.e., without accrued interest) or in default as to principal
or interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
The SEC has taken the position that purchased over-the-counter ("OTC")
options and the assets used as "cover" for written OTC options are illiquid
securities unless 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.
B-18
<PAGE>
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.
Mortgage-Related Securities. Mortgage-related securities are backed
---------------------------
by mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, mortgage-related securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Portfolio may purchase mortgage-related securities
at a premium or at a discount.
U.S. Government Agency Securities. Mortgage-related securities issued
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"). 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
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
B-19
<PAGE>
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
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 Income
Portfolio 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 paid by REITs in which it invests in
addition to the expenses paid by the Portfolio.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be
B-20
<PAGE>
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified (except to the extent the Code requires),
and are subject to the risks of financing projects. REITs are subject to heavy
cash flow dependency, default by borrowers, self-liquidation, and the
possibilities of failing to qualify for the exemption from tax for distributed
income under the Code and failing to maintain their exemptions from the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs (especially
mortgage REITs) are also subject to interest rate risks.
Repurchase Agreements. A Portfolio's custodian or sub-custodian will
---------------------
have custody of, and will hold in a segregated account, securities that the
Portfolio acquire 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 domestic banks with
total assets in excess of one billion dollars, or primary government securities
dealers reporting to the Federal Reserve Bank of New York, with respect to
securities of the type in which each Portfolio may invest, and will require that
additional securities be deposited with it if the value of the securities
purchased should decrease below the resale price. BSAM will monitor on an
ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. 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 is fixed at the time of the
commitment. At the time of entering into the agreement a Portfolio receives a
commitment fee, regardless of whether or not 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 taken 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.
Securities subject to a standby commitment may not be issued and the
value of the security, if issued, on the delivery date may be more or less than
its purchase price. Because the issuance of the security underlying the
commitment is at the option of the issuer, a Portfolio may bear the risk of a
B-21
<PAGE>
decline in the value of such security and may not benefit from an appreciation
in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, the commitment fee will be recorded as income on the expiration
date of the standby commitment.
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 obligor, (ii) the debtor may have a variety of defenses to
assert against the claim under the bankruptcy code, (iii) volatile pricing due
to a less liquid market, including a small number of brokers for trade claims
and a small universe of potential buyers, (iv) the possibility that 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 higher 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 that approximate its par value. A floating rate obligation
is one whose terms provide for the readjustment of its interest rate whenever a
specified interest rate changes and which, at any time, reasonably can be
expected to have a market value that approximates its par value. Variable and
floating rate obligations
B-22
<PAGE>
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 receive 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 annually "phantom 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
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<PAGE>
aggregate par value of the securities. Deferred payment securities are
securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals.
Zero coupon, pay-in-kind and deferred payment securities may be
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparable rated securities paying cash interest
at regular intervals. In addition, because a Portfolio must distribute income
to its shareholders to qualify for pass-through federal tax treatment (including
the "phantom 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 satisfy these distributions.
Management Policies
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 or a specified amount of cash 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.
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
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
The writer of an option retains the amount of the premium, although
this amount may be offset or exceeded, in the case of a covered call option, by
a decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
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 BSAM
expects will have a high degree of positive correlation to the values of such
portfolio securities. If BSAM's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If BSAM's judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Portfolio's investments and therefore the put option may not provide complete
protection against a decline in the value of the Portfolio's investments below
the level sought to be protected by the put option.
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
B-24
<PAGE>
may, therefore, purchase call options on other carefully selected securities the
values of which BSAM expects will have a high degree of positive correlation to
the values of the securities that the Portfolio intends to acquire. In such
circumstances, the Portfolio will be subject to risks analogous to those
summarized above in the event that the correlation between the value of call
options so purchased and the value of the securities intended to be acquired by
the Portfolio is not as close as anticipated and the value of the securities
underlying the call options increases less than the value of the securities.
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
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
B-25
<PAGE>
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 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. 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."
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.
B-26
<PAGE>
Options on a securities index involve risks similar to those risks
relating to transactions in financial futures contracts described below. Also,
an option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
Risks of Options Transactions. An exchange-traded option position may
-----------------------------
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although a Portfolio will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option at any particular time, and for some exchange-
traded options, no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its exchange-traded options
in order to realize any profit and may incur transaction costs in connection
therewith. If a Portfolio, as a covered call option writer, is unable to effect
a closing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange
include: (a) insufficient trading interest in certain options; (b) restrictions
on transactions imposed by an exchange; (c) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (d) interruption of the normal operations on an exchange;
(e) inadequacy of the facilities of an exchange or clearinghouse, such as The
Options Clearing Corporation (the "O.C.") to handle current trading volume; or
(f) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
O.C. as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which 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. Similarly,
in the event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by BSAM.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Risks of Options on Foreign Currencies. Options on foreign currencies
--------------------------------------
involve the currencies of two nations and therefore, developments in either or
both countries affect the values of options on foreign currencies. Risks
include those described in the Prospectus under "Risk Factors -- Foreign
Securities," including government actions affecting currency valuation and the
movements of currencies from one country to another. The quantity of currency
underlying option contracts represent odd lots in a market dominated by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while round-the-clock interbank currency markets
are open, and this can create price and rate discrepancies.
Futures Contracts and Related Options. 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
B-27
<PAGE>
investment objective. A "purchase" of a futures contract (or a "long" futures
position) means the assumption of a contractual obligation to acquire a
specified quantity of the securities underlying the contract at a specified
price at a specified future date. A "sale" of a futures contract (or a "short"
futures position) means the assumption of a contractual obligation to deliver a
specified quantity of the securities underlying the contract at a specified
price at a specified future date. At the time a futures contract is purchased or
sold, the Portfolio is required to deposit cash or securities with a futures
commission merchant or in a segregated custodial account representing between
approximately 10% to 5% of the contract amount, called "initial margin."
Thereafter, the futures contract will be valued daily and the payment in cash of
"maintenance" or "variation margin" may be required, resulting in 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 impacted 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, there is no assurance that a liquid market on an exchange will exist for
any particular futures contract or option at any particular time. In the event
no liquid market exists for a particular futures contract or option thereon in
which the Portfolio maintains a position, it would not be possible to effect a
closing transaction in that contract or to do so at a satisfactory price and the
Portfolio would have to either make or take delivery under the futures contract
or, in the case of a written call option, wait to sell the underlying securities
until the option expired or was exercised, or, in the case of a purchased
option, exercise the option. In the case of a futures contract or an option on
a futures contract which 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 BSAM's ability to predict correctly movements in the direction of interest
rates, securities prices and markets; (2) imperfect correlation between the
price of futures contracts and options thereon and movement in the prices of the
securities being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; (5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of the
Portfolio to sell a portfolio security at a time that otherwise would be
favorable for it to do so. In the event it did sell the security and eliminated
its "cover," it would have to replace its "cover" with an appropriate futures
contract or option or segregate securities with the required value, as described
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 BSAM's expectations are not met, assuming proper adherence to the
segregation requirement, the volatility of the a as a whole should be no greater
than if the same strategy had been pursued in the cash market.
B-28
<PAGE>
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.
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.
Uses of Futures Contracts. Futures contracts will be used for bona
-------------------------
fide hedging, risk management and return enhancement purposes.
B-29
<PAGE>
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.
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
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<PAGE>
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 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
B-31
<PAGE>
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, 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.
Forward Foreign Currency Exchange Contracts. 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 transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
When a Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when it anticipates the receipt
in a foreign currency of dividends or interest payments on a security which it
holds, the Portfolio may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment. By
entering into a forward contract, for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, a Portfolio may be able to protect against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the foreign currency during the period between the date on which the security is
purchased or sold, or on which the dividend or interest payment is declared, and
the date on which such payments are made or received.
B-32
<PAGE>
Additionally, when BSAM believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, a
Portfolio may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the forward contract is entered into
and the date it matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. If a Portfolio enters into a position hedging
transaction, the transaction will be covered by the position being hedged or the
custodian will place cash or liquid securities in a segregated account (less the
value of the "covering" positions, if any) in an amount equal to the value of
the total assets committed to the consummation of the given forward contract.
The assets placed in the segregated account will be marked-to-market daily, and
if the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will, at all times, equal the amount of the
Portfolio's net commitment with respect to the forward contract.
A Portfolio generally will not enter into a forward contract with a
term of greater than one year. At the maturity of a forward contract, a
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of a particular portfolio security at the expiration of the forward contract.
Accordingly, if a Portfolio decides to sell the security and deliver the foreign
currency and if the market value of the security is less than the amount of
foreign currency that the Portfolio must deliver, then the Portfolio must
purchase additional foreign currency on the spot market (and bear any related
costs).
If a Portfolio retains the security and engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been
movement in forward contract prices. Should forward contract prices decline
during the period between a Portfolio's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Portfolio will realize a gain to
the extent that the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward contract prices
increase, a Portfolio will suffer a loss to the extent that the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
A Portfolio's forward foreign currency exchange contract transactions
will generally be limited as described above. Of course, the Portfolio is not
required to enter into such transactions with regard to its foreign currency-
denominated securities. This method of protecting the value of portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities which are unrelated to
exchange rates. In addition, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result should the value of such currency
increase.
Although a Portfolio values its assets daily in terms of U.S. dollars,
it will not actually convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It may, however, do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
B-33
<PAGE>
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the spread) between the prices at which they are buying
and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Portfolio at one rate, while offering a lesser rate of exchange
to buy that currency back.
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 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; BSAM believes that swaps do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions.
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 BSAM.
The use of interest rate, mortgage, index and currency swaps, as well
as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If BSAM is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a
B-34
<PAGE>
Portfolio would be less favorable than it would have been if this investment
technique were not used. The SEC currently take 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 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, 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.
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.
B-35
<PAGE>
Fundamental Restrictions
1. Concentration
The Money Market Portfolio and Focus List 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 or in bank instruments issued by domestic banks.
The Income Portfolio, STARS Portfolio, Insiders Fund, Large Cap
Portfolio and Small Cap Portfolio each may not invest more than 25% of the value
of its total assets in the securities of issuers in any single industry,
provided that there shall be no limitation on the purchase of obligations issued
or guaranteed by the U.S. Government, its agencies or sponsored enterprises.
The Emerging Markets 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 Emerging Market
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.
The High Yield Portfolio, Balanced Portfolio and International
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.
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 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
B-36
<PAGE>
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 Emerging Markets 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 Emerging
Markets Portfolio, may not invest in commodities, except that each Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
5. 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 Emerging Markets 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 Emerging
Markets 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 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 Emerging Markets 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, 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
B-37
<PAGE>
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 Emerging
Markets 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 Emerging Markets 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 Emerging
Markets Portfolio, may not make loans to others, except through the purchase of
debt obligations and the entry into repurchase agreements. However, each
Portfolio may lend its portfolio securities in an amount not to exceed 33-1/3%
of the value of its total assets. Any loans of portfolio securities will be
made according to guidelines established by the 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 Emerging Markets 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.
Each Portfolio, other than the Money Market Portfolio and Emerging
Markets Portfolio, may not act as an underwriter of securities of other issuers,
except to the extent each 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 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 Portfolio may engage in transactions that may result in the
issuance of senior securities to the extent permitted under applicable
regulations and interpretations of
B-38
<PAGE>
the 1940 Act or an exemptive order; (b) each 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 Portfolio may borrow money as authorized by the 1940
Act.
The Income Portfolio, STARS Portfolio, Insiders 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 Emerging Markets 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, STARS Portfolio, Large Cap Portfolio, Small Cap
Portfolio and Insiders Fund each may not purchase securities on margin, but each
Portfolio may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes.
11. Unseasoned Issuers
The 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 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 Emerging
Markets Portfolio may not pledge, mortgage or hypothecate its assets, except to
the extent necessary to secure permitted borrowings and to the extent related to
the purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Options
The Money Market Portfolio may not write or sell puts, calls,
straddles, spreads or combinations thereof.
B-39
<PAGE>
The Income Portfolio, STARS Portfolio, Insiders 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 Emerging
Markets Portfolio, may not purchase securities of other investment companies,
except to the extent permitted under the 1940 Act.
4. Unseasoned Issuers
The Emerging Markets 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 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 Emerging Market 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 Fund each
may not invest in the securities of a company for the purpose of exercising
management or control, but each 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.
The Income Portfolio, STARS Portfolio, Insiders 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 Portfolio each may not knowingly invest more than 15% of the value
of its assets in securities that may be
B-40
<PAGE>
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 Portfolio each may not purchase securities on margin, but each
Portfolio may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes.
8. Short Sales
The Emerging Markets 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
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 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.
B-41
<PAGE>
MANAGEMENT OF THE FUND
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.
<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.; until 1969,
126 East 56th Street President of Koll, Bren Realty Advisors and Senior
New York, NY 10021 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 (54) * Trustee, Senior Managing Director of Bear Stearns; since 1997,
245 Park Avenue Chairman Chairman of BSFM; Treasurer of Bear Stearns;
New York, NY 10167 Treasurer of The Bear Stearns Companies Inc.;
Director of The Bear Stearns Companies Inc.
_______________________
* Indicates an "interested person" of the Adviser.
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.
Peter Fox (47) Executive Vice Founder, Fox Development Corp., 1998; since 1997,
Three First National Plaza President Managing Director - Emeritus, Bear Stearns; until
Chicago, IL 60602 1997, Senior Managing Director, Public Finance, Bear
Stearns.
Barry Sommers (30) Executive Vice Since 1997, Managing Director and Head of Marketing
245 Park Avenue President and Sales for Bear Sterns Funds; from 1995 to 1997,
New York, NY 10167 Vice President, Mutual Fund Sales, Goldman, Sachs &
Co.
Stephen A. Bornstein (56) Secretary Managing Director, Legal Department; General Counsel,
575 Lexington Avenue BSAM.
New York, NY 10022
</TABLE>
B-42
<PAGE>
<TABLE>
<CAPTION>
Position
Name, address (and age) with Trust Principal Occupation
- ---------------------- ---------- --------------------
<S> <C> <C>
Frank J. Maresca (40) Vice President Managing Director of Bear Stearns; since 1997, Chief
245 Park Avenue and Treasurer Executive Officer and President of BSFM.
New York, NY 10167
Vincent L. Pereira (34) Assistant Since 1995, Associate Director of Bear Stearns 1995;
245 Park Avenue Treasurer since 1997, Treasurer and Secretary of BSFM; until
New York, NY 10167 1995, 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 __________ ___, 1999, the Emerging Markets Portfolio was a series of
Bear Stearns Investment Trust ("BSIT"), another registered investment company
advised by BSAM. For the fiscal year ended March 31, 1999, Messrs. Bren 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
Compensation from Accrued as Part of Benefits from Paid to
Name of Board 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 $____________ 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 __________ ___, 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
B-43
<PAGE>
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.
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 Emerging Markets 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.
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 Portfolios February 22, 1995, as revised
May 4, 1995
- ---------------------------------------------------------------------------------------
Money Market Portfolio June 2, 1997
- ---------------------------------------------------------------------------------------
STARS Portfolio June 25, 1997
- ---------------------------------------------------------------------------------------
Balanced, High Yield, International Portfolios September 8, 1997
- ---------------------------------------------------------------------------------------
Focus List Portfolio December 29, 1997
- ---------------------------------------------------------------------------------------
Insiders Fund January 20, 1998
- ---------------------------------------------------------------------------------------
Emerging Market Portfolio August ___, 1999
- ---------------------------------------------------------------------------------------
</TABLE>
B-44
<PAGE>
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 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.
Portfolio Advisory Fee
Money Market Portfolio 0.20%
Income Portfolio 0.45%
High Yield Portfolio 0.60%
Emerging Markets 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
STARS Portfolio 0.75%
Focus List Portfolio 0.65%
Large Cap Portfolio 0.75%
Small Cap Portfolio 0.75%
Insiders Fund 1.00%
Balanced Portfolio 0.65%
International Portfolio 1.00%
B-45
<PAGE>
Insiders Fund. The monthly fee that the Insiders 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>
<S> <C> <C> <C>
Percentage Point Difference Between Designated Class Performance Basic Fee Performance Total Fee
(Net of Expenses Including Advisory Fees) and Percentage Change (%) Adjustment (%)
in the MidCap 400 Investment Record Rate (%)
- ---------------------------------------------------------------------------------------------------------------------
+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 fiscal years
ended March 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Paid Waived Paid Waived Paid Waived
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market $ 0 $ _____* N/A N/A
- ------------------------------------------------------------------------------------------------------
Income $ 0 $ 98,957 $ 0 $ 91,715
- ------------------------------------------------------------------------------------------------------
High Yield $ 0 $ 28,723** N/A N/A
- ------------------------------------------------------------------------------------------------------
Emerging $106,772 $ _______+ $118,207 $______+
Markets
- ------------------------------------------------------------------------------------------------------
STARS $617,310 $ 645,637 $ 47,973 $699,997
- ------------------------------------------------------------------------------------------------------
Insiders Fund $ 0 $ 157,031 $ 0 $182,313
- ------------------------------------------------------------------------------------------------------
Large Cap $ 0 $ 151,578 $ 0 $140,641
- ------------------------------------------------------------------------------------------------------
Small Cap $ 0 $ 285,539 $ 0 $425,409
- ------------------------------------------------------------------------------------------------------
Focus List $ 0 $ 6,748*** N/A N/A
- ------------------------------------------------------------------------------------------------------
Balanced $ 0 $12,178*** N/A N/A
- ------------------------------------------------------------------------------------------------------
International $ 0 $14,726*** N/A N/A
- ------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
B-46
<PAGE>
In addition, BSAM reimbursed the following amounts for the three
fiscal years ended March 31, 1999, in order to maintain applicable voluntary
expense limitations.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $_______* N/A
- --------------------------------------------------------------------------------------------------------------
Income $ 275,119 $280,261
- --------------------------------------------------------------------------------------------------------------
High Yield $ 41,870** N/A
- --------------------------------------------------------------------------------------------------------------
Emerging Markets $ 56,886 $249,429
- --------------------------------------------------------------------------------------------------------------
Insiders Fund $ 164,325 $243,945
- --------------------------------------------------------------------------------------------------------------
Large Cap $ 185,275 $161,196
- --------------------------------------------------------------------------------------------------------------
Small Cap $ 20,648 $ 86,666
- --------------------------------------------------------------------------------------------------------------
Focus List $46,225*** N/A
- --------------------------------------------------------------------------------------------------------------
Balanced $46,910*** N/A
- --------------------------------------------------------------------------------------------------------------
International $14,726*** N/A
- --------------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
Sub-Investment Advisory Agreement. Marvin & Palmer Associates, Inc.
---------------------------------
(the "Sub-Adviser") provides investment advisory services to the International
Portfolio pursuant to the Sub-Investment Advisory Agreement with BSAM dated
September 8, 1997, as amended February 4, 1998. 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 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
B-47
<PAGE>
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 August ___, 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 fiscal years ended March 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $_____* N/A
- ----------------------------------------------------------------------------------------------------
Income $ 30,572 $ 32,986
- ----------------------------------------------------------------------------------------------------
High Yield $ 7,181** N/A
- ----------------------------------------------------------------------------------------------------
Emerging Markets + $ ______+ $______+
- ----------------------------------------------------------------------------------------------------
STARS $ 224,700 $131,668
- ----------------------------------------------------------------------------------------------------
Insiders Fund $ 30,981 $ 32,547
- ----------------------------------------------------------------------------------------------------
Large Cap $ 28,128 $ 30,232
- ----------------------------------------------------------------------------------------------------
Small Cap $ 85,085 $ 57,108
- ----------------------------------------------------------------------------------------------------
Focus List $8,238*** N/A
- ----------------------------------------------------------------------------------------------------
Balanced $2,801*** N/A
- ----------------------------------------------------------------------------------------------------
International $2,209*** N/A
- ----------------------------------------------------------------------------------------------------
* 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 August ___, 1999, BSAM paid BSFM this fee from its management fee.
</TABLE>
Administrative Services Agreement. PFPC provides certain
---------------------------------
administrative services to the Portfolios pursuant to the Administrative
Services Agreement with the Trust dated February 22, 1995,
B-48
<PAGE>
as revised September 8, 1997 and August ___, 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 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 fiscal
years ended March 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Money Market $_____* N/A
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 98,944 $ 99,469
- ----------------------------------------------------------------------------------------------------
High Yield $_____** N/A
- ----------------------------------------------------------------------------------------------------
Emerging Markets $_______ $_______
- ----------------------------------------------------------------------------------------------------
STARS $_______ $_______
- ----------------------------------------------------------------------------------------------------
Insiders Fund $_______ $_______
- ----------------------------------------------------------------------------------------------------
Large Cap $100,107 $ 99,570
- ----------------------------------------------------------------------------------------------------
Small Cap $134,255 $119,822
- ----------------------------------------------------------------------------------------------------
Focus List $_______*** N/A
- ----------------------------------------------------------------------------------------------------
Balanced $_______*** N/A
- ----------------------------------------------------------------------------------------------------
International $_______*** N/A
- ----------------------------------------------------------------------------------------------------
* 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.
</TABLE>
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 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.
B-49
<PAGE>
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 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"), for the fiscal years ended March 31, 1999.
<TABLE>
<CAPTION>
Class A 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
- ------
Total Payments $ 11,111 $ 15,344
-------------- -------- --------
Broker-dealers $ 7,936 $ 15,344
Underwriters $ 0 $ 0
Other Distribution $ 3,175 $ 0
- -------------------------------------------------------------------------------------------------------------
High Yield
- ----------
Total Payments $ 8,354*
-------------- -------- N/A
Broker-dealers $ 5,967
Underwriters $ 2,387
Other Distribution $ 0
-------------------------------------------------------------------------------------------------------------
Emerging Markets
- ----------------
Total Payments $120,046 $110,830
-------------- -------- --------
Broker-dealers $ ______ $ ______
Underwriters $ ______ $ ______
Other Distribution $ ______ $ ______
</TABLE>
B-50
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
STARS
- -----
Total Payments $443,379 $276,327
-------------- -------- --------
Broker-dealers $221,689 $276,327
Underwriters $ 0 $ 0
Other Distribution $221,690 $ 0
- -------------------------------------------------------------------------------------------------------------
Insiders Fund
- -------------
Total Payments $ 87,556 $ 65,276
-------------- -------- --------
Broker-dealers $ 43,778 $ 65,276
Underwriters $ 0 $ 0
Other Distribution $ 43,778 $ 0
- -------------------------------------------------------------------------------------------------------------
Large Cap
- ---------
Total Payments $ 32,237 $ 27,440
-------------- -------- --------
Broker-dealers $ 16,119 $ 27,400
Underwriters $ 0 $ 0
Other Distribution $ 16,119 $ 0
- -------------------------------------------------------------------------------------------------------------
Small Cap
- ---------
Total Payments $ 95,967 $ 57,907
-------------- -------- --------
Broker-dealers $ 47,984 $ 57,907
Underwriters $ 0 $ 0
Other Distribution $ 47,984 $ 0
- -------------------------------------------------------------------------------------------------------------
Focus List
- ----------
Total Payments $2,352**
-------------- -------- N/A
Broker-dealers $ 1,176
Underwriters $ 0
Other Distribution $ 1,176
- -------------------------------------------------------------------------------------------------------------
Balanced
- --------
Total Payments $3,305**
-------------- -------- N/A
Broker-dealers $ 1,652
Underwriters $ 0
Other Distribution $ 1,653
- -------------------------------------------------------------------------------------------------------------
International
- -------------
Total Payments $2,887**
------------- -------- N/A
Broker-dealers $ 1,444
Underwriters $ 0
Other Distribution $ 1,443
- -------------------------------------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998.
** From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Class B 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
- ------
Total Payments $ 21 N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 21
- --------------------------------------------------------------------------------------------------------------
High Yield
- ----------
Total Payments $ 7,019* N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 7,019
- --------------------------------------------------------------------------------------------------------------
Emerging Markets
- ----------------
Total Payments $ 782** N/A
-------------- ---------
Broker-dealers $ _____
Underwriters $ _____
- --------------------------------------------------------------------------------------------------------------
STARS
- -----
Total Payments $ 7,370 N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 7,370
- --------------------------------------------------------------------------------------------------------------
Insiders Fund
- -------------
Total Payments $ 1,976 N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 1,976
- --------------------------------------------------------------------------------------------------------------
Large Cap
- ---------
Total Payments $ 271 N/A
--------------
Broker-dealers $ 0
Underwriters $ 271
- --------------------------------------------------------------------------------------------------------------
Small Cap
- ---------
Total Payments $ 830 N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 830
- --------------------------------------------------------------------------------------------------------------
Focus List
- ----------
Total Payments $3,037*** N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 3,037
- --------------------------------------------------------------------------------------------------------------
Balanced
- --------
Total Payments $2,073*** N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 2,073
- --------------------------------------------------------------------------------------------------------------
International
- -------------
Total Payments $4,481*** N/A
-------------- ---------
Broker-dealers $ 0
Underwriters $ 4,481
- --------------------------------------------------------------------------------------------------------------
*** From December 27, 1997 (commencement of investment operations) to March 31, 1998.
* From January 2, 1998 (commencement of investment operations) to March 31, 1998.
** From January 12, 1998 (commencement of investment operations) to March 31, 1998.
</TABLE>
B-52
<PAGE>
<TABLE>
<CAPTION>
Class C 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
- ------
Total Payments $ 10,434 $ 12,483
-------------- -------- --------
Broker-dealers $ 8,499 $ 6,904
Underwriters $ 1,935 $ 5,579
- -------------------------------------------------------------------------------------------------------------
High Yield
- ----------
Total Payments $13,194*
-------------- -------- N/A
Broker-dealers $ 0
Underwriters $ 13,194
- -------------------------------------------------------------------------------------------------------------
Income
- ------
Total Payments $ 29,812 $ 9,356
-------------- -------- --------
Broker-dealers $ _____ $ _____
Underwriters $ _____ $ _____
- -------------------------------------------------------------------------------------------------------------
STARS
- -----
Total Payments $520,582 $324,164
-------------- -------- --------
Broker-dealers $340,935 $156,745
Underwriters $179,647 $167,419
- -------------------------------------------------------------------------------------------------------------
Insiders Fund
- -------------
Total Payments $ 99,650 $ 94,265
-------------- -------- --------
Broker-dealers $ 78,870 $ 44,129
Underwriters $ 20,780 $ 50,136
- -------------------------------------------------------------------------------------------------------------
Large Cap
- ---------
Total Payments $ 40,215 $ 37,332
-------------- -------- --------
Broker-dealers $ 31,566 $ 15,234
Underwriters $ 8,649 $ 22,098
- -------------------------------------------------------------------------------------------------------------
Small Cap
- ---------
Total Payments $145,963 $111,111
-------------- -------- --------
Broker-dealers $ 95,103 $ 30,062
Underwriters $ 50,860 $ 81,049
- -------------------------------------------------------------------------------------------------------------
Focus List
- ---------- $2,640**
Total Payments -------- N/A
-------------- $ 0
Broker-dealers $ 2,640
Underwriters
- -------------------------------------------------------------------------------------------------------------
Balanced
- --------
Total Payments $1,813**
-------------- -------- N/A
Broker-dealers $ 0
Underwriters $ 1,813
- -------------------------------------------------------------------------------------------------------------
International
- -------------
Total Payments $ 4,471
-------------- -------- N/A
Broker-dealers $ 0
Underwriters $ 4,471
- -------------------------------------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998.
** From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
B-53
<PAGE>
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: 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
B-54
<PAGE>
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 Sterns with repsect to the Emerging Markets
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 August ___, 1999, which is renewable
annually.
The following table shows the 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 fiscal years ended March 31,
1999. In some states, banks or other institutions effecting transactions in
Portfolio shares may be required to register as dealers pursuant to state law.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
- ------
FESL $ 11,400 $ 11,400
CDSC $ 100 $ 100
- --------------------------------------------------------------------------------------------------------------
High Yield
- ----------
FESL $ 155,705* N/A
CDSC $ 0
- --------------------------------------------------------------------------------------------------------------
Emerging Markets
- ----------------
FESL $ ______ $ ______
CDSC $ ______ $ ______
- --------------------------------------------------------------------------------------------------------------
STARS
- -----
FESL $1,022,000 $904,000
CDSC $ 26,000 $ 30,000
- --------------------------------------------------------------------------------------------------------------
Insiders Fund
- -------------
FESL $ 236,026 $163,000
CDSC $ 2,558 $ 14,300
- --------------------------------------------------------------------------------------------------------------
Large Cap
- ---------
FESL $ 68,262 $ 68,262
CDSC $ 552 $ 552
</TABLE>
B-55
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Small Cap
- ---------
FESL $ 214,826 $214,826
CDSC $ 4,052 $ 4,052
- --------------------------------------------------------------------------------------------------------------
Focus List
- ----------
FESL $ 71,580** N/A
CDSC $ 0
- --------------------------------------------------------------------------------------------------------------
Balanced
- --------
FESL $ 32,306** N/A
CDSC $ 0
- --------------------------------------------------------------------------------------------------------------
International
- -------------
FESL $ 58,103** N/A
CDSC $ 0
- --------------------------------------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998.
** From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
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.
Fixed Income Portfolios
<TABLE>
<CAPTION>
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>
B-56
<PAGE>
Equity Portfolios
<TABLE>
<CAPTION>
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 5.50% 5.82% 5.25%
$50,000 to less than $100,000 4.75 4.99 4.25
$100,000 to less than $250,000 3.75 3.90 3.25
$250,000 to less than $500,000 2.75 2.83 2.50
$500,000 to less than $1,000,000 2.00 2.04 1.75
$1,000,000 and above* 0.00 0.00 1.25
</TABLE>
________
* There is no initial sales charge on purchases of $1,000,000 or more of Class A
shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems those
shares within one year after purchase, a CDSC of 1.00% will be imposed at the
time of redemption. Letter of Intent and Right of Accumulation apply to such
purchases of Class A shares.
The dealer concession may be changed from time to time but will remain
the same for all dealers. From time to time, Bear Stearns may make or allow
additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares. Dealers
may receive a larger percentage of the sales load from Bear Stearns than they
receive for selling most other funds.
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.
Fixed Income Emerging
Portfolios Income High Yield Markets
NAV $ $ $
============== ============== ==============
Sales Charge - 4.50%
(4.71% of NAV) -------------- -------------- --------------
Offering Price $ $ $
============== ============== ==============
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Portfolios Insiders
STARS Fund Large Cap Small Cap Focus List
<S> <C> <C> <C> <C> <C>
NAV $ $ $ $ $
============== ============== ============== ============== ==============
Sales Charge - 5.50%
(5.82% of NAV) -------------- -------------- -------------- -------------- --------------
Offering Price $ $ $ $ $
============== ============== ============== ============== ==============
- -------------------------------------------------------------------------------------------------------
</TABLE>
B-57
<PAGE>
Balanced Int'l
NAV $ $
============== ==============
Sales Charge - 5.50%
(5.82% of NAV) -------------- --------------
Offering Price $ $
============== ==============
- -------------------------------------------------------
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 are directly
attributable to a class are allocated equally to each outstanding share within
that class. Such expenses
B-58
<PAGE>
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 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
B-59
<PAGE>
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.
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
B-60
<PAGE>
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 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.
B-61
<PAGE>
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
Emerging Markets Debt Portfolio, High Yield Total Return Portfolio and Prime
Money Market Portfolio had capital loss carryforwards of approximately $978,841,
$175,885, and $34,543, 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 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.
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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 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 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
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(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
--------------------------------------------
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 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).
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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
Prime Money Market Portfolio, International Equity Portfolio and the Emerging
Markets Debt Portfolio, only an insignificant 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.
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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.
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
----------------------------
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.
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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 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
Growth 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.
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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.
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 Emerging Markets 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.
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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 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 the its portfolio managers in
their best judgment.
Equity Portfolios. BSAM assumes general supervision over placing
orders on behalf of each Equity Portfolio for the purchase or sale of investment
securities. Allocation of brokerage transactions, including their frequency, is
made in BSAM's best judgment and in a manner deemed fair and reasonable to
shareholders. The primary consideration is prompt execution of orders at the
most favorable net price. Subject to this consideration, the brokers selected
will include those that supplement
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BSAM's research facilities with statistical data, investment information,
economic facts and opinions. Information so received is in addition to and not
in lieu of services required to be performed by BSAM and BSAM's fees are not
reduced as a consequence of the receipt of such supplemental information. A
commission paid to such brokers may be higher than that which another qualified
broker would have charged for effecting the same transaction, provided that
BSAM, as applicable, determines in good faith that such commission is reasonable
in terms of the transaction or the overall responsibility of BSAM to the
Portfolio and its other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long-term.
Such supplemental information may be useful to BSAM in serving each
Equity Portfolio and the other funds which it advises and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to BSAM in carrying out its obligations to each Equity Portfolio.
Sales of Portfolio shares by a broker may be taken into consideration, and
brokers also will be selected because of their ability to handle special
executions such as are involved in large block trades or broad distributions,
provided the primary consideration is met. Large block trades may, in certain
cases, result from two or more funds advised or administered by BSAM being
engaged simultaneously in the purchase or sale of the same security. Certain of
BSAM's transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to each Equity Portfolio for transactions
in securities of domestic issuers. When transactions are executed in the over-
the-counter market, each Portfolio will deal with the primary market makers
unless a more favorable price or execution otherwise is obtainable. Foreign
exchange transactions of each Equity 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 fiscal years ended March 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income 245% 263%
- --------------------------------------------------------------------------------------------------------------
High Yield 140%* N/A
- --------------------------------------------------------------------------------------------------------------
Emerging Markets 129% 223%
- --------------------------------------------------------------------------------------------------------------
STARS 173% 220%
- --------------------------------------------------------------------------------------------------------------
Insiders Fund 116% 128%
- --------------------------------------------------------------------------------------------------------------
Large Cap 62% 137%
- --------------------------------------------------------------------------------------------------------------
Small Cap 90% 57%
- --------------------------------------------------------------------------------------------------------------
Focus List 29%** N/A
- --------------------------------------------------------------------------------------------------------------
Balanced 13%** N/A
- --------------------------------------------------------------------------------------------------------------
International 3%** N/A
- --------------------------------------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998.
** From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
In periods in which extraordinary market conditions prevail, BSAM will
not be deterred from changing investment strategy as rapidly as needed, in which
case higher portfolio turnover rates can
B-70
<PAGE>
be anticipated which would result in greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by BSAM based upon its
knowledge of available information as to the general level of commissions paid
by other institutional investors for comparable services.
To the extent consistent with applicable provisions of the 1940 Act
and the rules and exemptions adopted by the SEC thereunder, the Board has
determined that transactions for each Portfolio may be executed through Bear
Stearns if, in the judgment of BSAM, the use of Bear Stearns is likely to result
in price and execution at least as favorable as those of other qualified broker-
dealers, and if, in the transaction, Bear Stearns charges the Portfolio a rate
consistent with that charged to comparable unaffiliated customers in similar
transactions. In addition, 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 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 fiscal years ended March 31, 1999 (including the
amount paid to Bear Stearns). No brokerage commissions were paid by the Fixed
Income Portfolios.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STARS
Total $ 521,114 $ 474,679
----- ($305,271) ($368,764)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
Insiders Select
Total $ 59,364 $ 39,790
----- ($12,445) ($8,925)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
Large Cap
Total $ 26,799 $ 59,523
----- ($522) ($1,300)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
Small Cap
Total $ 302,476 $ 102,411
----- ($1,728) ($9,000)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
Focus List
Total $ 8,274* N/A
----- ($8,238)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
Balanced
Total $ 5,528* N/A
----- ($2,598)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
International
Total $ 16,474* N/A
----- ($0)
(Paid to Bear Stearns)
- --------------------------------------------------------------------------------------------------------------
* From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
B-71
<PAGE>
The following table shows the percentage of commissions for which a
Portfolio received research services during the fiscal years ended March 31,
1999.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
STARS ____ N/A
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insiders Fund 98% 0%
- --------------------------------------------------------------------------------------------------------------
Large Cap 98%
- --------------------------------------------------------------------------------------------------------------
Small Cap 95%
- --------------------------------------------------------------------------------------------------------------
Focus List 100%*
- --------------------------------------------------------------------------------------------------------------
Balanced ____* N/A
- --------------------------------------------------------------------------------------------------------------
International ____* N/A
- --------------------------------------------------------------------------------------------------------------
* From December 27, 1997 (commencement of investment operations) to March 31, 1998.
</TABLE>
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 Emerging
Markets 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. 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
B-72
<PAGE>
MONEY FUND REPORT(R) of Holliston, MA 01746, a widely-recognized independent
publication that monitors the performance of money market funds, or to the
average yields reported by the Bank Rate Monitor from money market deposit
accounts offered by the 50 leading banks and thrift institutions in the top five
standard metropolitan statistical areas.
The 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.
Current yield of a Fixed Income Portfolio is computed pursuant to a formula
which operates as follows: The amount of a Fixed Portfolio's expenses accrued
for the 30-day period (net of reimbursements) is subtracted from the amount of
the dividends and interest earned by the Portfolio during the period. That
result is then divided by the product of: (a) the average daily number of shares
outstanding during the period that were entitled to receive dividends, and (b)
the maximum offering price per share on the last day of the period less any
undistributed earned income per share reasonably expected to be declared as a
dividend shortly thereafter. The quotient is then added to 1, and that sum is
raised to the 6th power, after which 1 is subtracted. The current yield is then
arrived at by multiplying the result by 2.
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 Emerging Markets
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
With waivers With waivers With waivers Without With waivers Without
waivers waivers
- -----------------------------------------------------------------------------------------------------------
Class A _____% _____% _____% _____% _____% _____%
- -----------------------------------------------------------------------------------------------------------
Class B _____% _____% _____% _____% _____% _____%
- -----------------------------------------------------------------------------------------------------------
Class C _____% _____% _____% _____% _____% _____%
- -----------------------------------------------------------------------------------------------------------
Class Y _____% _____% _____% _____% _____% _____%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Average annual total return of each Portfolio is calculated by
determining the ending redeemable value of an investment purchased at NAV
(maximum offering price in the case of Class A) per share with a hypothetical
$1,000 payment made at the beginning of the period (assuming the reinvestment of
dividends and distributions), dividing by the amount of the initial investment,
taking the "n" th root of the quotient (where "n" is the number of years in the
period) and subtracting 1 from the result. A class' average annual total return
figures calculated in accordance with such formula assume
B-73
<PAGE>
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.
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 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. Certain transactions are exempt from item (1) of the previous sentence,
including: (1) any securities transaction, or series of related transactions,
involving 500 or fewer shares of (i) an issuer with an average monthly trading
volume of 100 million shares or more, or (ii) an issuer that has a market
capitalization of $1 billion or greater; and (2) transactions in exempt
securities or the purchase or sale of securities purchased or sold in exempt
transactions.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of each Portfolio first, shall avoid potential or
actual conflicts of interest with each Portfolio, and shall not take unfair
advantage of their relationship with each Portfolio. Under certain
circumstances, the Adviser to each Portfolio may aggregate or bunch trades with
other clients provided that no client is materially disadvantaged. Access
persons are required by the Code of Ethics to file quarterly reports of personal
securities investment transactions. However, an access person is not required
to report a transaction over which he or she had no control. Furthermore, a
trustee of the 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.
B-74
<PAGE>
INFORMATION ABOUT THE TRUST
STARS Portfolio.
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 S&P annual license fees between
0.30% to 0.375% 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.
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 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.
B-75
<PAGE>
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 _________ ___, 1999, the following shareholders owned, directly
or indirectly, 5% or more of the indicated class of Portfolio shares. 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.
[This information will be filed by amendment.]
B-76
<PAGE>
CUSTODIAN[S], 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 Emerging
Markets 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 Emerging Markets 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 Emerging Markets 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.
B-77
<PAGE>
APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch, Duff,
Thomson BankWatch and IBCA:
S&P Bond Ratings
AAA. Bonds rated AAA have the highest rating assigned by S&P.
---
Capacity to pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and
--
repay principal and differ from the highest rated issues only in small degree.
A. Bonds rated A have a strong capacity to pay interest and repay
-
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to
---
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
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.
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.
B-78
<PAGE>
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.
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.
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 Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA. Bonds rated AAA are considered to be investment grade and of the
---
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA. Bonds rated AA are considered to be investment grade and of very
--
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
B-79
<PAGE>
A. Bonds rated A are considered to be investment grade and of high
-
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB. Bonds rated BBB are considered to be investment grade and of
---
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
----
rating are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
---
an assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2. Good Credit Quality. Issues carrying this rating have a
---
satisfactory degree of assurance for timely payments, but the margin of safety
is not as great as the F-1+ and F-1 categories.
Duff Bond Ratings
AAA. Bonds rated AAA are considered highest credit quality. The risk
---
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA. Bonds rated AA are considered high credit quality. Protection
--
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A. Bonds rated A have protection factors which are average but
-
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB. Bonds rated BBB are considered to have below average protection
---
factors but still considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
B-80
<PAGE>
Fitch 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.
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.
IBCA Bond Ratings
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
two highest rating categories used by IBCA for long-term debt ratings:
B-81
<PAGE>
AAA. Obligations for which there is the lowest expectation of
---
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA. Obligations for which there is a very low expectation of
--
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment
-
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business economic or financial conditions may lead
to increased investment risk.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within these rating categories.
IBCA Short-Term Ratings
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The highest rating category of
IBCA for short-term debt is "A." IBCA employs two designations, "A1+" and "A1,"
within the highest rating category. The following summarizes the two highest
categories used by IBCA for short-term ratings:
A1. Obligations are supported by the highest capacity for timely
--
repayment. Where issues possess a particularly strong credit feature, a rating
of "A1+" is assigned.
A2. Obligations are supported by a good capacity for timely
--
repayment.
B-82
<PAGE>
THE BEAR STEARNS FUNDS
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
--------
(a) Exhibits:
EX-99.B1(a) Agreement and Declaration of Trust is incorporated
by reference to Exhibit (1)(a) of Post-Effective
Amendment No. 7 to the Registration Statement on
Form N-1A filed electronically on November 9, 1995,
accession number 0000950130-95-002359.
EX-99.B1(b) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1)(b) of
Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B2 By-Laws are incorporated by reference to Exhibit
(2) of Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed
electronically on November 9, 1995, accession
number 0000950130-95-002359.
EX-99.B3 None.
EX-99.B4(a) Investment Advisory Agreement between the
Registrant and Bear Stearns Asset Management
Inc. ("BSAM")(formerly known as Bear Stearns
Funds Management Inc.), with respect to Large
Cap Value Portfolio, Small Cap Value Portfolio
and Income Portfolio, is incorporated by
reference to Exhibit (5)(a) of Post-Effective
Amendment No. 7 to the Registration Statement on
Form N-1A filed electronically on November 9,
1995, accession number 0000950130-95-002359.
Ex-99.B4(b) Investment Advisory Agreement between the
Registrant and BSAM with respect to The Insiders
Select Fund, is filed herewith.
Ex-99.B4(c) Investment Advisory Agreement between Registrant
and BSAM, with respect to Focus List Portfolio, is
filed herewith.
C-1
<PAGE>
Ex-99.B4(d) Investment Advisory Agreement between Registrant
and BSAM, with respect to S&P STARS Portfolio, is
filed herewith.
EX-99.B4(e) Investment Advisory Agreement between the
Registrant and BSAM, with respect to Prime Money
Market Portfolio, is filed herewith.
EX-99.B4(f) Investment Advisory Agreement between the
Registrant and BSAM, with respect to Balanced
Portfolio, High Yield Total Return Portfolio and
International Equity Portfolio, is filed herewith.
EX-99.B4(g) Sub-Investment Advisory Agreement between BSAM
and Marvin & Palmer Associates, Inc., with
respect to International Equity Portfolio is
incorporated by reference to Exhibit 5 (d) of
Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed
electronically on July 28, 1998, accession
number 0000922423-98-000722.
EX-99.B5(a) Distribution Agreement between the Registrant
and Bear, Stearns & Co. Inc., with revised
Schedule I as of September 8, 1997, is
incorporated by reference to Exhibit 6 (a) of
Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed
electronically on July 28, 1998, accession
number 0000922423-98-000722.
EX-99.B5(b) Dealer Agreement is filed herewith.
EX-99.B6 None.
EX-99.B7 Custody Agreements between the Registrant and
Custodial Trust Company are incorporated by
reference to Exhibit (8) of Post-Effective
Amendment No. 7 to the Registration Statement on
Form N-1A filed electronically on November 9, 1995,
accession number 0000950130-95-002359.
EX-99.B8(a) Administration Agreement between the Registrant and
BSAM is incorporated by reference to Exhibit (5)(b)
of Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed
electronically on November 9, 1995, accession
number 0000950130-95-002359.
C-2
<PAGE>
EX-99.B8(b) Administrative Services Agreement, as amended,
between the Registrant and PFPC Inc. is
incorporated by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B9 Opinion of Kramer Levin Naftalis & Frankel LLP as
to the legality of the securities registered is
incorporated by reference to Exhibit (10) of
Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed electronically on July
28, 1998, accession number 0000922423-98-000722.
EX-99.B10(a) Consent of Kramer Levin Naftalis & Frankel LLP is
filed herewith.
EX-99.B10(b) Consent of Deloitte & Touche LLP is filed herewith.
EX-99.B11 None.
EX-99.B12 None.
Ex-99.B13(a) Amended and Restated Distribution Plan for Class
A, B and C shares of S&P STARS Portfolio, Large
Cap Value Portfolio, Small Cap Value Portfolio,
Income Portfolio, The Insiders Select Fund, Focus
List Portfolio, Balanced Portfolio, High Yield
Total Return Portfolio and International Equity
Portfolio, is filed herewith.
Ex-99.B13(b) Shareholder Servicing Plan for Class A, B and C
shares of S&P STARS Portfolio, Large Cap Value
Portfolio, Small Cap Value Portfolio, Income
Portfolio, The Insiders Select Fund, Focus
List Portfolio, Balanced Portfolio, High Yield
Total Return Portfolio, International Equity
Portfolio and Emerging Markets Debt Portfolio, is
filed herewith.
EX-99.B14 Financial Data Schedules are filed herewith as
Exhibit 27.
EX-99.B15 Rule 18f-3 Plan, as revised, is filed herewith.
Other Exhibits:
C-3
<PAGE>
EX-99.A Certificate of Corporate Secretary is incorporated
by reference to Other Exhibit (a) of Post-Effective
Amendment No. 7 to the Registration Statement on
Form N-1A filed electronically on November 9, 1995,
accession number 0000950130-95-002359.
EX-99.B Powers of Attorney of Michael Minikes, Peter M.
Bren, Alan J. Dixon, John R. McKernan, Jr. and
M.B. Oglesby, Jr. are filed herewith.
Item 24. Persons Controlled by or Under Common Control with the Fund
-----------------------------------------------------------
Not Applicable
Item 25. Indemnification
---------------
Reference is made to Article VIII of the Registrant's Declaration of
Trust (filed as Exhibit 1(a) to Registrant's Post-Effective Amendment No. 7
filed electronically on November 9, 1995, accession number 0000950130-95-002359
and incorporated herein by reference). The application of these provisions is
limited by Article 10 of the Registrant's By-Laws (filed as Exhibit 2 to
Registrant's Post-Effective Amendment No. 7 filed electronically on November 9,
1995, accession number 0000950130-95-002359 and incorporated herein by
reference) and by the following undertaking set forth in the rules promulgated
by the Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a trustee, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of
C-4
<PAGE>
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
Reference also is made to the Distribution Agreement previously
filed as Exhibit 6(a) to Registrant's Post-Effective Amendment No. 7 filed
electronically on November 9, 1995, accession number 0000950130-95-002359 and
incorporated herein by reference.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
Registrant is fulfilling the requirement of this Item 26 to provide
a list of the officers and directors of Bear Stearns Asset Management Inc.
(BSAM), the investment adviser of the Registrant, together with information as
to any other business, profession, vocation or employment of a substantial
nature engaged in by BSAM or those of its officers and directors during the past
two years, by incorporating by reference the information contained in the Form
ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by BSAM
(SEC File No. 801-29862).
Item 27. Principal Underwriters
----------------------
(a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as principal
underwriter or depositor for the following investment companies:
. Bear Stearns Investment Trust -- Emerging Markets Debt
Portfolio
. Managed Securities Plus Fund, Inc.
(b) Set forth below is a list of each executive officer and director
of Bear Stearns. All Directors and Executive Officers are also Senior Managing
Directors. The principal business address of each such person is 245 Park
Avenue, New York, New York 10167, except as set forth below.
Positions and Positions and
Offices with Offices with
Name Bear Stearns Registrant
- --------------------- ------------- -------------
Directors
- ---------
Alan C. Greenberg Chairman of the Board/
Chairman of the Executive Committee
E. John Rosenwald Jr. Vice Chairman
Michael L. Tarnopol Vice Chairman
James E. Cayne President/Chief Executive Officer
Mark E. Lehman Vice Chairman
C-5
<PAGE>
Alan D. Schwartz Executive Vice President
William J. Montgoris Chief Operating Officer
Warren J. Spector Executive Vice President
Michael Minikes Treasurer Chairman/Trustee
Samuel L. Molinaro Jr. Chief Financial Officer/
Senior Vice President - Finance
Denis A. Bovin
Peter D. Cherasia
Ralph R. Cioffi
Barry J. Cohen
Wendy L. de Monchaux
Bruce E. Geismar
Richard Harriton
Daniel L. Keating
John Knight
David A. Liebowitz
Bruce M. Lisman
Roland N. Livney
Jeffrey Mayer
Gary M. McLoughlin
Donald R. Mullen Jr.
Fares D. Noujaim
Craig M. Overlander
Stephen E. Raphael
Richard B. Sachs
David M. Solomon
Robert M. Steinberg
Donald W. Tang
Michael J. Urfirer
Eli Wachtel
Michael Winchell
Uzi Zucker
John H. Slade Director Emeritus
Positions and Positions and
Offices with Offices with
Name Bear Stearns Registrant
- ---- ------------ ----------
Executive Officers
- ------------------
Alan C. Greenberg Chairman of the Board/
Chairman of the Executive Committee
James E. Cayne Chief Executive
Officer/President
William J. Montgoris Chief Operating Officer
Mark E. Lehman Executive Vice President/
General Counsel/Chief Legal Officer
Alan D. Schwartz Executive Vice
President
Warren J. Spector Executive Vice
President
Kenneth L. Edlow Secretary
Michael Minikes Treasurer Chairman/Trustee
Michael J. Abatemarco1 Controller/Assistant
Secretary
Samuel L. Molinaro, Jr. Chief Financial Officer/
C-6
<PAGE>
Senior Vice President -
Finance
Frederick B. Casey Assistant Treasurer
Stephen A. Bornstein Assistant Secretary Secretary
- ----------
1 Michael J. Abatemarco's principal business address is 1 Metrotech Center
North, Brooklyn, New York 11201-3859.
Item 28. Location of Accounts and Records
--------------------------------
1. Bear Stearns Funds Management Inc.
575 Lexington Avenue
New York, New York 10022
(records relating to operations of the Company)
2. The Bear Stearns Funds
575 Lexington Avenue
New York, New York 10022
(records relating to the Company)
3. Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, New York 10022
(advisory records)
4. Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
(records of the Company and BSAM)
5. PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
(certain accounting, financial and shareholder records)
6. Marvin & Palmer Associates
1201 North Market Street
Suite 2300
Wilmington, Delaware 19801-2545
(records relating to its function as sub-investment adviser for the
International Equity Portfolio)
Item 29. Management Services
-------------------
Not Applicable
Item 30. Undertakings
------------
Registrant hereby undertakes
(1) to call a meeting of shareholders for the purpose of voting
upon the question of removal of a trustee or trustees when
requested in writing to
C-7
<PAGE>
do so by the holders of at least 10% of the Registrant's
outstanding shares of beneficial interest and in connection
with such meeting to comply with the provisions of Section
16(c) of the Investment Company Act of 1940 relating to
shareholder communications; and
(2) to furnish each person to whom a prospectus is delivered with
a copy of its most current annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
post-effective amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 14th day of May, 1999.
THE BEAR STEARNS FUNDS
(Registrant)
By: /s/ Doni L. Fordyce
-----------------------------
Doni L. Fordyce
President
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment to the registration statement has been signed below by
the following persons in the capacities and on the dates indicated.
/s/ Doni L. Fordyce
- ------------------------- President (Principal
Doni L. Fordyce Executive Officer)
/s/ Frank J. Maresca
- ------------------------- Vice President and
Frank J. Maresca Treasurer (Principal
Financial and Accounting
Officer)
*
- ------------------------- Trustee
Peter M. Bren
*
- ------------------------- Trustee
Alan J. Dixon
*
- ------------------------- Trustee
John R. McKernan, Jr.
*
- ------------------------- Trustee
M.B. Oglesby, Jr.
*
- ------------------------- Trustee
Michael Minikes
By: /s/ Frank J. Maresca
---------------------
Frank J. Maresca,
Attorney-in-Fact
C-9
<PAGE>
THE BEAR STEARNS FUNDS
INDEX TO EXHIBITS
EX-99.B4(b) Investment Advisory Agreement between the Registrant and BSAM
(Insiders Select Fund).
EX-99.B4(c) Investment Advisory Agreement between the Registrant and BSAM
(Focus List Portfolio).
EX-99.B4(d) Investment Advisory Agreement between the Registrant and BSAM
(S&P Stars Portfolio).
EX-99.B4(e) Investment Advisory Agreement between the Registrant and BSAM
(Prime Money Market Portfolio).
EX-99.B4(f) Investment Advisory Agreement between the Registrant and BSAM
(Balanced, High Yield Total Return and International Equity
Portfolios).
EX-99.B5(b) Dealer Agreement
EX-99.B10(a) Consent of Kramer Levin Naftalis & Frankel LLP
EX-99.B10(b) Consent of Deloitte & Touche LLP
EX-99.B13(a) Amended and Restated Distribution Plan
EX-99.B13(b) Shareholder Servicing Plan
EX-99.B14 Financial Data Schedules
EX-99.B15 Rule 18f-3 Plan
EX-99.B Powers of Attorney
C-10
<PAGE>
Exhibit 99.B4(b)
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
January 20, 1998
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect to the
series named on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Series"), herewith confirms its agreement with you as follows:
The Fund desires to employ its capital by investing and reinvesting
the same in investments of the type and in accordance with the limitations
specified in its charter documents and in its offering documents (Part A and
Part B) as from time to time in effect, copies of which have been or will be
submitted to you, and in such manner and to such extent as from time to time may
be approved by the Fund's Board. The Fund desires to employ you to act as its
investment adviser.
You may render services through your own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Fund under applicable laws and are under your common control as
long as all such persons are functioning as part of an organized group of
persons, and such organized group of persons, with respect to the services used
by the Fund, is managed at all times by your authorized officers. It is also
understood that you may from time to time, subject to the approval by the Fund's
Board and shareholders of the Series, as necessary, employ or associate yourself
with such person or persons as you may believe to be particularly fitted to
assist you in the performance of this Agreement. You will be as fully
responsible to the Fund for the acts and omissions of such persons as you are
for your own acts and omissions. The compensation of such person or persons
shall be paid by you and no obligation may be incurred on the Fund's behalf in
any such respect.
Subject to the supervision and approval of the Fund's Board, you
will provide investment management of each Series' portfolio in accordance with
such Series' investment objectives and policies as stated in the Fund's offering
documents (Part A and Part B) as from time to time in effect. In connection,
therewith, you will obtain and provide investment research
<PAGE>
and will supervise the Series investments and conduct a continuous program of
investment, evaluation and, if appropriate, sale and reinvestment of such Series
assets. You will furnish to the Fund such statistical information, with respect
to the investments which a Series may hold or contemplate purchasing, as the
Fund may reasonably request. The Fund wishes to be informed of important
developments materially affecting the Series portfolio and shall expect you, on
your own initiative, to furnish to the Fund from time to time such information
as you may believe appropriate for this purpose.
You shall exercise your best judgment in rendering the services to
be provided to the Fund hereunder, and the Fund agrees as an inducement to your
undertaking the same that neither you nor any Sub-Investment Adviser shall be
liable hereunder for any error of judgment or mistake of law or for any loss
suffered by one or more Series, provided that nothing herein shall be deemed to
protect or purport to protect you or any Sub-Investment Adviser against any
liability to the Fund or the Series or to its security holders to which you
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence in the performance of your duties hereunder or by reason of your
reckless disregard of your obligations or duties hereunder (hereinafter
"Disabling Conduct") or to which any Sub-Investment Adviser would otherwise be
subject by reason of Disabling Conduct.
In consideration of services rendered pursuant to this Agreement,
the Fund will pay you on the first business day of each month a fee at the rate
set forth on Schedule 1 hereto or will pay you in accordance with the
methodology described on additional Schedules hereto. Net asset value shall be
computed on such days and at such time or times as described in the Fund's
then-current Part A and Part B. The fee for the period from the date of the
commencement of sales of a Series' shares (after any sales are made to you) to
the end of the month during which such sales shall have been commenced shall be
pro-rated according to the proportion which such period bears to the full
monthly period, and upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value of
each Series' net assets shall be computed in the manner specified in the Fund's
charter documents for the computation of the value of each Series' net assets.
You will bear all expenses in connection with the performance of
your services under this Agreement and will pay all fees of any Sub-Investment
Adviser in connection with its duties in respect of the Series. All other
expenses to be incurred in the operation of the Fund (other than those to be
borne by a Sub-Investment Adviser, if any) will be borne by the Fund, except to
the extent specifically assumed by you. The expenses to be borne by the Fund
include, without limitation, the following: organizational costs, taxes,
interest, loan commitment fees, interest and distributions paid on securities
sold short, brokerage fees and commissions, if any, fees of Board members,
Securities and Exchange Commission fees, state Blue Sky qualification fees,
advisory, administration and fund accounting fees, charges of custodians,
transfer and dividend disbursing agents fees, certain insurance premiums,
industry association fees, outside auditing and legal expenses, costs of
independent pricing services, costs of maintaining the Series' existence, costs
attributable to investor services (including, without limitation, telephone and
2
<PAGE>
personnel expenses), costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, costs of shareholders' reports and meetings, and any
extraordinary expenses.
The Fund understands that you now act, and that from time to time
hereafter you may act, as investment adviser to one or more other investment
companies and fiduciary or other managed accounts, and the Fund has no objection
to your so acting, provided that when the purchase or sale of securities of the
same issuer is suitable for the investment objectives of two or more companies
or accounts managed by you which have available funds for investment, the
available securities will be allocated in a manner believed by you to be
equitable to each company or account. It is recognized that in some cases this
procedure may adversely affect the price paid or received by one or more Series
or the size of the position obtainable for or disposed of by one or more Series.
In addition, it is understood that the persons employed by you to
assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
You shall place all orders for the purchase and sale of portfolio
securities for the Series with brokers or dealers selected by you, which may
include brokers or dealers affiliated with you to the extent permitted by the
1940 Act and the Fund's policies and procedures applicable to the Series. You
shall use your best efforts to seek to execute portfolio transactions at prices
which, under the circumstances, result in total costs or proceeds being the most
favorable to the Series. In assessing the best overall terms available for any
transaction, you shall consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, research services
provided to you, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event shall you be under
any duty to obtain the lowest commission or the best net price for any Series on
any particular transaction, nor shall you be under any duty to execute any order
in a fashion either preferential to any Series relative to other accounts
managed by you or otherwise materially adverse to such other accounts.
In selecting brokers or dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to you and/or the other accounts over which you exercise
investment discretion. You are authorized to pay a broker or dealer who provides
such brokerage and research services a commission for executing a portfolio
transaction for the Series which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if
you determine in good faith that the total
3
<PAGE>
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or your overall responsibilities with respect to accounts
over which you exercise investment discretion. You shall report to the Board of
Trustees of the Fund regarding overall commissions paid by the Series and their
reasonableness in relation to their benefits to the Series. Any transactions for
the Series that are effected through an affiliated broker-dealer on a national
securities exchange of which such broker-dealer is a member will be effected in
accordance with Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder. The Series hereby
authorizes any such broker or dealer to retain commissions for effecting such
transactions and to pay out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
In executing portfolio transactions for the Series, you may, to the
extent permitted by applicable laws and regulations, but shall not be obligated
to, aggregate the securities to be sold or purchased with those of other
portfolios or its other clients if, in your reasonable judgment, such
aggregation (i) will result in an overall economic benefit to the Series, taking
into consideration the advantageous selling or purchase price, brokerage
commission and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Fund's registration statement
and the Series's Prospectus and Statement of Additional Information. In such
event, you will allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner, consistent with your
fiduciary obligations to the Series and such other clients.
The Fund will indemnify you and each Sub-Investment Adviser, your
officers, directors, employees and agents (each, an "indemnitee") against, and
hold each indemnitee harmless from, any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses) not
resulting from Disabling Conduct by the indemnitee. Indemnification shall be
made only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the indemnitee was not liable by
reason of Disabling Conduct or (ii) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the indemnitee
was not liable by reason of Disabling Conduct by (a) the vote of a majority of a
quorum of Board members who are neither "interested persons" of the Fund nor
parties to the proceeding ("disinterested non-party Board members") or (b) an
independent legal counsel in a written opinion. Each indemnitee shall be
entitled to advances from the Fund for payment of the reasonable expenses
incurred by it in connection with the matter as to which it is seeking
indemnification in the manner and to the fullest extent permissible under the
New York Business Corporation Law. Each indemnitee shall provide to the Fund a
written affirmation of its good faith belief that the standard of conduct
necessary for indemnification by the Fund has been met and a written undertaking
to repay any such advance if it should ultimately be determined that the
standard of conduct has not been met. In addition, at least one of the following
additional conditions shall be met: (a) the indemnitee shall provide security in
form and amount acceptable to the Fund for its undertaking; (b) the Fund is
insured against losses arising by reason of the advance; or (c) a majority of a
quorum of disinterested non-party Board members, or independent legal counsel,
in a written opinion, shall have determined, based on a review of facts readily
available to the Fund at the time the advance is proposed to be made, that there
is reason to believe that the indemnitee will ultimately be found to be entitled
to indemnification. No provision of this Agreement shall be construed to protect
any Board member or officer of the
4
<PAGE>
Fund, or any indemnitee, from liability in violation of Sections 17(h) and (i)
of the Investment Company Act of 1940, as amended (the "1940 Act").
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date")
and thereafter shall continue automatically for successive annual periods ending
on the day of each year set forth opposite the Series' name on Schedule 1 hereto
(the "Reapproval Day"), provided such continuance is specifically approved at
least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined
in the 1940 Act) of such Series' outstanding voting securities, provided that in
either event its continuance also is approved by a majority of the Fund's Board
members who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. As to each Series, this Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of holders of a majority of such Series' shares or, upon not less than 90 days'
notice, by you. This Agreement also will terminate automatically, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
The Fund recognizes that from time to time your directors, officers and
employees may serve as trustees, directors, partners, officers and employees of
other business trusts, corporations, partnerships or other entities (including
other investment companies), and that such other entities may include the name
"Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and property
of the relevant Series and shall not be binding upon any Board member, officer
or shareholder of the Fund individually.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By:_______________________
Accepted:
5
<PAGE>
BEAR STEARNS FUNDS MANAGEMENT INC.
By:_______________________________
6
<PAGE>
SCHEDULE 1
----------
Insiders Select Fund
For the period beginning beginning on the first day of the month
after which shareholders of the Fund have approved this Agreement, and ending
with the lastday of the twelfth full calendar month thereafter, and ending with
the last day of the twelfth full calendar month thereafter, the Fund will pay
you, at the end of each month, a monthly advisory fee calculated at an annual
rate of 1.0% of the Series' average daily net assets during such month (the
"Basic Fee"). Beginning with the thirteenth month, the Basic Fee will be
adjusted each month (the "Monthly Performance Adjustment") depending on the
extent to which the investment performance of the Class of shares expected to
bear the highest total Series operating expenses (as such Class from time to
time may be designated by the Fund's Board, the "Designated Class"), reflecting
the deduction of expenses, exceeds or is exceeded by the percentage change in
the investment record of the Standard & Poor's MidCap 400 Index (the "MidCap
400") for the immediately preceding twelve calendar months on a rolling basis.
The rate of the Monthly Performance Adjustment may increase or decrease the fee
payable to you by up to .50% per annum of the Series' average daily net assets.
The performance of the Designated Class during a performance period
will be calculated by first determining the change in the Class' net asset value
per share during the period, assuming the reinvestment of distributions during
that period, and then expressing this amount as a percentage of the net asset
value per share at the beginning of the period. The performance of the MidCap
400 during a performance period is calculated as the sum of the change in the
level of the index during the period, plus the value of any dividends or
distributions made by the companies whose securities comprise the index
accumulated to the end of the period.
After the Monthly Performance Adjustment is effective, the total
advisory fee, payable by the Fund to you at the end of each calendar month, will
be equal to the Basic Fee for the month adjusted upward or downward for the
month by the Monthly Performance Adjustment for the month. The monthly advisory
fee will be calculated as follows: (1) one-twelfth of the 1% annual basic fee
rate will be applied to the Series' average daily net assets over the most
recent calendar month, giving a dollar amount which will be the Basic Fee for
that month; (2) one-twelfth of the applicable performance adjustment fee rate
from the table below will be applied to the Series' average daily net assets
over the most recent month, giving a dollar amount which will be the Monthly
Performance Adjustment; and (3) the Monthly Performance Adjustment will then be
added to or subtracted from the Basic Fee and the result will be the amount
payable by the Fund to you as the total advisory fee for that month.
<PAGE>
The full range of permitted fees on an annualized basis is as follows:
<TABLE>
<CAPTION>
Percentage Point Difference Between Designated
Class' Performance (Net of Expenses Including Performance
Advisory Fees) and Percentage Change in the Adjustment
MidCap 400 Investment Record Basic Fee (%) Rate (%) Total Fee (%)
---------------------------- ------------- -------- -------------
<S> <C> <C> <C>
+3.00 percentage points or more........... 1% .50% 1.50%
+2.75 percentage points or more but less
less than + 3.00 percentage points..... 1% .40% 1.40%
+2.50 percentage points or more but less
than + 2.75 percentage points.......... 1% .30% 1.30%
+2.25 percentage points or more but less
than + 2.50 percentage points.......... 1% .20% 1.20%
+2.00 percentage points or more but less
than + 2.25 percentage points.......... 1% .10% 1.10%
Less than + 2.00 percentage points but more
than -2.00 percentage points........... 1% 0% 1.00%
- -2.00 percentage points or less but more
than -2.25 percentage points........... 1% -.10% .90%
- -2.25 percentage points or less but more
than -2.50 percentage points........... 1% -.20% .80%
- -2.50 percentage points or less but more 1%
than -2.75 percentage points............ -.30% .70%
- -2.75 percentage points or less but more 1%
than -3.00 percentage points........... -.40% .60%
- -3.00 percentage points or less........... 1% -.50% .50%
The period over which performance will be measured is a rolling 12-month period.
</TABLE>
Approved by shareholders January 20, 1998
Reapproved February 4, 1998 and February 10, 1999
To be reapproved on or before March 31, 2000
<PAGE>
Exhibit 99.B4(c)
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
December 29, 1997
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect to the
series named on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Series"), herewith confirms its agreement with you as follows:
The Fund desires to employ its capital by investing and reinvesting
the same in investments of the type and in accordance with the limitations
specified in its charter documents and in its offering documents (Part A and
Part B) as from time to time in effect, copies of which have been or will be
submitted to you, and in such manner and to such extent as from time to time may
be approved by the Fund's Board. The Fund desires to employ you to act as its
investment adviser.
In this connection it is understood that from time to time you will
employ or associate with yourself such person or persons as you may believe to
be particularly fitted to assist you in the performance of this Agreement. Such
person or persons may be officers or employees who are employed by both you and
the Fund. The compensation of such person or persons shall be paid by you and no
obligation may be incurred on the Fund's behalf in any such respect.
Subject to the supervision and approval of the Fund's Board, you
will provide investment management of each Series' portfolio in accordance with
such Series' investment objectives and policies as stated in the Fund's offering
documents (Part A and Part B) as from time to time in effect. In connection,
therewith, you will obtain and provide investment research and will supervise
each Series' investments and conduct a continuous program of investment,
evaluation and, if appropriate, sale and reinvestment of such Series assets. You
<PAGE>
will furnish to the Fund such statistical information, with respect to the
investments which a Series may hold or contemplate purchasing, as the Fund may
reasonably request. The Fund wishes to be informed of important developments
materially affecting any Series' portfolio and shall expect you, on your own
initiative, to furnish to the Fund from time to time such information as you may
believe appropriate for this purpose.
You shall exercise your best judgment in rendering the services to
be provided to the Fund hereunder, and the Fund agrees as an inducement to your
undertaking the same that you shall not be liable hereunder for any error of
judgment or mistake of law or for any loss suffered by one or more Series,
provided that nothing herein shall be deemed to protect or purport to protect
you against any liability to the Fund or a Series or to its security holders to
which you would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of your duties hereunder or by reason
of your reckless disregard of your obligations or duties hereunder (hereinafter
"Disabling Conduct") would otherwise be subject by reason of Disabling Conduct.
In consideration of services rendered pursuant to this Agreement,
the Fund will pay you on the first business day of each month a fee at the rate
set forth opposite each Series' name on Schedule 1 hereto or will pay you in
accordance with the methodology described on additional Schedules hereto. Net
asset value shall be computed on such days and at such time or times as
described in the Fund's then-current Part A and Part B. The fee for the period
from the date of the commencement of sales of a Series' shares (after any sales
are made to you) to the end of the month during which such sales shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value of
each Series' net assets shall be computed in the manner specified in the Fund's
charter documents for the computation of the value of each Series' net assets.
You will bear all expenses in connection with the performance of
your services under this Agreement. All other expenses to be incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by you. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory,
administration and fund accounting fees, charges of custodians, transfer and
dividend disbursing agents fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of independent
pricing services, costs of maintaining the Series' existence, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of preparing and printing prospectuses and statements of
additional information for regulatory
2
<PAGE>
purposes and for distribution to existing shareholders, costs of shareholders'
reports and meetings, and any extraordinary expenses.
The Fund understands that you now act, and that from time to time
hereafter you may act, as investment adviser to one or more other investment
companies and fiduciary or other managed accounts, and the Fund has no objection
to your so acting, provided that when the purchase or sale of securities of the
same issuer is suitable for the investment objectives of two or more companies
or accounts managed by you which have available funds for investment, the
available securities will be allocated in a manner believed by you to be
equitable to each company or account. It is recognized that in some cases this
procedure may adversely affect the price paid or received by one or more Series
or the size of the position obtainable for or disposed of by one or more Series.
In addition, it is understood that the persons employed by you to
assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
The Fund will indemnify you, your officers, directors, employees and
agents (each, an "indemnitee") against, and hold each indemnitee harmless from,
any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) not resulting from Disabling Conduct by
the indemnitee. Indemnification shall be made only following: (i) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the indemnitee was not liable by reason of Disabling Conduct or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of Disabling
Conduct by (a) the vote of a majority of a quorum of Board members who are
neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Board members") or (b) an independent legal counsel in
a written opinion. Each indemnitee shall be entitled to advances from the Fund
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under the New York Business Corporation Law. Each
indemnitee shall provide to the Fund a written affirmation of its good faith
belief that the standard of conduct necessary for indemnification by the Fund
has been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (a)
the indemnitee shall provide security in form and amount acceptable to the Fund
for its undertaking; (b) the Fund is insured
3
<PAGE>
against losses arising by reason of the advance; or (c) a majority of a quorum
of disinterested non-party Board members, or independent legal counsel, in a
written opinion, shall have determined, based on a review of facts readily
available to the Fund at the time the advance is proposed to be made, that there
is reason to believe that the indemnitee will ultimately be found to be entitled
to indemnification. No provision of this Agreement shall be construed to protect
any Board member or officer of the Fund, or any indemnitee, from liability in
violation of Sections 17(h) and (i) of the Investment Company Act of 1940, as
amended (the "1940 Act").
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date")
and thereafter shall continue automatically for successive annual periods ending
on the day of each year set forth opposite the Series' name on Schedule 1 hereto
(the "Reapproval Day"), provided such continuance is specifically approved at
least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined
in the 1940 Act) of such Series' outstanding voting securities, provided that in
either event its continuance also is approved by a majority of the Fund's Board
members who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. As to each Series, this Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of holders of a majority of such Series' shares or, upon not less than 90 days'
notice, by you. This Agreement also will terminate automatically, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
The Fund recognizes that from time to time your directors, officers
and employees may serve as trustees, directors, partners, officers and employees
of other business trusts, corporations, partnerships or other entities
(including other investment companies), and that such other entities may include
the name "Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and property
of the relevant Series and shall not be binding upon any Board member, officer
or shareholder of the Fund individually.
4
<PAGE>
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By:
----------------------------
Accepted:
BEAR STEARNS FUNDS MANAGEMENT INC.
By:
-------------------------------
5
<PAGE>
SCHEDULE 1
Name of Series Annual Fee as
a Percentage
of Average
Daily Net
Assets
------
Focus List Portfolio .65 of 1%
Reapproved February 10, 1999
To be reapproved on or before March 31, 2000
6
<PAGE>
Exhibit 99.B4(d)
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
June 25, 1997
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect to the
series named on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Series"), herewith confirms its agreement with you as follows:
The Fund desires to employ its capital by investing and reinvesting
the same in investments of the type and in accordance with the limitations
specified in its charter documents and in its offering documents (Part A and
Part B) as from time to time in effect, copies of which have been or will be
submitted to you, and in such manner and to such extent as from time to time may
be approved by the Fund's Board. The Fund desires to employ you to act as its
investment adviser.
In this connection it is understood that from time to time you will
employ or associate with yourself such person or persons as you may believe to
be particularly fitted to assist you in the performance of this Agreement. Such
person or persons may be officers or employees who are employed by both you and
the Fund. The compensation of such person or persons shall be paid by you and no
obligation may be incurred on the Fund's behalf in any such respect.
Subject to the supervision and approval of the Fund's Board, you
will provide investment management of each Series' portfolio in accordance with
such Series' investment objectives and policies as stated in the Fund's offering
documents (Part A and Part B) as from time to time in effect. In connection,
therewith, you will obtain and provide investment research and will supervise
each Series' investments and conduct a continuous program of investment,
evaluation and, if appropriate, sale and reinvestment of such Series assets. You
will furnish to the Fund such statistical information, with respect to the
investments which a Series may hold or contemplate purchasing, as the Fund may
reasonably request. The Fund wishes to be informed of important developments
materially affecting any Series' portfolio and shall expect you, on your
<PAGE>
own initiative, to furnish to the Fund from time to time such information as you
may believe appropriate for this purpose.
You shall exercise your best judgment in rendering the services to
be provided to the Fund hereunder, and the Fund agrees as an inducement to your
undertaking the same that you shall not be liable hereunder for any error of
judgment or mistake of law or for any loss suffered by one or more Series,
provided that nothing herein shall be deemed to protect or purport to protect
you against any liability to the Fund or a Series or to its security holders to
which you would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of your duties hereunder or by reason
of your reckless disregard of your obligations or duties hereunder (hereinafter
"Disabling Conduct") would otherwise be subject by reason of Disabling Conduct.
In consideration of services rendered pursuant to this Agreement,
the Fund will pay you on the first business day of each month a fee at the rate
set forth opposite each Series' name on Schedule 1 hereto or will pay you in
accordance with the methodology described on additional Schedules hereto. Net
asset value shall be computed on such days and at such time or times as
described in the Fund's then-current Part A and Part B. The fee for the period
from the date of the commencement of sales of a Series' shares (after any sales
are made to you) to the end of the month during which such sales shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value of
each Series' net assets shall be computed in the manner specified in the Fund's
charter documents for the computation of the value of each Series' net assets.
You will bear all expenses in connection with the performance of
your services under this Agreement. All other expenses to be incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by you. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory,
administration and fund accounting fees, charges of custodians, transfer and
dividend disbursing agents fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of independent
pricing services, costs of maintaining the Series, existence, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
stockholders, costs of stockholders' reports and meetings, and any extraordinary
expenses.
The Fund understands that you now act, and that from time to time
hereafter you may act, as investment adviser to one or more other investment
companies and fiduciary or other managed accounts, and the Fund has no objection
to your so acting, provided that when the
<PAGE>
purchase or sale of securities of the same issuer is suitable for the investment
objectives of two or more companies or accounts managed by you which have
available funds for investment, the available securities will be allocated in a
manner believed by you to be equitable to each company or account. It is
recognized that in some cases this procedure may adversely affect the price paid
or received by one or more Series or the size of the position obtainable for or
disposed of by one or more Series.
In addition, it is understood that the persons employed by you to
assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
The Fund will indemnify you, your officers, directors, employees and
agents (each, an "indemnitee") against, and hold each indemnitee harmless from,
any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) not resulting from Disabling Conduct by
the indemnitee. Indemnification shall be made only following: (i) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the indemnitee was not liable by reason of Disabling Conduct or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of Disabling
Conduct by (a) the vote of a majority of a quorum of Board members who are
neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Board members") or (b) an independent legal counsel in
a written opinion. Each indemnitee shall be entitled to advances from the Fund
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under the New York Business Corporation Law. Each
indemnitee shall provide to the Fund a written affirmation of its good faith
belief that the standard of conduct necessary for indemnification by the Fund
has been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (a)
the indemnitee shall provide security in form and amount acceptable to the Fund
for its undertaking; (b) the Fund is insured against losses arising by reason of
the advance; or (c) a majority of a quorum of disinterested non-party Board
members, or independent legal counsel, in a written opinion, shall have
determined, based on a review of facts readily available to the Fund at the time
the advance is proposed to be made, that there is reason to believe that the
indemnitee will ultimately be found to be entitled to indemnification. No
provision of this Agreement shall be construed to protect any Board member or
officer of the Fund, or any indemnitee, from liability in violation of Sections
17(h) and (i) of the Investment Company Act of 1940, as amended (the "1940
Act").
<PAGE>
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date")
and thereafter shall continue automatically for successive annual periods ending
on the day of each year set forth opposite the Series' name on Schedule 1 hereto
(the "Reapproval Day"), provided such continuance is specifically approved at
least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined
in the 1940 Act) of such' Series' outstanding voting securities, provided that
in either event its continuance also is approved by a majority of the Fund's
Board members who are not "interested persons" (as defined in the 1940 Act) of
any party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. As to each Series, this Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of holders of a majority of such Series' shares or, upon not less than 90 days'
notice, by you. This Agreement also will terminate automatically, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
The Fund recognizes that from time to time your directors, officers and
employees may serve as trustees, directors, partners, officers and employees of
other business trusts, corporations, partnerships or other entities (including
other investment companies), and that such other entities may include the name
"Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his capacity as an officer of the Fund. The obligations
of this Agreement shall only be binding upon the assets and property of the
relevant Series and shall not be binding upon any Board member, officer or
shareholder of the Fund individually.
<PAGE>
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By:
----------------------------
Accepted:
BEAR STEARNS FUNDS MANAGEMENT INC.
By:
-------------------------------
<PAGE>
SCHEDULE 1
Name of Series Annual Fee as
- -------------- a Percentage
of Average
Daily Net
Assets
------
S&P STARS Portfolio .75 of 1%
Reapproved February 10, 1999
To be reapproved on or before March 31, 2000
<PAGE>
Exhibit 99.B4(e)
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
June 2, 1997
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect to the
series named on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Series"), herewith confirms its agreement with you as follows:
The Fund desires to employ its capital by investing and reinvesting
the same in investments of the type and in accordance with the limitations
specified in its charter documents and in its offering documents (Part A and
Part B) as from time to time in effect, copies of which have been or will be
submitted to you, and in such manner and to such extent as from time to time may
be approved by the Fund's Board. The Fund desires to employ you to act as its
investment adviser.
You may render services through your own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Fund under applicable laws and are under your common control as
long as all such persons are functioning as part of an organized group of
persons, and such organized group of persons, with respect to the services used
by the Fund, is managed at all times by your authorized officers. You will be as
fully responsible to the Fund for the acts and omissions of such persons as you
are for your own acts and omissions.The compensation of such person or persons
shall be paid by you and no obligation may be incurred on the Fund's behalf in
any such respect.
Subject to the supervision and approval of the Fund's Board, you
will provide investment management of each Series' portfolio in accordance with
such Series' investment objectives and policies as stated in the Fund's offering
documents (Part A and Part B) as from time to time in effect. In connection,
therewith, you will obtain and provide investment research and will supervise
each Series' investments and conduct a continuous program of
<PAGE>
investment, evaluation and, if appropriate, sale and reinvestment of such Series
assets. You will furnish to the Fund such statistical information, with respect
to the investments which a Series may hold or contemplate purchasing, as the
Fund may reasonably request. The Fund wishes to be informed of important
developments materially affecting any Series' portfolio and shall expect you, on
your own initiative, to furnish to the Fund from time to time such information
as you may believe appropriate for this purpose.
You shall exercise your best judgment in rendering the services to
be provided to the Fund hereunder, and the Fund agrees as an inducement to your
undertaking the same that you shall not be liable hereunder for any error of
judgment or mistake of law or for any loss suffered by one or more Series,
provided that nothing herein shall be deemed to protect or purport to protect
you against any liability to the Fund or a Series or to its security holders to
which you would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of your duties hereunder or by reason
of your reckless disregard of your obligations or duties hereunder (hereinafter
"Disabling Conduct") would otherwise be subject by reason of Disabling Conduct.
In consideration of services rendered pursuant to this Agreement,
the Fund will pay you on the first business day of each month a fee at the rate
set forth opposite each Series' name on Schedule 1 hereto or will pay you in
accordance with the methodology described on additional Schedules hereto. Net
asset value shall be computed on such days and at such time or times as
described in the Fund's then-current Part A and Part B. The fee for the period
from the date of the commencement of sales of a Series' shares (after any sales
are made to you) to the end of the month during which such sales shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value of
each Series' net assets shall be computed in the manner specified in the Fund's
charter documents for the computation of the value of each Series' net assets.
You will bear all expenses in connection with the performance of
your services under this Agreement. All other expenses to be incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by you. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory,
administration and fund accounting fees, charges of custodians, transfer and
dividend disbursing agents fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of independent
pricing services, costs of maintaining the Series' existence, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of preparing and printing prospectuses and statements of
additional information for regulatory
2
<PAGE>
purposes and for distribution to existing shareholders, costs of shareholders'
reports and meetings, and any extraordinary expenses.
The Fund understands that you now act, and that from time to time
hereafter you may act, as investment adviser to one or more other investment
companies and fiduciary or other managed accounts, and the Fund has no objection
to your so acting, provided that when the purchase or sale of securities of the
same issuer is suitable for the investment objectives of two or more companies
or accounts managed by you which have available funds for investment, the
available securities will be allocated in a manner believed by you to be
equitable to each company or account. It is recognized that in some cases this
procedure may adversely affect the price paid or received by one or more Series
or the size of the position obtainable for or disposed of by one or more Series.
In addition, it is understood that the persons employed by you to
assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
The Fund will indemnify you, your officers, directors, employees and
agents (each, an "indemnitee") against, and hold each indemnitee harmless from,
any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) not resulting from Disabling Conduct by
the indemnitee. Indemnification shall be made only following: (i) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the indemnitee was not liable by reason of Disabling Conduct or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of Disabling
Conduct by (a) the vote of a majority of a quorum of Board members who are
neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Board members") or (b) an independent legal counsel in
a written opinion. Each indemnitee shall be entitled to advances from the Fund
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under the New York Business Corporation Law. Each
indemnitee shall provide to the Fund a written affirmation of its good faith
belief that the standard of conduct necessary for indemnification by the Fund
has been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (a)
the indemnitee shall provide security in form and amount acceptable to the Fund
for its undertaking; (b) the Fund is insured against losses arising by reason of
the advance; or (c) a
3
<PAGE>
majority of a quorum of disinterested non-party Board members, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the indemnitee will ultimately be
found to be entitled to indemnification. No provision of this Agreement shall be
construed to protect any Board member or officer of the Fund, or any indemnitee,
from liability in violation of Sections 17(h) and (i) of the Investment Company
Act of 1940, as amended (the "1940 Act").
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date")
and thereafter shall continue automatically for successive annual periods ending
on the day of each year set forth opposite the Series' name on Schedule 1 hereto
(the "Reapproval Day"), provided such continuance is specifically approved at
least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined
in the 1940 Act) of such Series' outstanding voting securities, provided that in
either event its continuance also is approved by a majority of the Fund's Board
members who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. As to each Series, this Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of holders of a majority of such Series' shares or, upon not less than 90 days'
notice, by you. This Agreement also will terminate automatically, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
The Fund recognizes that from time to time your directors, officers and
employees may serve as trustees, directors, partners, officers and employees of
other business trusts, corporations, partnerships or other entities (including
other investment companies), and that such other entities may include the name
"Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his capacity as an officer of the Fund. The obligations
of this Agreement shall only be binding upon the assets and property of the
relevant Series and shall not be binding upon any Board member, officer or
shareholder of the Fund individually.
4
<PAGE>
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By:
----------------------------
Accepted:
BEAR STEARNS FUNDS MANAGEMENT INC.
By:
-------------------------------
5
<PAGE>
SCHEDULE 1
Annual Fee as
a Percentage
of Average
Daily Net
Name of Series Assets
- -------------- ------
Prime Money Market .20 of 1%
Portfolio
Reapproved February 10, 1999
To be reapproved March 31, 2000
PAGE>
<PAGE>
Exhibit 99.B4(f)
INVESTMENT ADVISORY AGREEMENT
THE BEAR STEARNS FUNDS
245 Park Avenue
New York, New York 10167
September 8, 1997
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The above-named investment company (the "Fund"), with respect to the
series named on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Series"), herewith confirms its agreement with you as follows:
The Fund desires to employ its capital by investing and reinvesting
the same in investments of the type and in accordance with the limitations
specified in its charter documents and in its offering documents (Part A and
Part B) as from time to time in effect, copies of which have been or will be
submitted to you, and in such manner and to such extent as from time to time may
be approved by the Fund's Board. The Fund desires to employ you to act as its
investment adviser.
You may render services through your own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Fund under applicable laws and are under your common control as
long as all such persons are functioning as part of an organized group of
persons, and such organized group of persons, with respect to the services used
by the Fund, is managed at all times by your authorized officers. You will be as
fully responsible to the Fund for the acts and omissions of such persons as you
are for your own acts and omissions.The compensation of such person or persons
shall be paid by you and no obligation may be incurred on the Fund's behalf in
any such respect.
Subject to the supervision and approval of the Fund's Board, you
will provide investment management of each Series' portfolio in accordance with
such Series' investment objectives and policies as stated in the Fund's offering
documents (Part A and Part B) as from time to time in effect. In connection,
therewith, you will obtain and provide investment research and will supervise
each Series' investments and conduct a continuous program of
<PAGE>
investment, evaluation and, if appropriate, sale and reinvestment of such Series
assets. You will furnish to the Fund such statistical information, with respect
to the investments which a Series may hold or contemplate purchasing, as the
Fund may reasonably request. The Fund wishes to be informed of important
developments materially affecting any Series' portfolio and shall expect you, on
your own initiative, to furnish to the Fund from time to time such information
as you may believe appropriate for this purpose.
You shall exercise your best judgment in rendering the services to
be provided to the Fund hereunder, and the Fund agrees as an inducement to your
undertaking the same that you shall not be liable hereunder for any error of
judgment or mistake of law or for any loss suffered by one or more Series,
provided that nothing herein shall be deemed to protect or purport to protect
you against any liability to the Fund or a Series or to its security holders to
which you would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of your duties hereunder or by reason
of your reckless disregard of your obligations or duties hereunder (hereinafter
"Disabling Conduct") would otherwise be subject by reason of Disabling Conduct.
In consideration of services rendered pursuant to this Agreement,
the Fund will pay you on the first business day of each month a fee at the rate
set forth opposite each Series' name on Schedule 1 hereto or will pay you in
accordance with the methodology described on additional Schedules hereto. Net
asset value shall be computed on such days and at such time or times as
described in the Fund's then-current Part A and Part B. The fee for the period
from the date of the commencement of sales of a Series' shares (after any sales
are made to you) to the end of the month during which such sales shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to you, the value of
each Series' net assets shall be computed in the manner specified in the Fund's
charter documents for the computation of the value of each Series' net assets.
You will bear all expenses in connection with the performance of
your services under this Agreement. All other expenses to be incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by you. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory,
administration and fund accounting fees, charges of custodians, transfer and
dividend disbursing agents fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of independent
pricing services, costs of maintaining the Series' existence, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of preparing and printing prospectuses and statements of
additional information for regulatory
2
<PAGE>
purposes and for distribution to existing shareholders, costs of shareholders'
reports and meetings, and any extraordinary expenses.
The Fund understands that you now act, and that from time to time
hereafter you may act, as investment adviser to one or more other investment
companies and fiduciary or other managed accounts, and the Fund has no objection
to your so acting, provided that when the purchase or sale of securities of the
same issuer is suitable for the investment objectives of two or more companies
or accounts managed by you which have available funds for investment, the
available securities will be allocated in a manner believed by you to be
equitable to each company or account. It is recognized that in some cases this
procedure may adversely affect the price paid or received by one or more Series
or the size of the position obtainable for or disposed of by one or more Series.
In addition, it is understood that the persons employed by you to
assist in the performance of your duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict your right or the right of any of your affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
Any person, even though also your officer, director, partner,
employee or agent, who may be or become an officer, Board member, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund, to be rendering such services to or acting
solely for the Fund and not as your officer, director, partner, employee, or
agent or one under your control or direction even though paid by you.
You shall place all orders for the purchase and sale of portfolio
securities for the Series with brokers or dealers selected by you, which may
include brokers or dealers affiliated with you to the extent permitted by the
1940 Act and the Fund's policies and procedures applicable to the Series. You
shall use your best efforts to seek to execute portfolio transactions at prices
which, under the circumstances, result in total costs or proceeds being the most
favorable to the Series. In assessing the best overall terms available for any
transaction, you shall consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, research services
provided to you, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event shall you be under
any duty to obtain the lowest commission or the best net price for any Series on
any particular transaction, nor shall you be under any duty to execute any order
in a fashion either preferential to any Series relative to other accounts
managed by you or otherwise materially adverse to such other accounts.
In selecting brokers or dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to you and/or the other accounts over which you exercise
investment discretion. You are authorized to pay a broker or dealer who provides
such brokerage and research services a commission
3
<PAGE>
for executing a portfolio transaction for the Series which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if you determine in good faith that the total commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or your overall responsibilities with respect to accounts over which
you exercise investment discretion. You shall report to the Board of Trustees of
the Fund regarding overall commissions paid by the Series and their
reasonableness in relation to their benefits to the Series. Any transactions for
the Series that are effected through an affiliated broker-dealer on a national
securities exchange of which such broker-dealer is a member will be effected in
accordance with Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder. The Series hereby
authorizes any such broker or dealer to retain commissions for effecting such
transactions and to pay out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
In executing portfolio transactions for the Series, you may, to the
extent permitted by applicable laws and regulations, but shall not be obligated
to, aggregate the securities to be sold or purchased with those of other
portfolios or its other clients if, in your reasonable judgment, such
aggregation (i) will result in an overall economic benefit to the Series, taking
into consideration the advantageous selling or purchase price, brokerage
commission and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Fund's registration statement
and the Series's Prospectus and Statement of Additional Information. In such
event, you will allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner, consistent with your
fiduciary obligations to the Series and such other clients.
The Fund will indemnify you, your officers, directors, employees and
agents (each, an "indemnitee") against, and hold each indemnitee harmless from,
any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) not resulting from Disabling Conduct by
the indemnitee. Indemnification shall be made only following: (i) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the indemnitee was not liable by reason of Disabling Conduct or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of Disabling
Conduct by (a) the vote of a majority of a quorum of Board members who are
neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Board members") or (b) an independent legal counsel in
a written opinion. Each indemnitee shall be entitled to advances from the Fund
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under the New York Business Corporation Law. Each
indemnitee shall provide to the Fund a written affirmation of its good faith
belief that the standard of conduct necessary for indemnification by the Fund
has been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (a)
the indemnitee shall provide security in form and amount acceptable to the Fund
for its undertaking; (b) the Fund is insured against losses arising by reason of
the advance; or (c) a
4
<PAGE>
majority of a quorum of disinterested non-party Board members, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the indemnitee will ultimately be
found to be entitled to indemnification. No provision of this Agreement shall be
construed to protect any Board member or officer of the Fund, or any indemnitee,
from liability in violation of Sections 17(h) and (i) of the Investment Company
Act of 1940, as amended (the "1940 Act").
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date")
and thereafter shall continue automatically for successive annual periods ending
on the day of each year set forth opposite the Series' name on Schedule 1 hereto
(the "Reapproval Day"), provided such continuance is specifically approved at
least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined
in the 1940 Act) of such Series' outstanding voting securities, provided that in
either event its continuance also is approved by a majority of the Fund's Board
members who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. As to each Series, this Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of holders of a majority of such Series' shares or, upon not less than 90 days'
notice, by you. This Agreement also will terminate automatically, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
The Fund recognizes that from time to time your directors, officers
and employees may serve as trustees, directors, partners, officers and employees
of other business trusts, corporations, partnerships or other entities
(including other investment companies), and that such other entities may include
the name "Bear Stearns" as part of their name, and that your corporation or its
affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Fund's investment adviser, the Fund
agrees that, at your request, the Fund will take all necessary action to change
the name of the Fund to a name not including "Bear Stearns" in any form or
combination of words.
This Agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and property
of the relevant Series and shall not be binding upon any Board member, officer
or shareholder of the Fund individually.
5
<PAGE>
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE BEAR STEARNS FUNDS
By:
----------------------------
Accepted:
BEAR STEARNS FUNDS MANAGEMENT INC.
By:
-------------------------------
6
<PAGE>
SCHEDULE 1
Annual Fee as a Percentage
Name of Series of Average Daily Net Assets
- -------------- ---------------------------
Balanced Portfolio 0.65% of 1%
High Yield Total Return Portfolio 0.60% of 1%
International Equity Portfolio 1.00 of 1%
Approved September 8, 1997
Reapproved February 10, 1999
To be reapproved on or before March 31, 2000
<PAGE>
Exhibit 99.B5(b)
THE BEAR STEARNS FUNDS
AND
BEAR STEARNS INVESTMENT TRUST
DEALER AGREEMENT
February 25, 1999
Bear, Stearns & Co. Inc. ("Bear Stearns") has entered into distribution
agreements (the "Distribution Agreement"), dated February 22, 1995 with The Bear
Stearns Funds (the BSF "Trusts (s)") and on March 1, 1993 with the Bear Stearns
Investment Trust ("BSIT") (BSF and BSIT collectively, the "Trust(s)") in which
Bear Stearns has agreed to act as distributor (the "Distributor") of shares of
each series ("Series") of the Trusts. For purposes of this Agreement, the term
("Shares") shall mean the authorized shares of the relevant Series or "Class" of
the Trust. This Dealer Agreement shall herein be referred to as the "Agreement."
For purposes of this Agreement, "Bear Stearns" shall mean Bear, Stearns & Co.
Inc. in our capacity as Distributor.
1. Role of Bear Stearns. Pursuant to the Distribution Agreements, we have
--------------------
agreed to use our best efforts to make arrangements for securities dealers
("Authorized Dealers") which can make the representation set forth in Section 6
of this Agreement to solicit from the public orders to purchase Shares. This
will confirm our mutual agreement as to the terms and conditions applicable to
your participation as an Authorized Dealer. You understand (a) that we may, at
any time at our option, act as an Authorized Dealer, (b) that we are seeking to
enter into this Agreement in counterparts with you and certain other securities
dealers, which also may act as Authorized Dealers, (c) that, except as we may
otherwise agree with you, we may enter into agreements (which may or may not be
the same as this Agreement) with other Authorized Dealers, (d) that the Trusts
and we may modify, suspend, terminate or withdraw entirely the offering of
Shares at any time without giving notice to you pursuant to Section 14 and
without incurring any liability or obligation to you, (e) that we may, upon
notice, change the public offering price, sales load, or dealer allowance or
modify, cancel or change the terms of this Agreement, and (f) we shall be under
no liability to you except for lack of good faith and for obligations expressly
assumed by us herein. All purchases of Shares from, and redemptions of Shares
by, the Trusts shall be effected through us acting on behalf of the Trusts. You
understand that we shall have no obligation to sell Shares to you at such times
as we are not acting as Distributor for the Shares.
2. Role of Authorized Dealers. (a) As an Authorized Dealer, you shall have
--------------------------
no obligation to purchase or sell or to solicit the purchase or sale of Shares.
As, when and if you determine to purchase Shares or you receive a customer order
for the purchase of Shares and you determine to accept such order, you shall
comply with the procedures for the purchase of Shares set forth in the relevant
Prospectus and Statement of Additional Information as most currently amended or
supplemented (the "SAI"). The procedure relating to the handling of orders shall
be subject to such further instructions as we shall forward to you in writing
from time to time.
(b) You agree to offer Shares to the public at the then applicable public
offering price and subject to the minimum investment amount set forth in the
relevant Prospectus and SAI, subject to any waivers or reductions of sales load
(the "Sales Load") or dealer allowances (the
<PAGE>
"Dealer Allowances") as described in the relevant Prospectus and SAI as amended
from time to time. Any amendment to a Prospectus which affects the Sales Load,
Dealer Allowances, waivers or discounts shall not affect the Sales Load, Dealer
Allowances, discounts or waivers with respect to sales on which orders have been
accepted by us prior to the date of notice of such amendment. Your placement of
an order for Shares after the date of any notice of such amendment shall
conclusively evidence your agreement to be bound thereby. The Trusts and Bear
Stearns reserve the right to modify any minimum investment requirements, the
subsequent investment requirements, the manner in which Shares are offered and
the Sales Load rates applicable to future purchase of Shares. You also
acknowledge that the amounts charged to the public for Shares may include such
transaction fees ("Transaction Fees") as may be described in the relevant
Prospectus and SAI. In addition, you may make available Shares through a "no
transaction fee" program, to the extent permitted in a Trust's Prospectus or
SAI. Bear Stearns shall make a reasonable effort to notify you of any
redetermination or suspension of the public offering price, but Bear Stearns
shall be under no liability for failure to do so. Reduced Sales Loads also may
be available as a result of a cumulative discount or pursuant to a right of
accumulation as set forth in the relevant Prospectus. You agree to advise us
promptly as to the amounts of any sales made by you to the public qualifying for
reduced Sales Loads.
(c) You agree to purchase Shares from us only to cover purchase orders
already received from your customers, or for your own bona fide investment. You
will not withhold placing with us orders received from your customers so as to
profit yourself as a result of such withholding. All orders for Shares are
subject to acceptance or rejection by Bear Stearns or the Trusts in the sole
discretion of either.
(d) In purchasing Shares through us, you shall rely solely on the
representations contained in the relevant Prospectus, relevant SAI and any
supplemental sales material. We will indemnify you and hold you harmless as to
any representations made in the then-current Prospectus, SAI and any other
supplemental material which we supply to you and you have not altered. You will
not furnish to any person any information relating to the Shares, the Trusts,
any Series or us that is inconsistent with information contained in the relevant
Prospectus, relevant SAI, or any printed information issued by the Trusts or us
as information supplemental to such Prospectus or cause any advertisement to be
published or posted in any public place without our consent and the consent of
the Trusts.
(e) In all sales of Shares to the public, you shall act as dealer for your
own account, whether as agent or principal. Nothing herein shall be deemed to
constitute you or any other Authorized Dealer as agent for the Trusts, us, or
any other Authorized Dealer. You agree not to act as our agent and not to claim
to act as our agent or as agent of any of the foregoing. You shall be deemed an
independent contractor and you shall have no authority to act for or represent
the Trusts. You will not act as an "underwriter" or "distributor" of Shares, as
those terms are used in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations thereunder.
You agree to buy Shares only through us and not from any other source and
to sell Shares only to us, as the Trusts' redemption agent, and not to any other
purchaser.
<PAGE>
(f) You agree to accept orders for the redemption of Shares and to
transmit to the Trusts such orders and all additional material required to
complete the redemption as described in the relevant Prospectus and SAI.
(g) You agree that we shall have full authority to act upon your express
instructions to repurchase or exchange Shares through us on behalf of your
customers under the terms and conditions provided in the relevant Prospectus and
SAI. You agree to hold us, our parent company, subsidiaries, affiliates and
their respective officers, directors, employees and agents harmless as a result
of any action taken with respect to authorized repurchases or exchanges upon
your express instructions.
3. Compensation. (a) You will be entitled to receive that portion of the
------------
Sales Load allocated to Authorized Dealers as set forth in the relevant
Prospectus in connection with purchases of Shares effected to or through you.
You acknowledge that the Prospectuses will set forth a description of waivers or
reduction of the Sales Load in certain cases and you hereby waive such portion
of the Sales Load otherwise allocated to you. We will promptly remit or cause to
be remitted to you, by wire transfer of same day funds to an account you shall
designate, that portion of the Sales Load or Transaction Fees, if any, to which
you are entitled, after deduction of the portion allocated to us, which was
received by us and not yet paid to you.
(b) If payment in Federal Funds is not received by the third business day
after the Subscription Date or, in case of orders within three business days
after the execution of the order, Bear Stearns reserves the right, without any
notice, to cancel the sale and to hold you responsible for any loss, including
loss of profits, suffered by Bear Stearns or by the Trusts resulting from such
failure.
4. Orders and Payment for Shares. Upon receipt from you of any order to
-----------------------------
purchase Shares and, if a new account, an Account Information Form, we shall
confirm such order to you in writing or by wire to be followed by a confirmation
in writing. Additional instructions may be forwarded to you from time to time.
Payment for Shares ordered from us shall be made in Federal Funds and must be
received by the Trust's agent, PFPC Inc., within three business days of a
receipt and acceptance by us of an order. You agree that before transmitting
investors' funds, you will comply with Rule 15c2-4 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
5. Blue Sky and Other Qualifications. The Trust has registered an
---------------------------------
indefinite number of Shares under the Securities Act. Upon application by you,
we shall inform you as to any advice received by us concerning the jurisdictions
in which the Shares have been qualified for offer or sale or are exempt under
the securities or blue sky laws of such jurisdictions, but we assume no
obligation or responsibility as to your right to offer or sell Shares in any
jurisdiction (other than under the federal laws of the United States). You agree
to offer shares only in those states in which the Shares are qualified for offer
or sale or exempt under the securities or blue sky laws of such state. You may
not offer or sell Shares outside the United States, its territories or its
possessions, you will take, at your expense, such action, if any, as may be
necessary to comply with the laws of such foreign jurisdictions.
<PAGE>
6. Representations, Warranties and Undertakings. You represent and warrant
--------------------------------------------
to and undertake that:
(a) You are familiar with Securities Act Release No. 4968, Rule 15c2-8
under the Exchange Act, Section 4(3) of Securities Act and Section 24(d) of the
Investment Company Act relating to the distribution and delivery of preliminary
and final prospectuses and will comply therewith. You will deliver thereafter to
any customer whose Shares you are holding as record holder copies of the annual
and interim reports and proxy solicitation materials relating to the Shares.
(b) You agree to keep an accurate record of distributions (including
dates, number of copies and persons to whom sent) of copies of any Prospectus
(and any SAI) for each Fund (or any amendment or supplement) and, promptly upon
request by Bear Stearns, to bring all subsequent changes to such Prospectus to
the attention of anyone to whom such material shall have been distributed. You
further agree to furnish to persons who receive a confirmation of sale of shares
of any fund of the Trusts a copy of the Prospectus (and not the SAI for such
fund of the Trusts filed pursuant to Rule 497 under the Securities Act of 1933,
as amended).
(c) You will make all reasonable efforts to obtain proxies from such
purchasers whose Shares you are holding as record holder. Additional copies of a
Fund's Prospectuses, SAI, annual or interim reports, proxy solicitation
materials and any other printed information supplemental to such material will
be supplied as reasonably requested.
(d) You are a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and a member in good standing of the National Association
of Securities Dealers, Inc. (the "NASD") or, in the alternative, that you are a
foreign dealer or bank, not required to be registered as a broker-dealer with
the SEC and not required or eligible for membership in the NASD. If you are such
an NASD member, you agree that in making sales of shares of the one or more
classes of shares of each fund of the Trusts, you will comply with all
applicable rules of the NASD, including without limitation, rules pertaining to
the opening, approval, supervision and monitoring of customer accounts, the
NASD's Interpretation with Respect to Free-Riding and Withholding and Sections
2730, 2740 and 2750 of the NASD's Conduct Rules. If you are such an unregistered
foreign dealer or bank, you agree not to offer or sell, or to agree to offer or
sell, directly or indirectly, any shares to any party to whom such shares may
not be sold unless you are so registered and a member of the NASD, and in making
sales of such shares you agree to comply with the NASD's Interpretation with
Respect to Free-Riding and Withholding and Sections 2730, 2740 and 2750 of the
NASD's Conduct Rules as though you were a member in good standing of the NASD
and to comply with Section 2420 of such Conduct Rules as it applies to a
nonmember broker or dealer in a foreign country. You agree to abide by all other
Rules and Regulations of the NASD, including Section 2830 of its Conduct Rules,
and all applicable state and Federal laws, rules and regulations. Your
acceptance also constitutes a representation that you have been duly authorized
by proper corporate or partnership action to enter into this Agreement and to
perform its obligations hereunder. You will not accept any orders from any
broker, dealer or financial institution who is purchasing from it with a view
toward distribution unless you have obtained such person's or entity's written
consent to be bound by the terms of this Agreement.
<PAGE>
(e) You undertake to comply with respect to your offering of Shares to the
public pursuant to this Agreement with all applicable provisions of the
Securities Act, the Exchange Act and the Investment Company Act and the rules
and regulations thereunder and with the applicable rules of the NASD.
(f) You represent that any compensation payable to you hereunder (i) will
be disclosed to your customers; (ii) will be authorized by your customers; and
(iii) will not result in an excessive fee to you. In addition, if an issue
relating to a Class' 12b-1 Plan (as defined below) is submitted for shareholder
approval, you will vote any Shares held for your own account in the same
proportion as the vote of the Shares held by your customers on such issue. You
further represent that in effecting the purchase or redemption of Shares in
accordance with the terms of this Agreement: (i) you shall act solely as agent
for the account of your customer; (ii) purchases or redemptions of Shares shall
be initiated solely upon the instruction and order of your customer; (iii) the
customer will have full beneficial ownership of any Shares purchased upon its
authorization and order; and (iv) all transactions shall be for the account of
the customer and under no circumstances for your account, and shall be without
recourse to you. Under no circumstances will you make any oral or written
representations to the contrary.
7. l2b-1 Plan. Those Series or Classes set forth as having a l2b-1 Plan
----------
have adopted a plan under Rule l2b-1 of the Investment Company Act (a "12b-1
Plan") as described in the relevant Prospectus and SAI. To the extent you
provide services of the type contemplated by the 12b-1 Plan, you may be entitled
to receive compensation from us as set forth in the l2b-1 Plan. All
compensation, including fees under the l2b-1 Plan, shall be payable to you only
to the extent that funds are received and are in the possession of the
Distributor.
8. Shareholder Servicing Plan. Those Series or Classes set forth as having
--------------------------
a Shareholder Servicing Plan have adopted such as plan as described in the
relevant Prospectus and SAI. To the extent that you provide services of the type
contemplated by the Shareholder Servicing Plan, you may be entitled to receive
compensation from us set forth in the Shareholder Servicing Plan. Such services
may include: (i) establishing and maintaining accounts and records relating to
shareholders; (ii) processing dividend and distribution payments from the Trusts
on behalf of shareholders; (iii) providing information periodically to
shareholders showing their positions in shares and integrating such statements
with those of other transactions and balances in shareholders' other accounts
serviced by such financial institution; (iv) arranging for bank wires; (v)
responding to shareholder inquiries relating to the services performed; (vi)
responding to routine inquiries from shareholders concerning their investments;
(vii) providing subaccounting with respect to shares beneficially owned by
shareholders, or the information to the Trusts necessary for subaccounting;
(viii) if required by law, forwarding shareholder communications from the Trusts
(such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to shareholders; (ix)
assisting in processing purchase, exchange and redemption requests from
shareholders and in placing such orders with our service contractors; (x)
assisting shareholders in changing dividend options, account designations and
addresses; (xi) providing shareholders with a service that invests the assets of
their accounts in shares pursuant to specific or pre-authorized instructions;
and (xii) providing such other similar services as the Trusts or the Distributor
may reasonably request to the extent you are permitted to do so under applicable
statutes, rules and regulations. All compensation, including the fees under
<PAGE>
the Shareholder Servicing Plan, shall be payable to you only to the extent that
funds are received and are in the possession of the Distributor.
9. Indemnification. The parties to this Agreement hereby agree to
---------------
indemnify and hold harmless each other, their officers and directors, and any
person who is or may be deemed to be a controlling person of each other, and any
person who is or may be deemed to be a controlling person of each other, from
and against any losses, claims, damages, liabilities or expenses (including
reasonable fees of counsel) to which any such person or entity may become
subject insofar as such losses, claims, damages, liabilities or expense (or
actions in respect thereof) arise out of or are based upon (a) any untrue
statement or alleged untrue statement of material fact, or any omission or
alleged omission to state a material fact made or omitted by it herein, or (b)
any willful misfeasance or gross misconduct by it in the performance of its
duties and obligations hereunder.
10. NSCC Indemnity - Shareholder and House Accounts. In consideration of
-----------------------------------------------
the Distributor liquidating, exchanging and/or transferring unissued Shares for
your customers without the use of original or underlying documentation
supporting such instruction (e.g. a signed stock power or signature guarantees),
you hereby agree to indemnify the Distributor and the Trusts against any losses,
including reasonable attorney's fees, that may arise from such liquidation,
exchange and/or transfer of unissued Shares upon your direction. This
indemnification shall apply only to the liquidation, exchange and/or transfer of
unissued Shares in shareholder and house accounts executed as wire orders
transmitted via NSCC's Fund/SERV system. You represent and warrant to the Trusts
and the Distributor that all such transactions shall be authorized by your
customers.
This indemnification shall not apply to any losses (including attorneys
fees) caused by the Distributor or the Trusts to comply with any of your
instructions governing any of the above transactions, or any negligent act or
omission of the Distributor or the Trusts, or any of their directors, officers,
employees or agents. All transactions shall be settled upon your confirmation
through NSCC transmission to the Distributor.
The Distributor or the Trusts may revoke the indemnity contained in this
Section nine upon written notice to each of the other parties hereto, and in the
case of such revocation, this indemnity agreement shall remain effective as to
trades made prior to such revocation.
11. Termination. Either party to this Agreement may cancel this Agreement,
-----------
by written notice to the other party. Such cancellation shall be effective upon
receipt of such notice. Bear Stearns agrees to cancel this Agreement upon
instruction by a majority of the Trustees who are not "interested persons" of
the Trusts (as defined in the Investment Company Act) and who have not direct or
indirect financial interest in the operation of this Agreement.
12. Representations to Survive. The agreements, representations,
--------------------------
warranties and other statements set forth in or made pursuant to this Agreement
will remain in full force and effect, to the extent permitted by applicable law,
regardless of any investigation made by or on behalf of us or any Authorized
Dealer. The provisions of Section 6 and 8 of this Agreement shall survive the
offer and sale of the Shares and the termination or cancellation of this
Agreement, to the extent permitted by applicable law.
<PAGE>
13. No Association. Nothing herein contained constitutes an agreement to
--------------
become partners with you or with any other Authorized Dealer, but you shall be
liable for your proportionate share of any tax, liability or expense based on
any claim arising from the sale of Shares under this Agreement. We shall not be
under any liability to you, except for obligations expressly assumed by us in
this Agreement and liabilities under Section 11(f) of the Securities Act of
1933, as amended, and no obligations on our part shall be implied or inferred
herefrom. We and you hereby elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as
amended, and agree not to take any position inconsistent with that election.
14. Recordkeeping. You will maintain all records required by law to be
-------------
kept by you relating to transactions in the Shares and, upon request by the
Trusts, promptly make such of these records available to the Trusts as the
Trusts may reasonably request in connection with its operations.
15. Notices. Notices hereunder shall be deemed to have been duly given if
-------
delivered by hand or facsimile (a) if to you, at your address or facsimile
number set forth below and (b) if to us, to Bear, Stearns & Co. Inc., 575
Lexington Avenue, New York, New York 10022, Attention: Frank J. Maresca or, in
each case, such other address as may be notified to the other party.
16. Amendments. We may modify this Agreement at any time by written notice
----------
to you. The first order placed by you subsequent to the giving of such notice
shall be deemed acceptance by you of the modification described in such notice.
17. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York.
18. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the Rules of the New York Stock Exchange, Inc. Such arbitration
shall be commenced within one year after the cause of action forming the basis
of the controversy or claim accrued. The arbitration shall be conducted in New
York, New York before three arbitrators, all of whom shall be from the
securities industry. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
<PAGE>
Please confirm your agreement by signing and returning to us the two
enclosed duplicate copies of this Agreement. Upon our acceptance hereof, the
Agreement shall constitute a valid and binding contract between us. After our
acceptance, we will deliver to you one fully executed copy of this Agreement.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:_____________________________
Name: ____________________
Title: ___________________
Confirmed: ___________, 199_
- --------------------------------
(Name of Authorized Dealer)
By:
-----------------------------
(Authorized Signature)
Name:
-------------------------
Title:
------------------------
- --------------------------------
Street Address
- --------------------------------
City State Zip
- --------------------------------
Facsimile No.
- --------------------------------
Telephone No.
- --------------------------------
Telex No.
- --------------------------------
Firm Taxpayer Identification No.
<PAGE>
BEAR STEARNS FUNDS DEALER PROFILE SHEET
<TABLE>
<CAPTION>
================================================================================================
<S> <C>
1. Has signed dealer agreement been sent to distributor? Yes __ or No __ Date Sent:______
- ------------------------------------------------------------------------------------------------
2. Dealer name:_____________________________________________________________
- ------------------------------------------------------------------------------------------------
3. Dealer address:___________________________________________________________
- ------------------------------------------------------------------------------------------------
4. Dealer contact:___________________________________________________________
- ------------------------------------------------------------------------------------------------
5. Dealer phone number & fax number:_________________________________________
================================================================================================
QUESTIONS PRECEDED BY ** RELATE TO FUND\SERV
IF NOT A FUND\SERV PARTICIPANT, PLEASE SKIP TO QUESTION #10
================================================================================================
**6. Is the dealer using Fund\Serv? Yes __ or No __
- ------------------------------------------------------------------------------------------------
**7. Is the dealer using networking? Yes __ or No __
If yes, when would they like to receive position files? Choices are:
____ 1st & 3rd Friday _____ 2nd & 4th Friday _____ 1st & 3rd _____ Thursday
____ 2nd & 4th Thursday
Please note: Any additional position files are on an as requested basis.
Please contact Broker services at the 800 number listed below.
- ------------------------------------------------------------------------------------------------
**8. If using networking, indicate network level:__________________________________________
- ------------------------------------------------------------------------------------------------
**9. If another dealer is clearing for them, what is the other dealer's name:
------------------------------------------------
Address:
------------------------------------------------
------------------------------------------------
------------------------------------------------
NSCC number:___________________________________________________________________
Alpha indicator:_______________________________________________________________
Network level:_________________________________________________________________
Contact name:__________________________________________________________________
Contact phone: Area Code:(__) ___________________________
- ------------------------------------------------------------------------------------------------
10. What is the address of the main office for mailing purposes of commission
checks? (MAIN OFFICE ONLY)
- ------------------------------------------------------------------------------------------------
11. Will statements go to main office or branch? Main Office __________ Branch
- ------------------------------------------------------------------------------------------------
12. Omnibus account? Yes ________ or No_________
- ------------------------------------------------------------------------------------------------
Completed fact sheet to be forwarded with signed Selected Dealer Agreement to:
Bear Stearns Asset Management Inc.
575 Lexington Avenue, 10th Floor
New York, NY 10022
Any questions regarding the completion of this form, please contact
Eric Tepper at (212) 272-2782
================================================================================================
</TABLE>
<PAGE>
Exhibit 99.B10(a)
[LETTERHEAD OF KRAMER LEVIN NAFTALIS & FRANKEL LLP]
May 14, 1999
The Bear Stearns Funds
575 Lexington Avenue
New York, New York 10022
Re: The Bear Stearns Funds
Registration No. 33-84842
Post-Effective Amendment
to Registration Statement on Form N-1A
Gentlemen:
We consent to the reference to our Firm as counsel in Post-Effective
Amendment No. 22 to the Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
<PAGE>
Exhibit 99.B10(b)
CONSENT OF INDEPENDENT AUDITORS
The Bear Stearns Funds:
We consent to the reference to us in this Post-Effective Amendment No. 22 to
Registration Statement No. 33-84842 under the caption "Custodians, Transfer
Agent and Dividend Disbursing Agent, Counsel and Independent Auditors" appearing
in the Statement of Additional Information, which is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 13, 1999
<PAGE>
Exhibit 99.B13(A)
THE BEAR STEARNS FUNDS
AMENDED AND RESTATED
DISTRIBUTION PLAN
WHEREAS, The Bear Stearns Funds (the "Trust") engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, shares of the Trust are divided into nine separate portfolios of
investments, each with different investment objectives and policies (each a
"Portfolio") and, in turn each Portfolio is divided into separate classes (each
a "Class");
WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act (the "Rule") with respect to each Class of
each Portfolio listed on Schedule 1 annexed hereto;
WHEREAS, the Trust's Board has determined that there is a reasonable
likelihood that adoption of this Plan will benefit the Portfolios and their
shareholders; and
WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the "Distributor")
as Distributor of the Portfolios' shares (the "Shares") pursuant to a
Distribution Agreement dated February 22, 1995.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby agrees
to the terms of, this Plan in accordance with Rule 12b-1 under the Act on the
following terms and conditions:
1. (a) Each Portfolio shall pay the Distributor for distributing its Shares
a monthly fee at the annual rate set forth on Schedule 1.
(b) The Distributor may pay one or more third parties a fee in respect
of any Shares owned by investors for whom the third party is the
dealer or holder of record. The Distributor shall determine the
amounts to be paid to such third parties and the basis on which such
payments will be made. Payments to a third party are subject to
compliance by the third party with the terms of any related Plan
agreement between the third party and the Distributor.
(c) For the purposes of determining the fees payable under this Plan,
the value of the net assets of each Class of each Portfolio shall be
computed in the manner specified in the Trust's charter documents as
then in effect for the computation of the value of net assets.
2. The terms and provisions of this Plan shall be interpreted and defined in
a manner consistent with the provisions and definitions contained in (i)
the 1940 Act, (ii) the Rule and (iii)
<PAGE>
Section 2830 of the National Association of Securities Dealers, Inc.
Business Conduct Rules or its successor.
3. As to any Portfolio or Class, this Plan shall not take effect until it,
together with any related agreement, has been approved by vote of a
majority of both (a) the Trust's Board and (b) those Trustees who are not
"interested persons" of the Trust (as defined by the Act) and who have no
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the "Rule 12b-1 Trustees") cast in person at a
meeting (or meetings) called for the purpose of voting on this Plan and
such related agreements.
4. As to any Portfolio or Class, as the case may be, this Plan shall remain
in effect for one year from the date on which the Plan was first executed
and shall continue in effect thereafter so long as such continuance is
specifically approved at least annually in the manner provided for
approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trust's Board and the Board shall
review, at least quarterly, a written report of amounts paid hereunder and
the purposes for which they were made.
6. As to any Portfolio or Class, as the case may be, this Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Trustees or
by a vote of a majority of its outstanding voting securities.
7. This Plan may not be amended to increase materially the amount of
compensation payable pursuant to paragraph 1 hereof unless such amendment
is approved by a vote of at least a majority (as defined in the Act) of
the outstanding voting securities of the relevant Portfolio or Class. No
material amendment to the Plan shall be made unless approved in the manner
provided in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of the Trustees
who are not interested persons (as defined in the Act) of the Trust shall
be committed to the discretion of the Trustees who are not such interested
persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 5 hereof, for a period of not
less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily
accessible place.
10. The name The Bear Stearns Funds is the designation of the Trustees for the
time being under an Agreement and Declaration of Trust dated September 29,
1994, as amended from time to time, and all persons dealing with the Trust
must look solely to the property of the Trust for enforcement of any
claims against the Trust as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Trust.
-2-
<PAGE>
IN WITNESS WHEREOF, the Trust, on behalf of the Portfolios and Classes,
and the Distributor have executed this Plan as of the date set forth below.
September 8, 1997; amended and restated February 10, 1999.
THE BEAR STEARNS FUNDS
By:_______________________
BEAR, STEARNS & CO. INC.
By: _______________________
-3-
<PAGE>
SCHEDULE 1
Name of Series Class A* Class B* Class C*
- -------------- -------- -------- --------
S&P STARS Portfolio .25%(1) .75%(2) .75%(1)
Large Cap Value Portfolio .25%(1) .75%(2) .75%(1)
Small Cap Value Portfolio .25%(1) .75%(2) .75%(1)
Income Portfolio .10%(1) .75%(2) .75%(1)
The Insiders Select Fund .25%(1) .75%(2) .75%(1)
Focus List Portfolio .25%(2) .75%(2) .75%
Balanced Portfolio .25%(2) .75%(2) .75%
High Yield Total Return Portfolio .10%(2) .75%(2) .75%
International Equity Portfolio .25%(2) .75%(2) .75%
Emerging Markets Debt Portfolio .10%(2) .75%(2) .75%
- ----------
Schedule I amended as of February 10, 1999
(1) Reapproved February 20, 1999 to be reapproved no later than February 22,
2000.
(2) Reapproved February 10, 1999 to be reapproved no later than March 31, 2000.
* Annual Fee as a Percentage of Average Daily Net Assets.
-4-
<PAGE>
Exhibit 99.B13(B)
THE BEAR STEARNS FUNDS
AMENDED AND RESTATED
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted as of September 8,
1997, as amended February 10, 1999, by The Bear Stearns Funds, a business trust
organized under the laws of The Commonwealth of Massachusetts (the "Fund"), on
behalf of the classes of shares of its Portfolios (the "Portfolios") as set
forth in Schedule I, as amended from time to time, subject to the following
terms and conditions:
Section 1. Service Agreements; Annual Fees.
Shareholder Servicing Agreements. The Fund and the Distributor of the
Fund, Bear, Stearns & Co. Inc., (the "Distributor") are each authorized to enter
into Shareholder Servicing Agreements on behalf of the Portfolios (the
"Agreements"), the form of which shall be approved by the Board of Trustees of
the Fund (the "Board"), with financial institutions and other persons who
provide shareholder liaison services ("Service Providers") as set forth in this
Plan.
Shareholder Servicing Fee. Each Portfolio will pay either (i) to the
Distributor, who may, in turn, pay Service Providers or, (ii) directly to
Service Providers, a shareholder servicing fee under the Plan at an annual rate
of up to 0.25% of the average daily net assets of the Portfolio attributable to
the classes of shares as listed on Schedule 1 (the "Servicing Fee"). Provided,
however, that no Portfolio shall directly or indirectly pay any amounts, whether
Payments (as defined in the Agreements) or otherwise, that exceed any applicable
limits imposed by law or the National Association of Securities Dealers, Inc.
Adjustment to Fees. Each class of any Portfolio may pay a Servicing Fee to
the Distributor at a lesser rate than the fees specified in Section I hereof as
agreed upon by the Board of Trustees and the Distributor and approved in the
manner specified in Section 3 of this Plan.
Payment of Fees. The Servicing Fees will be calculated daily and paid
monthly by each Portfolio with respect to each class of shares at the annual
rates indicated above.
Section 2. Expenses Covered by the Plan.
Servicing Fees may be used for payments to Service Providers who provide
personal or account maintenance services to their customers who may from time to
time beneficially own shares to the extent the Distributor or Service Provider
is permitted to do so under applicable statutes, rules and regulations. Such
services may include: (i) establishing and maintaining accounts and records
relating to shareholders; (ii) processing dividend and distribution payments
from the Fund on behalf of shareholders; (iii) providing information
periodically to shareholders showing their positions in shares and integrating
such statements with those of other transactions and balances in shareholders'
other accounts serviced by such financial institution; (iv) arranging for bank
wires; (v) responding to shareholder inquiries relating to the services
performed; (vi) responding to routine inquiries from shareholders concerning
their investments; (vii) providing subaccounting with respect to shares
beneficially owned by shareholders, or the information to the
<PAGE>
Fund necessary for subaccounting; (viii) if required by law, forwarding
shareholder communications from the Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to shareholders; (ix) assisting in processing purchase, exchange and
redemption requests from shareholders and in placing such orders with our
service contractors; (x) assisting shareholders in changing dividend options,
account designations and addresses; (xi) providing shareholders with a service
that invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; and (xii) providing such other similar services as
the Fund may reasonably request to the extent the Distributor or financial
institution is permitted to do so under applicable statutes, rules and
regulations.
Section 3. Approval of Trustees.
As to any Portfolio or Class, neither the Plan nor any related agreements
will take effect until approved by a majority of both (a) the full Board of
Trustees of the Fund and (b) those Trustees who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreements related to it (the "Qualified Trustees"), cast
in person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 4. Continuance of the Plan.
The Plan will continue in effect for successive twelve-month periods:
provided, however, that such continuance as to any Portfolio or Class is
specifically approved at least annually by the Trustees of the Fund and by a
majority of the Qualified Trustees.
Section 5. Termination.
The Plan may be terminated at any time with respect to a Portfolio or
Class (i) by the Portfolio without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of the classes of shares of the
Portfolio listed on Schedule I or (ii) by a vote of the Qualified Trustees. The
Plan may remain in effect with respect to a Portfolio even if the Plan has been
terminated in accordance with this Section 5 with respect to any other
Portfolio.
Section 6. Amendments.
No material amendment to the Plan may be made unless approved by the
Portfolio's Board of Trustees in the manner described in Section 3 above.
Section 7. Written Reports.
In each year during which the Plan remains in effect, a person authorized
to direct the disposition of monies paid or payable by a Portfolio pursuant to
the Plan or any related agreement will prepare and furnish to the Board, and the
Board will review, at least quarterly, written reports which set out the amounts
expended under the Plan and the purposes for which those expenditures were made.
-2-
<PAGE>
Section 8. Preservation of Materials.
The Portfolio will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 7 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 9. Limit of Liability.
The limitation of shareholder liability set forth in the Fund's
Declaration of Trust is hereby acknowledged. The obligations of the Fund under
this Plan, if any, shall not be binding upon the Trustees individually or upon
holders of shares of the Fund individually but shall be binding only upon the
assets and property of the Fund, and upon the Trustees insofar as they hold
title thereto.
Section 10. Meanings Of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the Investment Company Act of 1940 by the Securities and
Exchange Commission.
THE BEAR STEARNS FUNDS
By:_________________________
BEAR, STEARNS & CO. INC.
By:_________________________
-3-
<PAGE>
SCHEDULE I
This Shareholder Servicing Plan shall be adopted with respect to the
following Portfolios of The Bear Stearns Funds:
FUND Class A Class B Class C
- ---- ------- ------- -------
S&P STARS Portfolio .25% .25% .25%
Large Cap Value Portfolio .25% .25% .25%
Small Cap Value Portfolio .25% .25% .25%
Income Portfolio .25% .25% .25%
The Insiders Select Fund .25% .25% .25%
Focus List Portfolio .25% .25% .25%
Balanced Portfolio .25% .25% .25%
High Yield Total Return .25% .25% .25%
Portfolio
International Equity Portfolio .25% .25% .25%
Emerging Markets Debt .25% .25% .25%
Portfolio
Reapproved February 4, 1998 to be reapproved no later than March 31, 1999
Reapproved February 10, 1999 to be reapproved no later than March 31, 2000
-4-
<PAGE>
Exhibit 99.B15
THE BEAR STEARNS FUNDS
Rule 18f-3 Plan
Rule l8f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"), requires that the Board of an investment company desiring to offer
multiple classes pursuant to said Rule adopt a plan setting forth the separate
distribution arrangements and expense allocations of each class, and any related
conversion features or exchange privileges.
The Board, including a majority of the non-interested Board members,
of The Bear Stearns Funds (the "Fund") which desires to offer multiple classes
for the series set forth on Schedule A (the "Series") has determined that the
following plan is in the best interests of each class individually and the Fund
as a whole:
1. Class Designation: The shares of the Large Cap Value Portfolio,
the Small Cap Value Portfolio, The Insiders Select Fund, the S&P STARS
Portfolio, the Income Portfolio, the Focus List Portfolio, the Balanced
Portfolio, the High Yield Total Return Portfolio, the International Equity
Portfolio and the Emerging Markets Debt Portfolio shall be divided into Class A,
Class B, Class C and Class Y.
2. Differences in Services: The services offered to shareholders of
each Class shall be substantially the same, except that Right of Accumulation
and Letter of Intent shall be available only to holders of Class A shares.
3. Differences in Distribution Arrangements: Class A shares shall be
offered with a front-end sales charge, as such term is defined in Article III,
Section 2830, of the Business Conduct Rules of the National Association of
Securities Dealers, Inc., and a contingent deferred sales charge (a "CDSC"), as
such term is defined in said Section 26(b), may be assessed on certain
redemptions of Class A shares purchased without an initial sales charge as part
of an investment of $1 million or more. The amount of the sales charge and the
amount of and provisions relating to the CDSC pertaining to the Class A shares
are set forth on Schedule B hereto.
Class B shares shall not be subject to a front-end sales charge, but
shall be subject to a CDSC. The amount of and provisions relating to the CDSC
pertaining to Class B shares are set forth on Schedule C hereto.
Class C shares shall not be subject to a front-end sales charge, but
shall be subject to a CDSC. The amount of and provisions relating to the CDSC
pertaining to Class C shares are set forth on Schedule D hereto.
Class A, Class B and Class C shares shall be charged a fee pursuant
to a Distribution Plan adopted under Rule 12b-1 under the 1940 Act and a
Shareholder Servicing Plan. The amount of the fees under each such plan are set
forth on Schedule E hereto.
<PAGE>
Class Y shares shall be offered at net asset value with no front-end
sales charge, CDSC or distribution and shareholder servicing fees. Class Y
shares are available to investors whose minimum initial purchase is at least
$2.5 million, subject to such waivers or variations as from time to may be in
effect.
4. Expense Allocation: The following expenses will be allocated, to
the extent-practicable, on a Class-by-Class basis: (a) fees under the
Distribution Plan and Shareholder Servicing Plan adopted for such class of
shares; (b) printing and postage expenses related to preparing and distributing
materials, shareholder reports, prospectuses and proxies to current shareholders
of a special Class; (c) Securities and Exchange Commission and Blue Sky
registration fees incurred by a specific Class; (d) the expense of
administrative personnel and services as required to support the shareholders of
a specific Class; (e) litigation or other legal expenses relating solely to a
specific Class; and (f) Board members' fees incurred as a result of issues
relating to a specific Class.
Income, realized and unrealized capital gains and losses, and any
expenses of a Series not allocated to a particular class of such Series pursuant
to this Plan shall be allocated to each class of the Series on the basis of the
net asset value of that class in relation to the net asset value of the Series.
The Adviser, Distributor, Administrator and any other provider of
services to the Fund may waive or reimburse the expenses of a particular class
or classes, provided, however, that such waiver shall not result in cross
subsidization between the classes.
5. Conversion Features: If a holder of Class A shares notifies the
Fund's distributor that it desires to have its Class A Shares converted to Class
Y Shares because it is eligible to purchase Class Y Shares, the shares which are
the subject of the notice shall be converted to Class Y shares, without the
imposition of any sales charge, fee or other charge, on the third business day
following confirmation of the investor's eligibility to own Class Y Shares, at
the relative net value of such Class as of the close of business on such date.
Eight years after the date of the initial purchase, Class B shares will
automatically convert into Class A shares, based on the relative net value of
such Class as of the close of business on such date, without the imposition of
any sales charge, fee or other charge.
After conversion, the converted shares will be subject to an
asset-based sales charge and/or service fee (as those terms are defined in
Article III, Section 2830 of the National Association Securities Dealers, Inc.
Business Conduct Rules), if any, that in the aggregate are lower than the
asset-based sales charge and service fee to which they were subject prior to
that conversion. In no event will a class of shares have a conversion feature
that automatically would convert shares of such class into shares of a class
with a distribution arrangement that could be viewed as less favorable to the
shareholder from the point of view of overall cost.
-2-
<PAGE>
The implementation of the conversion feature is subject to the
continuing availability of a ruling of the Internal Revenue Service, or of an
opinion of counsel or tax advisor, stating that the conversion of one class of
shares to another does not constitute a taxable event under federal income tax
law. The conversion feature may be suspended if such a ruling or opinion is not
available.
If a Series implements any amendment to a Distribution Plan (or, if
presented to shareholders, adopts or implements any amendment of a shareholder
services plan) that the Board determines would materially increase the charges
that may be borne by the Class A Shareholders under such plan, the Class B
Shares will stop converting to the Class A Shares until the Class B Shares,
voting separately, approve the amendment or adoption. The Board shall have sole
discretion in determining whether such amendment or adoption is to be submitted
to a vote of the Class B Shareholders. Should such amendment or adoption not be
submitted to a vote of the Class B Shareholders or, if submitted, should the
Class B Shareholders fail to approve such amendment or adoption, the Board shall
take such action as is necessary to: (1) create a new class (the "New Class A
Shares") which shall be identical in all material respects to the Class A Shares
as they existed prior to the implementation of the amendment or adoption; and
(2) ensure that the existing Class B Shares will be exchanged or converted into
New Class A Shares no later than the date such Class B Shares were scheduled to
convert to Class A Shares. If deemed advisable by the Board to implement the
foregoing, and at the sole discretion of the Board, such action may include the
exchange of all Class B Shares for a new class (the "New Class B Shares"),
identical in all respects to the Class B Shares except that the New Class B
Shares will automatically convert into the New Class A Shares. Such exchanges or
conversions shall be effected in a manner that the Board reasonably believes
will not be subject to federal taxation.
6. Exchange Privileges: Shares of a Class are exchangeable only for
(a) shares of the same Class of another Series or of other investment companies
sponsored by the Fund's distributor and (b) shares of the Money Market Portfolio
of The RBB Fund, Inc.
7. Board Review: The Board shall review this Plan as frequently as
it deems necessary. Prior to any material amendment(s) to this Plan, the Board,
including a majority of the Board members that are not interested persons of the
Fund, shall find that the Plan, as proposed to be amended (including any
proposed amendments to the method of allocating class and/or fund expenses), is
in the best interest of each class of shares of a Series individually and the
Series as a whole. In considering whether to approve any proposed amendment(s)
to the Plan, the Board shall request and evaluate such information as they
consider reasonably necessary to evaluate the proposed amendment(s) to the Plan.
Such information shall address the issue of whether any waivers or
reimbursements of fees or expenses could be considered a cross-subsidization of
one class by another, and other potential conflicts of interest between classes.
-3-
<PAGE>
In making its determination to approve this Plan, the Board has
focused on, among other things, the relationship between or among the classes
and has examined potential conflicts of interest among classes (including those
potentially involving a cross-subsidization between classes) regarding the
allocation of fees, services, waivers and reimbursements of expenses, and voting
rights. The Board has evaluated the level of services provided to each class and
the cost of those services to ensure that the services are appropriate and the
allocation of expenses is reasonable. In approving any subsequent amendments to
this Plan, the Board shall focus on and evaluate such factors as well as any
others deemed necessary by the Board.
Dated: March 24, 1995, as revised May 4, 1995, May 31, 1995, September 29, 1995,
August 12, 1996, April 29, 1997, August 11, 1997, September 8, 1997,
November 12, 1998 and February 10, 1999.
-4-
<PAGE>
SCHEDULE A
----------
S&P STARS Portfolio
Large Cap Value Portfolio
Small Cap Value Portfolio
Income Portfolio
The Insiders Select Fund
Focus List Portfolio
Balanced Portfolio
High Yield Total Return Portfolio
International Equity Portfolio
Emerging Markets Debt Portfolio
A-1
<PAGE>
SCHEDULE B
----------
Front-End Sales Charge--Class A Shares--The public offering price for Class A
shares shall be the net asset value per share of that Class plus a sales load as
shown below:
(a) For S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value
Portfolio, The Insiders Select Fund, Focus List Portfolio, Balanced
Portfolio and International Equity Portfolio:
Total Sales Load
---------------------------------
Amount of Transaction As a % of As a % of
offering net asset
price per value per
share share
--------------- --------------
Less than $50,000.......................... 5.50% 5.82%
$50,000 to less than $100,000.............. 4.75 4.99
$100,000 to less than $250,000............. 3.75 3.90
$250,000 to less than $500,000............. 2.75 2.83
$500,000 to less than $1,000,000........... 2.00 2.04
$1,000,000 and above....................... 0.00 0.00
(b) For Income Portfolio, High Yield Total Return Portfolio, and Emerging
Markets Debt Portfolio:
Total Sales Load
---------------------------------
Amount of Transaction As a % of As a % of
offering net asset
price per value per
share share
--------------- --------------
Less than $50,000.......................... 4.50% 4.71%
$50,000 to less than $100,000.............. 4.25% 4.44%
$100,000 to less than $250,000............. 3.25% 3.36%
$250,000 to less than $500,000............. 2.50% 2.56%
$500,000 to less than $1,000,000........... 2.00% 2.04%
$1,000,000 and above....................... 0.00 0.00
B-1
<PAGE>
Contingent Deferred Sales Charge--Class A Shares--A CDSC of 1.00% shall be
assessed at the time of redemption of Class A shares purchased without an
initial sales charge as part of an investment of at least $1,000,000 and
redeemed within one year after purchase. A CDSC of .50% shall be assessed at the
time of redemption of Class A shares purchased without a sales charge with the
proceeds from the redemption of shares of an investment company sold with a
sales charge or commission and not distributed by the Fund's Distributor. The
terms contained in Schedule D pertaining to the CDSC assessed on redemptions of
Class C shares, including the provisions for waiving the CDSC, shall be
applicable to the Class A shares subject to a CDSC. Letter of Intent and Right
of Accumulation shall apply to such purchases of Class A shares.
B-2
<PAGE>
SCHEDULE C
----------
Contingent Deferred Sales Charge--Class B Shares--A CDSC of up to 5% may be
imposed on redemptions of Class B shares made within the first six years of the
date of purchase. The CSDC will be imposed in accordance with the following
table:
Year Since
Initial Purchase
of Class B Shares CDSC
----------------- ----
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth 0%
No CDSC shall be imposed to the extent that the net asset value of
Class B shares redeemed does not exceed (i) the current net asset value of Class
B shares acquired through reinvestment of dividends on capital gain
distributions, plus (ii) increases in the net asset value of the shareholder's
Class B shares above the dollar amount of all payments for the purchase of Class
B shares of the Fund held by such shareholder at the time of redemption.
If the aggregate value of the Class B shares redeemed has declined
below their original cost as a result of the Fund's performance, a CDSC may be
applied to the then-current net asset value rather than the purchase price.
In determining whether a CDSC is applicable to a redemption, the
calculation shall be made in a manner that results in the lowest possible rate.
Therefore, it shall be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
Class B shares above the total amount of payments for the purchase of Class B
shares made during the preceding year; then of amounts representing the cost of
shares purchased more than one year prior to the redemption; finally, of amounts
representing the cost of shares purchased within one year prior to redemption.
Waiver of CDSC--The CDSC shall be waived in connection with (a) redemptions made
within one year after the death or disability, defined in Section 72(m)(7) of
the Internal Revenue Code of 1986, as amended (the "Code"), of the shareholder,
(b) redemptions by employees participating in Eligible Benefit Plans, (c)
redemptions as a result of a combination of any
C-1
<PAGE>
investment company with a Portfolio by merger, acquisition of assets or
otherwise, (d) a distribution following retirement under a tax-deferred
retirement plan or upon attaining age 70-1/2 in the case of an IRA or Keogh plan
or custodial account pursuant to Section 403(b) of the Code, and (e) to the
extent that shares redeemed have been withdrawn from the Automatic Withdrawal
Plan, up to a maximum amount of 12% per year from a shareholder account based on
the value of the account at the time the automatic withdrawal is established.
Any shares subject to a CDSC which were purchased prior to the termination of
such waiver shall have the CDSC waived as provided in the Fund's prospectus at
the time of the purchase of such shares.
C-2
<PAGE>
SCHEDULE D
----------
Contingent Deferred Sales Charge--Class C Shares--A CDSC of 1.00% payable to the
Fund's Distributor shall be imposed on any redemption of Class C shares made
within one year of the date of purchase. No CDSC shall be imposed to the extent
that the net asset value of the Class C shares redeemed does not exceed (i) the
current net asset value of Class C shares acquired through reinvestment of
dividends or capital gain distributions, plus (ii) increases in the net asset
value of the shareholder's Class C shares above the dollar amount of all
payments for the purchase of Class C shares of the Fund held by such shareholder
at the time of redemption.
If the aggregate value of the Class C shares redeemed has declined
below their original cost as a result of the Fund's performance, a CDSC may be
applied to the then-current net asset value rather than the purchase price.
In determining whether a CDSC is applicable to a redemption, the
calculation shall be made in a manner that results in the lowest possible rate.
Therefore, it shall be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
Class C shares above the total amount of payments for the purchase of Class C
shares made during the preceding year; then of amounts representing the cost of
shares purchased more than one year prior to the redemption; finally, of amounts
representing the cost of shares purchased within one year prior to redemption.
Waiver of CDSC--The CDSC shall be waived in connection with (a) redemptions made
within one year after the death or disability, defined in Section 72(m)(7) of
the Internal Revenue Code of 1986, as amended (the "Code"), of the shareholder,
(b) redemptions by employees participating in Eligible Benefit Plans, (c)
redemptions as a result of a combination of any investment company with a
Portfolio by merger, acquisition of assets or otherwise, and (d) a distribution
following retirement under a tax-deferred retirement plan or upon attaining age
70-1/2 in the case of an IRA or Keogh plan or custodial account pursuant to
Section 403(b) of the Code, and to the extent that shares redeemed have been
withdrawn from the Automatic Withdrawal Plan, up to a maximum amount of 12% per
year from a shareholder account based on the value of the account at the time
the automatic withdrawal is established. Any shares subject to a CDSC which were
purchased prior to the termination of such waiver shall have the CDSC waived as
provided in the Fund's prospectus at the time of the purchase of such shares.
D-1
<PAGE>
SCHEDULE E
----------
Amount of Distribution Plan--Each of the following Series shall pay a fee based
on the value of the average daily net assets of the respective Class as follows:
Name of Series Class A Class B Class C
- -------------- ------- ------- -------
S&P STARS Portfolio .25% .75% .75%
Large Cap Value Portfolio .25% .75% .75%
Small Cap Value Portfolio .25% .75% .75%
The Insiders Select Fund .25% .75% .75%
Income Portfolio .10% .75% .75%
Focus List Portfolio .25% .75% .75%
Balanced Portfolio .25% .75% .75%
High Yield Total Return Portfolio .10% .75% .75%
International Equity Portfolio .25% .75% .75%
Emerging Markets Debt Portfolio .10% .75% .75%
Amount of Shareholder Servicing Plan--Each of the following Series shall pay a
fee based on the value of the average daily net assets of the respective Class
as follows:
Name of Series Class A Class B Class C
- -------------- ------- ------- -------
S&P STARS Portfolio .25% .25% .25%
Large Cap Value Portfolio .25% .25% .25%
Small Cap Value Portfolio .25% .25% .25%
The Insiders Select Fund .25% .25% .25%
Income Portfolio .25% .25% .25%
Focus List Portfolio .25% .25% .25%
Balanced Portfolio .25% .25% .25%
High Yield Total Return Portfolio .25% .25% .25%
International Equity Portfolio .25% .25% .25%
Emerging Markets Debt Portfolio .25% .25% .25%
E-1
<PAGE>
Exhibit 99B
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes
and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as
my true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Registration Statements of the Trust under the
Securities Act of 1933 and Investment Company Act of 1940, any and all
Pre-Effective Amendments to any Registration Statement of the Trust, any and all
Post-Effective Amendments to said Registration Statements, any Registration
Statements on Form N-14, and any supplements or other instruments in connection
therewith, and generally to do all such things in my name and behalf in
connection therewith as said attorneys-in-fact deem necessary or appropriate,
and that have been approved by the Board of Trustees of the Trust or by the
appropriate officers of the Trust, acting in good faith and in a manner they
reasonably believe to be in the best interests of the Trust, upon the advice of
counsel, such approval to be conclusively evidenced by their execution thereof,
to comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
DATED this 30th day of April, 1999.
/s/ Peter M. Bren
------------------------
Peter M. Bren
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes
and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as
my true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Registration Statements of the Trust under the
Securities Act of 1933 and Investment Company Act of 1940, any and all
Pre-Effective Amendments to any Registration Statement of the Trust, any and all
Post-Effective Amendments to said Registration Statements, any Registration
Statements on Form N-14, and any supplements or other instruments in connection
therewith, and generally to do all such things in my name and behalf in
connection therewith as said attorneys-in-fact deem necessary or appropriate,
and that have been approved by the Board of Trustees of the Trust or by the
appropriate officers of the Trust, acting in good faith and in a manner they
reasonably believe to be in the best interests of the Trust, upon the advice of
counsel, such approval to be conclusively evidenced by their execution thereof,
to comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
DATED this 30th day of April, 1999.
/s/ Alan J. Dixon
------------------------
Alan J. Dixon
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes
and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as
my true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Registration Statements of the Trust under the
Securities Act of 1933 and Investment Company Act of 1940, any and all
Pre-Effective Amendments to any Registration Statement of the Trust, any and all
Post-Effective Amendments to said Registration Statements, any Registration
Statements on Form N-14, and any supplements or other instruments in connection
therewith, and generally to do all such things in my name and behalf in
connection therewith as said attorneys-in-fact deem necessary or appropriate,
and that have been approved by the Board of Trustees of the Trust or by the
appropriate officers of the Trust, acting in good faith and in a manner they
reasonably believe to be in the best interests of the Trust, upon the advice of
counsel, such approval to be conclusively evidenced by their execution thereof,
to comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
DATED this 30th day of April, 1999.
/s/ John R. McKernan, Jr.
-------------------------
John R. McKernan, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes
and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as
my true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Registration Statements of the Trust under the
Securities Act of 1933 and Investment Company Act of 1940, any and all
Pre-Effective Amendments to any Registration Statement of the Trust, any and all
Post-Effective Amendments to said Registration Statements, any Registration
Statements on Form N-14, and any supplements or other instruments in connection
therewith, and generally to do all such things in my name and behalf in
connection therewith as said attorneys-in-fact deem necessary or appropriate,
and that have been approved by the Board of Trustees of the Trust or by the
appropriate officers of the Trust, acting in good faith and in a manner they
reasonably believe to be in the best interests of the Trust, upon the advice of
counsel, such approval to be conclusively evidenced by their execution thereof,
to comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
DATED this 30th day of April, 1999.
/s/ M.B. Oglesby, Jr.
------------------------
M.B. Oglesby, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes
and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as
my true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Registration Statements of the Trust under the
Securities Act of 1933 and Investment Company Act of 1940, any and all
Pre-Effective Amendments to any Registration Statement of the Trust, any and all
Post-Effective Amendments to said Registration Statements, any Registration
Statements on Form N-14, and any supplements or other instruments in connection
therewith, and generally to do all such things in my name and behalf in
connection therewith as said attorneys-in-fact deem necessary or appropriate,
and that have been approved by the Board of Trustees of the Trust or by the
appropriate officers of the Trust, acting in good faith and in a manner they
reasonably believe to be in the best interests of the Trust, upon the advice of
counsel, such approval to be conclusively evidenced by their execution thereof,
to comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
DATED this 30th day of April, 1999.
/s/ Michael Minikes
------------------------
Michael Minikes
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<SERIES>
<NUMBER> 011
<NAME> LARGE CAP VALUE PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
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<NAME> LARGE CAP VALUE PORTFOLIO-CLASS B
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<PAGE>
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<NAME> LARGE CAP VALUE PORTFOLIO-CLASS C
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<PAGE>
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<NAME> LARGE CAP VALUE PORTFOLIO-CLASS Y
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NAME> SMALL CAP VALUE PORTFOLIO-CLASS A
<S> <C>
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<PAGE>
<ARTICLE> 6
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<NAME> SMALL CAP VALUE PORTFOLIO-CLASS B
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NAME> SMALL CAP VALUE PORTFOLIO-CLASS C
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<PAGE>
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<NAME> SMALL CAP VALUE PORTFOLIO-CLASS Y
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<PAGE>
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<NAME> INCOME PORTFOLIO-CLASS A
<S> <C>
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<NAME> INCOME PORTFOLIO-CLASS B
<S> <C>
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<TOTAL-ASSETS> 12544375
<PAYABLE-FOR-SECURITIES> 334311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100571
<TOTAL-LIABILITIES> 434882
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11675010
<SHARES-COMMON-STOCK> 28411
<SHARES-COMMON-PRIOR> 1443
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 191249
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 243234
<NET-ASSETS> 12109493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 326894
<OTHER-INCOME> 0
<EXPENSES-NET> 36134
<NET-INVESTMENT-INCOME> 290760
<REALIZED-GAINS-CURRENT> 17843
<APPREC-INCREASE-CURRENT> 262497
<NET-CHANGE-FROM-OPS> 571100
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (290778)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26809
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 159
<NET-CHANGE-IN-ASSETS> 3423385
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 173424
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22046
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 196241
<AVERAGE-NET-ASSETS> 128783
<PER-SHARE-NAV-BEGIN> 12.37
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> (.33)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> INCOME PORTFOLIO-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 11754451
<INVESTMENTS-AT-VALUE> 11997685
<RECEIVABLES> 505651
<ASSETS-OTHER> 41039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12544375
<PAYABLE-FOR-SECURITIES> 334311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100571
<TOTAL-LIABILITIES> 434882
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11675010
<SHARES-COMMON-STOCK> 132833
<SHARES-COMMON-PRIOR> 113394
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 191249
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 243234
<NET-ASSETS> 12109493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 326894
<OTHER-INCOME> 0
<EXPENSES-NET> 36134
<NET-INVESTMENT-INCOME> 290760
<REALIZED-GAINS-CURRENT> 17843
<APPREC-INCREASE-CURRENT> 262497
<NET-CHANGE-FROM-OPS> 571100
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (290778)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27470
<NUMBER-OF-SHARES-REDEEMED> 10457
<SHARES-REINVESTED> 2426
<NET-CHANGE-IN-ASSETS> 3423385
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 173424
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22046
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 196241
<AVERAGE-NET-ASSETS> 1462177
<PER-SHARE-NAV-BEGIN> 12.37
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> (.33)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 034
<NAME> INCOME PORTFOLIO-CLASS Y
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 11754451
<INVESTMENTS-AT-VALUE> 11997685
<RECEIVABLES> 505651
<ASSETS-OTHER> 41039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12544375
<PAYABLE-FOR-SECURITIES> 334311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100571
<TOTAL-LIABILITIES> 434882
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11675010
<SHARES-COMMON-STOCK> 363486
<SHARES-COMMON-PRIOR> 350666
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 191249
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 243234
<NET-ASSETS> 12109493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 326894
<OTHER-INCOME> 0
<EXPENSES-NET> 36134
<NET-INVESTMENT-INCOME> 290760
<REALIZED-GAINS-CURRENT> 17843
<APPREC-INCREASE-CURRENT> 262497
<NET-CHANGE-FROM-OPS> 571100
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (290778)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10199
<NUMBER-OF-SHARES-REDEEMED> 4254
<SHARES-REINVESTED> 6875
<NET-CHANGE-IN-ASSETS> 3423385
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 173424
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22046
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 196241
<AVERAGE-NET-ASSETS> 4459884
<PER-SHARE-NAV-BEGIN> 12.37
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> INSIDERS SELECT FUND-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 44976631
<INVESTMENTS-AT-VALUE> 43387970
<RECEIVABLES> 2160789
<ASSETS-OTHER> 94422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45643181
<PAYABLE-FOR-SECURITIES> 1268958
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292107
<TOTAL-LIABILITIES> 1561065
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43059310
<SHARES-COMMON-STOCK> 1604973
<SHARES-COMMON-PRIOR> 1225788
<ACCUMULATED-NII-CURRENT> 15236
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2596231
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1588661)
<NET-ASSETS> 44082116
<DIVIDEND-INCOME> 286430
<INTEREST-INCOME> 141282
<OTHER-INCOME> 0
<EXPENSES-NET> 413006
<NET-INVESTMENT-INCOME> 15236
<REALIZED-GAINS-CURRENT> 73407
<APPREC-INCREASE-CURRENT> (8821368)
<NET-CHANGE-FROM-OPS> (8732731)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 628076
<NUMBER-OF-SHARES-REDEEMED> 248891
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6354827
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2522830
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238957
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 657796
<AVERAGE-NET-ASSETS> 24283575
<PER-SHARE-NAV-BEGIN> 17.88
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (3.04)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.86
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> INSIDERS SELECT FUND-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 44976631
<INVESTMENTS-AT-VALUE> 43387970
<RECEIVABLES> 2160789
<ASSETS-OTHER> 94422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45643181
<PAYABLE-FOR-SECURITIES> 1268958
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292107
<TOTAL-LIABILITIES> 1561065
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43059310
<SHARES-COMMON-STOCK> 479037
<SHARES-COMMON-PRIOR> 127400
<ACCUMULATED-NII-CURRENT> 15236
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2596231
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1588661)
<NET-ASSETS> 44082116
<DIVIDEND-INCOME> 286430
<INTEREST-INCOME> 141282
<OTHER-INCOME> 0
<EXPENSES-NET> 413006
<NET-INVESTMENT-INCOME> 15236
<REALIZED-GAINS-CURRENT> 73407
<APPREC-INCREASE-CURRENT> (8821368)
<NET-CHANGE-FROM-OPS> (8732731)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 387245
<NUMBER-OF-SHARES-REDEEMED> 35608
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6354827
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2522830
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238957
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 657796
<AVERAGE-NET-ASSETS> 5412265
<PER-SHARE-NAV-BEGIN> 17.69
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> (3.00)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.67
<EXPENSE-RATIO> 2.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 043
<NAME> INSIDERS SELECT FUND-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 44976631
<INVESTMENTS-AT-VALUE> 43387970
<RECEIVABLES> 2160789
<ASSETS-OTHER> 94422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45643181
<PAYABLE-FOR-SECURITIES> 1268958
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292107
<TOTAL-LIABILITIES> 1561065
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43059310
<SHARES-COMMON-STOCK> 834156
<SHARES-COMMON-PRIOR> 695398
<ACCUMULATED-NII-CURRENT> 15236
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2596231
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1588661)
<NET-ASSETS> 44082116
<DIVIDEND-INCOME> 286430
<INTEREST-INCOME> 141282
<OTHER-INCOME> 0
<EXPENSES-NET> 413006
<NET-INVESTMENT-INCOME> 15236
<REALIZED-GAINS-CURRENT> 73407
<APPREC-INCREASE-CURRENT> (8821368)
<NET-CHANGE-FROM-OPS> (8732731)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 221617
<NUMBER-OF-SHARES-REDEEMED> 82859
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6354827
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2522830
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238957
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 657796
<AVERAGE-NET-ASSETS> 13509387
<PER-SHARE-NAV-BEGIN> 17.68
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> (3.00)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.66
<EXPENSE-RATIO> 2.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 044
<NAME> INSIDERS SELECT FUND-CLASS Y
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 44976631
<INVESTMENTS-AT-VALUE> 43387970
<RECEIVABLES> 2160789
<ASSETS-OTHER> 94422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45643181
<PAYABLE-FOR-SECURITIES> 1268958
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292107
<TOTAL-LIABILITIES> 1561065
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43059310
<SHARES-COMMON-STOCK> 64610
<SHARES-COMMON-PRIOR> 69939
<ACCUMULATED-NII-CURRENT> 15236
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2596231
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1588661)
<NET-ASSETS> 44082116
<DIVIDEND-INCOME> 286430
<INTEREST-INCOME> 141282
<OTHER-INCOME> 0
<EXPENSES-NET> 413006
<NET-INVESTMENT-INCOME> 15236
<REALIZED-GAINS-CURRENT> 73407
<APPREC-INCREASE-CURRENT> (8821368)
<NET-CHANGE-FROM-OPS> (8732731)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1730
<NUMBER-OF-SHARES-REDEEMED> 7059
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6354827
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2522830
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238957
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 657796
<AVERAGE-NET-ASSETS> 1174486
<PER-SHARE-NAV-BEGIN> 18.09
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (3.09)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.08
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> S&P STARS PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 207824928
<INVESTMENTS-AT-VALUE> 224080222
<RECEIVABLES> 3636743
<ASSETS-OTHER> 94576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227811541
<PAYABLE-FOR-SECURITIES> 821200
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 912029
<TOTAL-LIABILITIES> 1733229
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 197369210
<SHARES-COMMON-STOCK> 6108073
<SHARES-COMMON-PRIOR> 5489027
<ACCUMULATED-NII-CURRENT> (1065687)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13519495
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16255294
<NET-ASSETS> 226078312
<DIVIDEND-INCOME> 689124
<INTEREST-INCOME> 89022
<OTHER-INCOME> 0
<EXPENSES-NET> 1843831
<NET-INVESTMENT-INCOME> (1065685)
<REALIZED-GAINS-CURRENT> 7629906
<APPREC-INCREASE-CURRENT> (23501097)
<NET-CHANGE-FROM-OPS> (16936878)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2152078
<NUMBER-OF-SHARES-REDEEMED> 1533032
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11705384
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5889589
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 868182
<INTEREST-EXPENSE> 4258
<GROSS-EXPENSE> 2137365
<AVERAGE-NET-ASSETS> 117041166
<PER-SHARE-NAV-BEGIN> 19.97
<PER-SHARE-NII> (.08)
<PER-SHARE-GAIN-APPREC> (1.23)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.66
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> S&P STARS PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 207824928
<INVESTMENTS-AT-VALUE> 224080222
<RECEIVABLES> 3636743
<ASSETS-OTHER> 94576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227811541
<PAYABLE-FOR-SECURITIES> 821200
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 912029
<TOTAL-LIABILITIES> 1733229
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 197369210
<SHARES-COMMON-STOCK> 833208
<SHARES-COMMON-PRIOR> 292094
<ACCUMULATED-NII-CURRENT> (1065687)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13519495
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16255294
<NET-ASSETS> 226078312
<DIVIDEND-INCOME> 689124
<INTEREST-INCOME> 89022
<OTHER-INCOME> 0
<EXPENSES-NET> 1843831
<NET-INVESTMENT-INCOME> (1065685)
<REALIZED-GAINS-CURRENT> 7629906
<APPREC-INCREASE-CURRENT> (23501097)
<NET-CHANGE-FROM-OPS> (16936878)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 561884
<NUMBER-OF-SHARES-REDEEMED> 20770
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11705384
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5889589
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 868182
<INTEREST-EXPENSE> 4258
<GROSS-EXPENSE> 2137365
<AVERAGE-NET-ASSETS> 10837240
<PER-SHARE-NAV-BEGIN> 19.86
<PER-SHARE-NII> (.09)
<PER-SHARE-GAIN-APPREC> (1.26)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.51
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 053
<NAME> S&P STARS PORTFOLIO-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 207824928
<INVESTMENTS-AT-VALUE> 224080222
<RECEIVABLES> 3636743
<ASSETS-OTHER> 94576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227811541
<PAYABLE-FOR-SECURITIES> 821200
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 912029
<TOTAL-LIABILITIES> 1733229
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 197369210
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 091
<NAME> INTERNATIONAL EQUITY PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 9785313
<INVESTMENTS-AT-VALUE> 10077221
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<TOTAL-LIABILITIES> 464674
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<PAID-IN-CAPITAL-COMMON> 9758571
<SHARES-COMMON-STOCK> 386642
<SHARES-COMMON-PRIOR> 273530
<ACCUMULATED-NII-CURRENT> 11048
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<ACCUMULATED-NET-GAINS> (320020)
<OVERDISTRIBUTION-GAINS> 0
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<NET-INVESTMENT-INCOME> 8587
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<NUMBER-OF-SHARES-REDEEMED> (608969)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1669007
<ACCUMULATED-NII-PRIOR> 2461
<ACCUMULATED-GAINS-PRIOR> (117110)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 50589
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<GROSS-EXPENSE> 226624
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<PER-SHARE-NAV-BEGIN> 13.77
<PER-SHARE-NII> .02
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 092
<NAME> INTERNATIONAL EQUITY PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 9785313
<INVESTMENTS-AT-VALUE> 10077221
<RECEIVABLES> 47828
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<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 238288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 226386
<TOTAL-LIABILITIES> 464674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9758571
<SHARES-COMMON-STOCK> 189336
<SHARES-COMMON-PRIOR> 155378
<ACCUMULATED-NII-CURRENT> 11048
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (320020)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 293964
<NET-ASSETS> 9743563
<DIVIDEND-INCOME> 79062
<INTEREST-INCOME> 30895
<OTHER-INCOME> 0
<EXPENSES-NET> 101370
<NET-INVESTMENT-INCOME> 8587
<REALIZED-GAINS-CURRENT> (202910)
<APPREC-INCREASE-CURRENT> (664584)
<NET-CHANGE-FROM-OPS> (858907)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 600925
<NUMBER-OF-SHARES-REDEEMED> 82439
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1669007
<ACCUMULATED-NII-PRIOR> 2461
<ACCUMULATED-GAINS-PRIOR> (117110)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50589
<INTEREST-EXPENSE> 47
<GROSS-EXPENSE> 226624
<AVERAGE-NET-ASSETS> 2580998
<PER-SHARE-NAV-BEGIN> 13.75
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (.85)
<PER-SHARE-DIVIDEND> 0
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.90
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 093
<NAME> INTERNATIONAL EQUITY PORTFOLIO-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 9785313
<INVESTMENTS-AT-VALUE> 10077221
<RECEIVABLES> 47828
<ASSETS-OTHER> 83188
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10208237
<PAYABLE-FOR-SECURITIES> 238288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 226386
<TOTAL-LIABILITIES> 464674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9758571
<SHARES-COMMON-STOCK> 177779
<SHARES-COMMON-PRIOR> 158014
<ACCUMULATED-NII-CURRENT> 11048
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (320020)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 293964
<NET-ASSETS> 9743563
<DIVIDEND-INCOME> 79062
<INTEREST-INCOME> 30895
<OTHER-INCOME> 0
<EXPENSES-NET> 101370
<NET-INVESTMENT-INCOME> 8587
<REALIZED-GAINS-CURRENT> (202910)
<APPREC-INCREASE-CURRENT> (664584)
<NET-CHANGE-FROM-OPS> (858907)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 381144
<NUMBER-OF-SHARES-REDEEMED> 92559
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1669007
<ACCUMULATED-NII-PRIOR> 2461
<ACCUMULATED-GAINS-PRIOR> (117110)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50589
<INTEREST-EXPENSE> 47
<GROSS-EXPENSE> 226624
<AVERAGE-NET-ASSETS> 2515704
<PER-SHARE-NAV-BEGIN> 13.75
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (.85)
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<PER-SHARE-NAV-END> 12.90
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 101
<NAME> HIGH YIELD TOTAL RETURN PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 75411178
<INVESTMENTS-AT-VALUE> 68705665
<RECEIVABLES> 2286327
<ASSETS-OTHER> 95277
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71087269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2418365
<TOTAL-LIABILITIES> 2418365
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75021414
<SHARES-COMMON-STOCK> 3244949
<SHARES-COMMON-PRIOR> 1437735
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 352826
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6705513)
<NET-ASSETS> 68668904
<DIVIDEND-INCOME> 236201
<INTEREST-INCOME> 2807523
<OTHER-INCOME> 0
<EXPENSES-NET> 388499
<NET-INVESTMENT-INCOME> 2655225
<REALIZED-GAINS-CURRENT> (29511)
<APPREC-INCREASE-CURRENT> (7265370)
<NET-CHANGE-FROM-OPS> (4639656)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2655225
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2590019
<NUMBER-OF-SHARES-REDEEMED> 853088
<SHARES-REINVESTED> 70283
<NET-CHANGE-IN-ASSETS> 33056504
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 382337
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 183743
<INTEREST-EXPENSE> 4885
<GROSS-EXPENSE> 634570
<AVERAGE-NET-ASSETS> 35155799
<PER-SHARE-NAV-BEGIN> 12.73
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> (1.23)
<PER-SHARE-DIVIDEND> .57
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.50
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 102
<NAME> HIGH YIELD TOTAL RETURN PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 75411178
<INVESTMENTS-AT-VALUE> 68705665
<RECEIVABLES> 2286327
<ASSETS-OTHER> 95277
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71087269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2418365
<TOTAL-LIABILITIES> 2418365
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75021414
<SHARES-COMMON-STOCK> 1300120
<SHARES-COMMON-PRIOR> 472393
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 352826
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6705513)
<NET-ASSETS> 68668904
<DIVIDEND-INCOME> 236201
<INTEREST-INCOME> 2807523
<OTHER-INCOME> 0
<EXPENSES-NET> 388499
<NET-INVESTMENT-INCOME> 2655225
<REALIZED-GAINS-CURRENT> (29511)
<APPREC-INCREASE-CURRENT> (7265370)
<NET-CHANGE-FROM-OPS> (4639656)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2655225
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 871871
<NUMBER-OF-SHARES-REDEEMED> 61909
<SHARES-REINVESTED> 17765
<NET-CHANGE-IN-ASSETS> 33056504
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 382337
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 183743
<INTEREST-EXPENSE> 4885
<GROSS-EXPENSE> 634570
<AVERAGE-NET-ASSETS> 10727606
<PER-SHARE-NAV-BEGIN> 12.73
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> (1.23)
<PER-SHARE-DIVIDEND> .53
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.50
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 103
<NAME> HIGH YIELD TOTAL RETURN PORTFOLIO-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 75411178
<INVESTMENTS-AT-VALUE> 68705665
<RECEIVABLES> 2286327
<ASSETS-OTHER> 95277
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71087269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2418365
<TOTAL-LIABILITIES> 2418365
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75021414
<SHARES-COMMON-STOCK> 1425244
<SHARES-COMMON-PRIOR> 887582
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 352826
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6705513)
<NET-ASSETS> 68668904
<DIVIDEND-INCOME> 236201
<INTEREST-INCOME> 2807523
<OTHER-INCOME> 0
<EXPENSES-NET> 388499
<NET-INVESTMENT-INCOME> 2655225
<REALIZED-GAINS-CURRENT> (29511)
<APPREC-INCREASE-CURRENT> (7265370)
<NET-CHANGE-FROM-OPS> (4639656)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2655225
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 790764
<NUMBER-OF-SHARES-REDEEMED> 278619
<SHARES-REINVESTED> 25517
<NET-CHANGE-IN-ASSETS> 33056504
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 382337
<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 4885
<GROSS-EXPENSE> 634570
<AVERAGE-NET-ASSETS> 14897235
<PER-SHARE-NAV-BEGIN> 12.73
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> (1.23)
<PER-SHARE-DIVIDEND> .53
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.50
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 0111
<NAME> EMERGING MARKETS DEBT PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 40182200
<INVESTMENTS-AT-VALUE> 32734642
<RECEIVABLES> 2423694
<ASSETS-OTHER> 31108
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 35189444
<PAYABLE-FOR-SECURITIES> 795563
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 211811
<TOTAL-LIABILITIES> 1007374
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42251205
<SHARES-COMMON-STOCK> 3376191
<SHARES-COMMON-PRIOR> 2787259
<ACCUMULATED-NII-CURRENT> 198514
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (820091)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7447558)
<NET-ASSETS> 34182070
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2185779
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<EXPENSES-NET> 361142
<NET-INVESTMENT-INCOME> 1824287
<REALIZED-GAINS-CURRENT> (1430221)
<APPREC-INCREASE-CURRENT> (10225550)
<NET-CHANGE-FROM-OPS> (9831484)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1663496)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 954412
<NUMBER-OF-SHARES-REDEEMED> 474872
<SHARES-REINVESTED> 109457
<NET-CHANGE-IN-ASSETS> (4149298)
<ACCUMULATED-NII-PRIOR> 37723
<ACCUMULATED-GAINS-PRIOR> 610130
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<GROSS-EXPENSE> 512021
<AVERAGE-NET-ASSETS> 34640269
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> (3.25)
<PER-SHARE-DIVIDEND> (.45)
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<PER-SHARE-NAV-END> 8.82
<EXPENSE-RATIO> 1.75
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 0121
<NAME> EMERGING MARKETS DEBT PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 40182200
<INVESTMENTS-AT-VALUE> 32734642
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 35189444
<PAYABLE-FOR-SECURITIES> 795563
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<OTHER-ITEMS-LIABILITIES> 211811
<TOTAL-LIABILITIES> 1007374
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42251205
<SHARES-COMMON-STOCK> 163602
<SHARES-COMMON-PRIOR> 47357
<ACCUMULATED-NII-CURRENT> 198514
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (820091)
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<ACCUM-APPREC-OR-DEPREC> (7447558)
<NET-ASSETS> 34182070
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<INTEREST-INCOME> 2185779
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<NET-INVESTMENT-INCOME> 1824287
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<NUMBER-OF-SHARES-SOLD> 113410
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<NET-CHANGE-IN-ASSETS> (4149298)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 0131
<NAME> EMERGING MARKETS DEBT PORTFOLIO-CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
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