PART B
THE BEAR STEARNS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Prime Money Market Portfolio Large Cap Value Portfolio
Income Portfolio Small Cap Value Portfolio
High Yield Total Return Focus List Portfolio
Portfolio Balanced Portfolio
Emerging Markets Debt Portfolio International Equity Portfolio
S&P STARS Portfolio
The Insiders Select Fund
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES
July 29, 1999, as revised April 6, 2000
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the current
relevant prospectus (the "Prospectus") dated July 29, 1999 of The Bear Stearns
Funds (the "Trust"), as each may be revised from time to time, offering shares
of the portfolios listed above (each, a "Portfolio"). To obtain a free copy of
such Prospectus, please write to the Trust at PFPC Inc. ("PFPC"), Attention:
[Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960; call the
Trust at 1-800-447-1139 or call Bear, Stearns & Co. Inc. ("Bear Stearns") at
1-800-766-4111.
Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a
wholly owned subsidiary of The Bear Stearns Companies Inc., serves as each
Portfolio's investment adviser. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") has been engaged to provide investment advisory services,
including portfolio management, to the International Equity Portfolio subject
to the supervision of BSAM. BSAM and the Sub-Adviser are collectively
referred to herein as the "Advisers."
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned
subsidiary of The Bear Stearns Companies Inc., is the administrator of the
Portfolios.
Bear Stearns, an affiliate of BSAM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment and Management Policies...........................................1
Management of the Trust.....................................................46
Management Arrangements.....................................................49
Purchase and Redemption of Shares...........................................58
Determination of Net Asset Value............................................63
Taxes.......................................................................65
Dividends -- Money Market Portfolio.........................................73
Portfolio Transactions......................................................73
Performance Information.....................................................77
Code of Ethics..............................................................79
Information about the Trust.................................................80
Custodians, Transfer and Dividend Disbursing Agent, Counsel
and Independent Auditors....................................................90
Financial Statements........................................................90
Appendix...................................................................A-1
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Each of the Portfolios described in this SAI, other than the Prime
Money Market Portfolio (the "Money Market Portfolio"), currently offers Class A,
Class B, Class C and Class Y Shares. The Money Market Portfolio currently offers
only Class Y Shares. The Portfolios, other than the Money Market Portfolio, may
be categorized as follows:
Fixed Income Portfolios:
Income Portfolio
High Yield Total Return Portfolio ("High Yield Portfolio")
Emerging Markets Debt Portfolio ("EMD Portfolio")
Equity Portfolios:
S&P STARS Portfolio
The Insiders Select Fund
Large Cap Value Portfolio ("Large Cap Portfolio")
Small Cap Value Portfolio ("Small Cap Portfolio")
Focus List Portfolio
Balanced Portfolio
International Equity Portfolio
The investment objectives and principal investment policies of each
Portfolio are described in the Prospectus. Each Portfolio's investment objective
cannot be changed without approval by the holders of a majority of such
Portfolio's outstanding voting shares (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")). A Portfolio's investment objective may
not be achieved. The following Portfolios are non-diversified: The Insiders
Select Fund and the S&P STARS, Focus List and EMD Portfolios. The other
Portfolios are diversified. See "Investment and Management Policies --
Management Policies -- Non-Diversified Status."
INVESTMENT AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the sections in the Prospectus entitled "Risk/Return Summary,"
"Investments" and "Risk Factors." Unless otherwise stated, the indicated
percentage relates to a Portfolio's total assets that may be committed to the
stated investment, measured at the time the Portfolio makes the investment. New
financial products and risk management techniques continue to be developed, and
each Portfolio may use these new investments and techniques to the extent
consistent with its investment objective and policies.
Asset-Backed Securities. The Money Market, Income, High Yield, EMD,
Balanced and International Equity Portfolios each may invest in asset-backed
securities. The High Yield and Balanced Portfolios each may invest up to 5% and
10%, respectively, of total assets in asset-backed securities. Asset-backed
securities represent participations in, or are secured by and payable from,
assets such as motor vehicle installment sales, installment loan contracts,
leases of various types of real and personal property, receivables from
revolving credit (credit card) agreements and other categories of receivables.
Such assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
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Like mortgage-related securities, asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. A Portfolio's ability to maintain positions in such securities will be
affected by reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that the Portfolio invests in asset-backed securities, the values of its
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are
not presented by mortgage-related securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Any asset-backed securities held by the Money Market Portfolio must
comply with the portfolio maturity and quality requirements contained in Rule
2a-7 under the 1940 Act. The Money Market 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. Each Portfolio may invest in bank obligations.
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the Federal
Deposit Insurance Corporation (the "FDIC"). State banking authorities supervise
and examine domestic banks organized under state law. State banks are members of
the Federal Reserve System only if they elect to join. In addition, a Portfolio
may acquire state bank-issued certificates of deposit ("CDs") that are insured
by the FDIC (although such insurance may not be of material benefit, depending
on the principal amount of the CDs of each bank that is held) and are subject to
federal examination and to a substantial body of federal law and regulation. As
a result of federal or state laws and regulations, domestic branches of domestic
banks generally must, among other things, maintain specified levels of reserves,
limit the amounts they loan to a single borrower and comply with other
regulations designed to promote financial soundness. However, not all of such
laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and governmental regulation. Such obligations are
subject to different risks from those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign
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branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial record
keeping requirements. In addition, less information may be publicly available
about a foreign branch of a domestic bank or about a foreign bank than about a
domestic bank.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation or by federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge a certain percentage of their assets, as fixed from time
to time by the appropriate regulatory authority, by depositing assets with a
designated bank within the state; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of federal and state branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
Bank Debt. The High Yield and EMD Portfolios each may invest up to
15% and 20%, respectively, of its total assets in Participations and
Assignments, defined below. 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.
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Participations and Assignments otherwise bear risks common to other
debt securities, including nonpayment of principal and interest by the borrower,
impairment of loan collateral and lack of liquidity. The market for such
instruments is not liquid and only a limited number of institutional investors
participate in it. The lack of a liquid secondary market may have an adverse
impact on the value of such instruments and will have an adverse impact on an
investor's ability to dispose of particular Assignments or Participations in
response to a specific event, such as deterioration in the creditworthiness of
the borrower. In addition to the creditworthiness of the borrower, an investor's
ability to receive payment of principal and interest is also dependent on the
creditworthiness of any institution (i.e., the Lender) interposed between the
investor and the borrower.
Borrowing. Each Portfolio, other than the EMD and Income Portfolios,
may borrow in an amount up to 33-1/3% of its total assets (including the amount
borrowed), less all liabilities and indebtedness other than the borrowing. The
EMD Portfolio may, solely for temporary or emergency purposes, borrow in an
amount up to 15% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing. The Income Portfolio
currently intends to borrow money only for temporary or emergency (net
leveraging) purposes, in an amount up to 15% of the value of its total assets. A
Portfolio may not purchase securities when borrowings exceed 5% of its total
assets.
Borrowings create leverage, a speculative factor. To the extent the
income derived from the assets obtained with borrowed funds exceeds the interest
and other expenses that a Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income from
the assets obtained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the Portfolio will be less than if borrowing were
not used, and, therefore, the amount available for distribution to shareholders
as dividends will be reduced.
Brady Bonds. The Income, High Yield and International Equity
Portfolios may invest in 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
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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. Each
Portfolio may invest in commercial paper and other short-term obligations.
Commercial paper consists of unsecured promissory notes issued by banks,
corporations and other borrowers. Such instruments are usually discounted,
although some are interest-bearing. Except as noted below with respect to
variable amount master demand notes, issues of commercial paper normally have
maturities of less than nine months and fixed rates of return. Variable rate
demand notes include variable amount master demand notes, which are obligations
that permit a Portfolio to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Portfolio, as lender, and
the borrower. These notes permit daily changes in the amounts borrowed. As
mutually agreed between the parties, a Portfolio may increase the amount under
the notes at any time up to the full amount provided by the note agreement, or
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Because these obligations are direct lending arrangements
between the lender and the borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with floating and variable rate
demand obligations, the Advisers will consider, on an ongoing basis, earning
power, cash flow and other liquidity ratios of the borrower, and the borrower's
ability to pay principal and interest on demand. Such obligations frequently are
not rated by credit rating agencies, and a Portfolio may invest in them only if
at the time of investment the borrower meets the criteria that the Trust's Board
of Trustees (the "Board") has established.
Convertible Securities. Each Portfolio, other than the Money Market
and Focus List Portfolios, may invest in convertible securities. The Insiders
Select Fund and the Large Cap, Small Cap, Balanced and International Equity
Portfolios each may invest in convertible debt securities that are rated no
lower than "BBB" by Standard & Poor's ("S&P") or "Baa" by Moody's Investors
Service ("Moody's"), or if unrated by these rating organizations, determined to
be of comparable quality by the Advisers. The Balanced Portfolio may invest up
to 20% of its total assets in convertible securities.
Convertible securities include debt securities and preferred stock
that are convertible at stated exchange rates into the issuer's common stock.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
When the market price of the common stock underlying a convertible security
exceeds the conversion price, however, the convertible security tends to reflect
the market price of the underlying common stock. As the market price of the
underlying common stock declines, the
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convertible security tends to trade increasingly on a yield basis, and thus may
not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's
capital structure and consequently entail less risk than the issuer's common
stock. The convertible securities in which a Portfolio may invest are subject to
the same rating criteria as the Portfolio's investments in non-convertible debt
securities. In the case of convertible security with a call feature, the issuer
may call the security at a pre-determined price. If a convertible security held
by a Portfolio is called, the Portfolio may permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Convertible debt securities may be considered equity investments for
purposes of a Portfolio's investment policies.
Corporate Debt Obligations. The Income, High Yield, EMD,
International Equity and Balanced Portfolios each may invest up to 65%, 80%,
70%, 35% and 60%, respectively, of its total assets in corporate debt
obligations. Corporate debt obligations include obligations of industrial,
utility and financial issuers in the form of bonds, debentures, and notes. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity. Except under
conditions of default, changes in the value of a Portfolio's fixed income
securities will not affect cash income derived from these securities but will
affect the Portfolio's net asset value.
Custodial Receipts. The High Yield Portfolio may invest in custodial
receipts, and the Balanced and International Equity Portfolios each may invest
up to 5% of its net assets in these instruments. Custodial receipts evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. government, its agencies, instrumentalities,
political subdivisions or authorities. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investors Growth
Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities"
("CATs"). For certain securities law purposes, custodial receipts are not
considered U.S. government securities.
Distressed Securities. The EMD Portfolio may invest in distressed
securities and the High Yield Portfolio may invest up to 20% of its total assets
in these securities. Distressed securities are issued by financially troubled or
bankrupt companies ("financially troubled issuers") or companies whose
securities are, in the view of the Adviser, currently undervalued, out-of-favor
or price depressed relative to their long-term potential for growth and income
("operationally troubled issuers").
The securities of financially and operationally troubled issuers may
require active monitoring and at times may require the Adviser to participate in
bankruptcy or reorganization proceedings on behalf of a Portfolio. To the extent
that the Adviser becomes involved in such proceedings, a Portfolio may have a
more active participation in the affairs of the issuer than is generally assumed
by an investor and such participation may subject the Portfolio to the
litigation risks described below. However, no Portfolio invests in the
securities of financially or operationally troubled issuers for the purpose of
exercising day-to-day management of any issuer's affairs.
Bankruptcy and Other Proceedings -- Litigation Risks. When a company
seeks relief under the Federal Bankruptcy Code (or has a petition filed against
it), an automatic stay prevents all entities, including creditors, from
foreclosing or taking other actions to enforce claims, perfect liens or reach
collateral securing such claims. Creditors who have claims against the company
prior to the date of the bankruptcy filing must petition the court to permit
them to take any action to protect or enforce their claims or their rights in
any collateral. Such creditors may be prohibited from doing so if the court
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concludes that the value of the property in which the creditor has an interest
will be "adequately protected" during the proceedings. If the bankruptcy court's
assessment of adequate protection is inaccurate, a creditor's collateral may be
wasted without the creditor being afforded the opportunity to preserve it. Thus,
even if an investor holds a secured claim, it may be prevented from collecting
the liquidation value of the collateral securing its debt, unless relief from
the automatic stay is granted by the court.
Security interests held by creditors are closely scrutinized and
frequently challenged in bankruptcy proceedings and may be invalidated for a
variety of reasons. For example, security interests may be set aside because, as
a technical matter, they have not been perfected properly under the Uniform
Commercial Code or other applicable law. If a security interest is invalidated,
the secured creditor loses the value of the collateral and because loss of the
secured status causes the claim to be treated as an unsecured claim, the holder
of such claim will almost certainly experience a significant loss of its
investment. While the Advisers will scrutinize any security interests, the
security interests may be challenged vigorously and found defective in some
respect, or a Portfolio may not be able to prevail against the challenge.
Debt may be disallowed or subordinated to the claims of other
creditors if the creditor is found guilty of certain inequitable conduct
resulting in harm to other parties with respect to the affairs of a company
filing for protection from creditors under the Federal Bankruptcy Code.
Creditors' claims 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.
Equity Securities. The Insiders Select Fund and the S&P STARS, Large
Cap and Small Cap Portfolios each must invest at least 85% of its total assets
in equities: the Focus List and International Equity Portfolios must each invest
at least 90% and 65%, respectively, of its total assets in equities; and the
Balanced Portfolio must invest between 40% and 60% of its total assets in
equities. The Income, High Yield and EMD Portfolios each may invest 35%, 20% and
30%, respectively, of its total assets in equity securities, including
distressed securities, as described above. These securities include foreign and
domestic common stocks or preferred stocks, rights and warrants and debt
securities or preferred stock which are convertible or exchangeable for common
stock or preferred stock.
Fixed Income Securities. The Money Market Portfolio may invest
without limit in short-term fixed income securities. The Income, High Yield and
EMD Portfolios each must invest at least 65%, 80% and 70%, respectively, of its
total assets in fixed income securities; and the Balanced Portfolio must invest
between 40% and 60% of its total assets in fixed income securities. The Insiders
Select Fund and the S&P STARS, Large Cap and Small Cap Portfolios each may
invest up to 15% of its total assets in fixed income securities. The Focus List
and International Equity Portfolios each may invest up to 10%
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and 35%, respectively, of its total assets in fixed income securities.
Fixed-income securities include certain corporate debt obligations and U.S.
government securities. Although interest-bearing securities are investments that
promise a stable stream of income, the prices of such securities typically are
inversely affected by changes in interest rates and, therefore, are subject to
the risk of market price fluctuations. Thus, if interest rates have increased
from the time a security was purchased, such security, if sold, might be sold at
a price less than its cost. Similarly, if interest rates have declined from the
time a security was purchased, such security, if sold, might be sold at a price
greater than its cost. In either instance, if the security was purchased at face
value and held to maturity, no gain or loss would be realized. Certain
securities purchased by a Portfolio, such as those with interest rates that
fluctuate directly or indirectly based on multiples of a stated index, are
designed to be highly sensitive to changes in interest rates and can subject the
holders thereof to extreme reductions of yield and possibly loss of principal.
Emerging Market Countries. The High Yield, EMD, Balanced and
International Equity Portfolios each may invest in the securities of issuers
located in countries that are considered to be emerging or developing ("emerging
countries") by the World Bank, the International Finance Corporation, or the
United Nations and its authorities. A company is considered to be an emerging
country issuer if: (i) its securities are principally traded in an emerging
country; (ii) it derives at least 50% of its total revenue from (a) providing
goods or services in emerging countries or (b) sales made in emerging countries;
(iii) it maintains 50% or more of its assets in one or more emerging countries;
or (iv) it is organized under the laws of, or has a principal office in, an
emerging country.
Emerging Market Country Loans. The EMD Portfolio may invest in
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. The
EMD Portfolio will acquire participations only if the lender interpositioned
between the Portfolio and the borrower is determined by the Adviser to be
creditworthy. When the EMD 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 EMD 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, the EMD
Portfolio could be forced to liquidate loan participations or sub-participations
at unfavorable prices to avoid the new money obligations.
Emerging Market Securities. The High Yield, EMD, Balanced and
International Equity Portfolios each may invest in emerging market securities.
The securities markets of certain emerging market countries may be marked by a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain
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emerging market countries are in early stages of their development. Even the
markets for relatively widely traded securities in emerging markets may not be
able to absorb, without price disruptions, a significant increase in trading
volume or trades of a size customarily undertaken by institutional investors in
the securities markets of developed countries. In addition, market making and
arbitrage activities are generally less extensive in such markets, which may
contribute to increased volatility and reduced liquidity of such markets. The
limited liquidity of emerging markets may also affect a Portfolio's ability to
accurately value its portfolio securities or to acquire or dispose of securities
at the price and time it wishes to do so or in order to meet redemption
requests.
Transaction costs, including brokerage commissions or dealer
mark-ups, in emerging market countries may be higher than in the United States
and other developed securities markets. In addition, the securities of non-U.S.
issuers generally are not registered with the Securities and Exchange Commission
(the "SEC"), and issuers of these securities usually are not subject to its
reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those prevalent in the U.S.
Existing laws and regulations of emerging market countries may be
inconsistently applied. As legal systems in emerging market countries develop,
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law. A Portfolio's ability to enforce its
rights against private emerging market country issuers by attaching assets to
enforce a judgment may be limited. Bankruptcy, moratorium and other similar laws
applicable to private emerging market country issuers may differ substantially
from those of other countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of its debt
obligations, for example, is of considerable importance. In addition, the
holders of commercial bank debt may contest payments to the holders of emerging
market country debt securities in the event of default under commercial bank
loan agreements.
Certain emerging market countries require governmental approval
prior to investments by foreign persons or limit investment by foreign persons
to only a specified percentage of an issuer's outstanding securities or a
specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Portfolio. The Portfolio may be required to
establish special custodial or other arrangements before investing in certain
emerging market countries.
Emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for 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.
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The economies of emerging market countries may differ unfavorably
from the U.S. economy in such respects as growth of gross domestic product, rate
of inflation, capital reinvestment, resources, self-sufficiency and balance of
payments. Many emerging market countries have experienced in the past, and
continue to experience, high rates of inflation. In certain countries inflation
has at times accelerated rapidly to hyperinflationary levels, creating a
negative interest rate environment and sharply eroding the value of outstanding
financial assets in those countries. The economies of certain emerging market
countries are heavily dependent upon international trade and are accordingly
affected by protective trade barriers and the economic conditions of their
trading partners. In addition, the economies of certain emerging market
countries are vulnerable to weakness in world prices for their commodity
exports.
A Portfolio's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
See "Taxes."
Foreign Government Securities. The Income, High Yield, EMD and
International Equity Portfolios each may invest in foreign government securities
to the extent that these Portfolios may invest in fixed income securities, as
described in "Fixed Income Securities" above. Investment in sovereign debt
obligations involves special risks not present in debt obligations of U.S.
corporate issuers. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due in accordance with the terms of such debt, and an investor
may have limited recourse in the event of a default. Periods of economic
uncertainty may result in volatile sovereign debt market prices. A sovereign
debtor's willingness or ability to repay principal and pay interest in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign currency reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy toward
international lenders and the political constraints to which a sovereign debtor
may be subject. When an emerging country government defaults on its debt
obligations, the investor must pursue any remedies in the courts of the
defaulting party itself.
Certain emerging market governments that issue lower quality debt
securities are among the largest debtors to commercial banks, foreign
governments and supranational organizations such as the World Bank, and may be
unwilling or unable to make repayments as they become due.
Below-investment-grade debt securities are generally unsecured and may be
subordinated to the claims of other creditors, resulting in a heightened risk of
loss due to default.
Foreign Securities. Each Portfolio may invest in foreign securities.
The International Equity Portfolio must invest at least 65% (and may invest up
to 100%) of its total assets in foreign securities. The High Yield Portfolio may
invest up to 25% of its total assets in foreign securities, the Large Cap and
Small Cap Portfolios each may invest up to 10% of its total assets in these
securities and the Balanced Portfolio may invest up to 5% of its total assets in
these 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 also
be subject to currency exposure as a result of its investment in currency or
currency futures.
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
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relative merits of investments in different countries, actual or anticipated
changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene or by currency controls or political developments in
the United States or abroad.
Since foreign issuers generally are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies, there may be less
publicly available information about a foreign company than about a U.S.
company. Volume and liquidity in most foreign securities markets are less than
in the United States and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although a Portfolio that invests in such
securities endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign securities exchanges, brokers, dealers and listed and unlisted companies
than in the United States.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of the Portfolio's assets are uninvested and no
return is earned on such assets. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio securities or, if
the Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Portfolio's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investment in foreign companies, foreign branches of U.S. banks,
foreign banks, or other foreign issuers, may take the form of ownership of
securities issued by such entities or may take the form of sponsored and
unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers. An ADR is a negotiable receipt,
usually issued by a U.S. bank, that evidences ownership of a specified number of
foreign securities on deposit with a U.S. depository and entitles the
shareholder to all dividends and capital gains of the underlying securities.
ADRs are traded on U.S. exchanges or in the U.S. over-the-counter market and,
generally, are in registered form. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank similar to that for ADRs and are designed for
use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted
in the same currency as the underlying security.
In the case of sponsored ADRs, the issuer of the underlying foreign
security and the depositary enter into a deposit agreement, which sets out the
rights and responsibilities of the issuer, the depositary and the ADR holder.
Under the terms of most sponsored arrangements, depositaries agree to distribute
notices of shareholder meetings and voting instructions, thereby ensuring that
ADR holders 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
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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.
Growth Stocks. As a secondary investment strategy, the Balanced
Portfolio may allocate a portion of its investment in equity securities to
"growth stocks." These securities are considered to have superior prospects for
long-term earnings growth and price appreciation. Growth stocks, including some
technology and telecommunications stocks, are characterized by high
price/earnings multiples and associated high risk/reward profiles. The market
for technology and telecommunications stocks has experienced substantial
volatility.
Illiquid Securities. Each Portfolio, other than the Money Market
Portfolio, may invest up to 15% of its net assets in illiquid securities. The
Money Market Portfolio may invest up to 10% of its assets in these securities.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and an investor might be unable to dispose
of restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. An
investor might also seek to have such restricted securities registered in order
to dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The Advisers anticipate that the
market for certain restricted securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act and commercial paper for which there is a readily
available market will not be deemed to be illiquid. The Advisers will monitor
the liquidity of such restricted securities subject to the supervision of the
Board. In reaching liquidity decisions, the Advisers will consider, inter alia,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for
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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 the Advisers; and (ii) it must not be "traded flat" (i.e., without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The SEC has taken the position that purchased over-the-counter
("OTC") options and the assets used as "cover" for written OTC options are
deemed illiquid securities unless a Portfolio and the counterparty have provided
for the Portfolio, at the Portfolio's election, to unwind the OTC option. The
unwinding 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, thereby allowing the Portfolio to treat as liquid those
securities that were formerly used as "cover."
Inverse Floating Rate Securities. The Balanced Portfolio may invest
up to 5% of its net assets in 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 the Balanced Portfolio's 15%
limitation on investments in such securities.
Investment in Other Investment Companies. In accordance with the
1940 Act, the Income and EMD Portfolios each may invest a maximum of up to 10%
of the value of its total assets in securities of other investment companies,
and the Portfolio may own up to 3% of the total outstanding voting stock of any
one investment company. In addition, up to 5% of the value of the Portfolio's
total assets may be invested in the securities of any one investment company.
Money Market Instruments. Each Portfolio may invest in money market
instruments. The S&P STARS, Large Cap and Small Cap Portfolios each may invest
15% of its total assets in these instruments. The Balanced and International
Equity Portfolios each may invest 20% and 35%, respectively, of its total assets
in these instruments.
A Portfolio may invest in money market instruments, including U.S.
government obligations, U.S. Treasury bills and commercial paper that is (a)
rated at the time of purchase in the highest category by a nationally recognized
statistical rating organization; (b) issued by a company having an outstanding
unsecured debt issue currently rated not lower than "Aa3" by Moody's or "AA" by
S&P, Fitch IBCA or Duff; or (c) if unrated, of comparable quality. A Portfolio
may also invest in bank obligations, including, without limitation, time
deposits, bankers' acceptances and certificates of deposit, which may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are subject
to extensive governmental regulations, which may limit both the amount and types
of loans which may be made and interest rates which may be charged. In addition
the profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operation of this industry.
Mortgage-Related Securities. The Money Market, Income, High Yield,
EMD, Balanced and International Equity Portfolios each may invest in
mortgage-related securities. The Balanced
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Portfolio may invest up to 25% of its total assets in these securities.
Mortgage-related securities are backed by mortgage obligations including, among
others, conventional 30-year fixed rate mortgage obligations, graduated payment
mortgage obligations, 15-year mortgage obligations, and adjustable-rate mortgage
obligations. All of these mortgage obligations can be used to create
pass-through securities. A pass-through security is created when mortgage
obligations are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgage obligations is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments of principal (net of a service fee). 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.
The Income Portfolio may invest in stripped mortgage-related
securities that are created by segregating the cash flows from underlying
mortgage loans or mortgage securities to create two or more new securities. Each
has a specified percentage of the underlying security's principal or interest
payments. Mortgage securities may be partially stripped, so that each class
receives some interest and some principal, or they may be completely stripped.
In that case, all of the interest is distributed to holders of an
"interest-only" security, and all of the principal is distributed to holders of
a "principal-only" security. Strips can be created for pass-through certificates
or collateralized mortgage obligations ("CMOs"). The yields to maturity of
interest-only and principal-only stripped mortgage-related securities are very
sensitive to principal repayments on the underlying mortgages.
U.S. Government Agency Securities. Mortgage-related securities
issued by the Government National Mortgage Association ("GNMA") include GNMA
Mortgage Pass-Through Certificates (also known as "Ginnie Maes"). Ginnie Maes
are guaranteed as to the timely payment of principal and interest by GNMA and
are backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of GNMA
to borrow funds from the U.S. Treasury to make payments under its guarantee.
U.S. Government Related Securities. Mortgage-related securities
issued by the Federal National Mortgage Association ("FNMA") include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs"). FHLMC is a corporate instrumentality of the United
States created pursuant to an Act of Congress, which is owned entirely by the
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Bank and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which
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is guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount
due on account of its guarantee of ultimate payment of principal at any time
after default on an underlying mortgage, but in no event later than one year
after it becomes payable.
Mortgage Dollar Rolls. The Balanced Portfolio may invest up to 20%
of its total assets in mortgage "dollar rolls," which 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. The Balanced 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, the Balanced Portfolio treats mortgage dollar rolls as two separate
transactions: one involving the purchase of a security and a separate
transaction involving a sale. The Balanced Portfolio currently does not intend
to enter into mortgage dollar rolls that are accounted for as a financing.
Municipal Obligations. The Income and High Yield Portfolios each may
invest up to 25% and 5% of total assets, respectively, in municipal obligations.
The Balanced Portfolio may invest up to 5% of its net assets in these
securities. Municipal obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general taxing
power. Industrial development bonds, in most cases, are revenue bonds and
generally do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. The Portfolios may
invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible investments.
Real Estate Investment Trusts ("REITs"). The Balanced Portfolio may
invest up to 10% of its total assets in REITs, which 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
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Revenue Code of 1986, as amended (the "Code"). A Portfolio will indirectly bear
its proportionate share of any expenses incurred by REITs in which it invests in
addition to the expenses paid by the Portfolio.
Investing in REITs involves certain unique risks. Equity REITs may
be affected by changes in the value of the underlying property owned by such
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified
(except to the extent the Code requires), and are subject to the risks of
financing projects. REITs are subject to heavy cash flow dependency, default by
borrowers, self-liquidation, and the possibilities of failing to qualify for the
exemption from tax for distributed income under the Code and failing to maintain
their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also
subject to interest rate risks.
Repurchase Agreements. Each Portfolio may enter into repurchase
agreements. The Balanced Portfolio may invest up to 20% of its total assets in
repurchase agreements. Repurchase agreements are a type of secured lending and
typically involve the acquisition of debt securities from a financial
institution, such as a bank, savings and loan association or broker-dealer,
which then agrees to repurchase the security at a specified resale price on an
agreed future date (ordinarily one week or less). The difference between the
purchase and resale prices generally reflects the market interest rate for the
term of the agreement.
A Portfolio's custodian or sub-custodian will have custody of, and
will hold in a segregated account, securities that the Portfolio acquires under
a repurchase agreement. Repurchase agreements are considered by the SEC to be
loans. If the seller defaults, a Portfolio might suffer a loss to the extent the
proceeds from the sale of the securities underlying the repurchase agreement are
less than the repurchase price. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, a Portfolio will enter into repurchase
agreements only with counterparties whose short-term paper is rated no lower
than "A1/P1" or whose corporate parent has a rating of no lower than "A1/P1"
with total assets in excess of one billion dollars, or primary government
securities dealers reporting to the Federal Reserve Bank of New York, with
respect to securities of the type in which each Portfolio may invest, and will
require that additional securities be deposited with it if the value of the
securities purchased should decrease below the resale price. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. A Portfolio will consider on an ongoing
basis the creditworthiness of the institutions with which it enters into
repurchase agreements.
Reverse Repurchase Agreements. The High Yield and EMD Portfolios
each 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. The EMD Portfolio may invest in
standby commitment agreements, which commit an investor, for a stated period of
time, to purchase a stated amount of a fixed income security which may be issued
and sold to the investor at the option of the issuer. The price and coupon of
the security are fixed at the time of the commitment. At the time of entering
into the agreement an investor receives a commitment fee, regardless of whether
the security is ultimately issued, which is typically approximately 0.50% of the
aggregate purchase price of the security that the investor has committed to
purchase. The EMD 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
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advantageous. The EMD Portfolio will not enter into a standby commitment with a
remaining term in excess of 45 days and will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restriction on resale, will not exceed 10% of its assets determined at the
time of the acquisition of such commitment or security. The EMD 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 a security, if issued, on the delivery date may be more or less than
its purchase price. Because the issuance of the security underlying the
commitment is at the option of the issuer, the EMD Portfolio may bear the risk
of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, any commitment fee previously paid and expensed will be recorded
as income on the expiration date of the standby commitment.
Structured Securities. Each Portfolio, other than the Money Market
Portfolio, may invest in structured or indexed securities. The Balanced
Portfolio may invest up to 5% of its total assets in these 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. The High Yield and EMD Portfolios each may invest in
trade claims. Trade claims are non-securitized rights of payment arising from
obligations other than borrowed funds. Trade claims typically arise when, in the
ordinary course of business, vendors and suppliers extend credit to a company by
offering payment terms. Generally, when a company files for bankruptcy
protection, payments on trade claims cease and the claims are subject to
compromise along with the other debts of the company. Trade claims typically are
bought and sold at a discount reflecting the degree of uncertainty with respect
to the timing and extent of recovery. In addition to the risks otherwise
associated with low-quality obligations, trade claims have other risks,
including (i) the possibility that the amount of the claim may be disputed by
the debtor, (ii) the debtor may have a variety of defenses to assert against the
claim under the bankruptcy code, (iii) volatile pricing due to a less liquid
market, including a small number of brokers for trade claims and a small
universe of potential buyers, (iv) the possibility that a Portfolio may be
obligated to purchase a trade claim larger than initially anticipated and (v)
the risk of failure of sellers of trade claims to indemnify a Portfolio against
loss due to the bankruptcy or insolvency of such sellers. The negotiation and
enforcement of rights in connection with trade claims may result in substantial
legal expenses to a Portfolio, which may reduce return on such investments. It
is not unusual for trade claims
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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. Each Portfolio may invest in
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 approximates its par value. A floating rate obligation is one whose terms
provide for the readjustment of its interest rate whenever a specified interest
rate changes and which, at any time, reasonably can be expected to have a market
value that approximates its par value. Variable and floating rate obligations
provide holders with protection against rises in interest rates, but pay lower
yields than fixed rate obligations of the same maturity. Variable rate
obligations may fluctuate in value in response to interest rate changes if there
is a delay between changes in market interest rates and the interest reset date
for the obligation.
Warrants and Stock Purchase Rights. The EMD Portfolio may invest in
warrants and stock purchase rights. The Insiders Select Fund and the S&P STARS,
Large Cap, Small Cap, Balanced and International Equity Portfolios each may
invest up to 5% of its total assets in these instruments. 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. Each Portfolio, other than the
Money Market, EMD and International Equity Portfolios, may invest up to 33-1/3%
of its total assets in when-issued or forward commitment transactions. The Money
Market and International Equity Portfolios each may invest up to 25% and 20% of
its total assets, respectively, in these transactions. The EMD Portfolio may
invest up to 15% of its assets in when, as and if issued securities.
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
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considerably longer than a typical when-issued trade. Each when-issued
transaction specifies a date upon which the commitment to enter into the
relevant transaction will terminate if the securities have not been issued on or
before such date. In some cases, however, the securities may be issued prior to
such termination date, but may not be deliverable until a period of time
thereafter. If the anticipated event does not occur and the securities are not
issued, a Portfolio would be entitled to retain any funds committed for the
purchase, but the Portfolio may have foregone investment opportunities during
the term of the commitment.
Zero Coupon, Pay-In-Kind Or Deferred Payment Securities. Each
Portfolio may invest in zero coupon securities and each Portfolio, other than
the International Equity Portfolio, may invest in pay-in-kind and other discount
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 "accreted income." A
Portfolio accrues income with respect to these securities for federal income tax
and accounting purposes prior to the receipt of cash payments. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred payment securities are securities that remain
zero coupon securities until a predetermined date, at which time the stated
coupon rate becomes effective and interest becomes payable at regular intervals.
Zero coupon, pay-in-kind and deferred payment securities may be
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular intervals. In addition, because a Portfolio must distribute income to
its shareholders to qualify for pass-through federal tax treatment (including
"accreted income" or the value of the pay-in-kind interest), it may have to
dispose of its investments under disadvantageous circumstances to generate the
cash, or may have to borrow to implement these distributions.
Management Policies
Below Investment Grade and Unrated Securities. Debt securities that
are unrated or below investment grade are generally considered to have a credit
quality rated below investment grade by NRSROs such as Moody's and S&P.
Securities rated below investment grade are the equivalent of high yield, high
risk bonds, commonly known as "junk bonds." Investment grade debt is generally
rated "BBB" or higher by S&P or "Baa" or higher by Moody's. Below
investment-grade debt securities (that is, securities rated "Ba1" or lower by
Moody's or "BB+" or lower by S&P) are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of the debt securities held by a Portfolio may be
comparable to securities rated as low as "C" by Moody's or "D" by S&P, the
lowest ratings assigned by these agencies. These securities are considered to
have extremely poor prospects of ever attaining any real investment grade
standing, and to have a current identifiable vulnerability to default, and the
issuers and/or guarantors of these securities are considered to be unlikely to
have the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions and/or to be in default or
not current in the payment of interest or principal.
Below investment-grade and unrated debt securities generally offer a
higher current yield than that available from investment grade issues, but
involve greater risk. Below investment-grade and unrated securities are
especially subject to adverse changes in general economic conditions, to changes
in the financial condition of their issuers and to price fluctuation in response
to changes in interest rates. During periods of economic downturn or rising
interest rates, issuers of below-investment-grade and
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unrated instruments may experience financial stress that could adversely affect
their ability to make payments of principal and interest, to meet projected
business goals and to obtain additional financing. If the issuer of a bond
defaults, a Portfolio may incur additional expenses to seek recovery. A foreign
issuer may not be willing or able to repay the principal or interest of such
obligations when it becomes due, due to factors such as debt service, cash flow
situation, the extent of its foreign reserves, and the availability of
sufficient foreign exchange on the date a payment is due. The risk of loss due
to default by the issuer is significantly greater for the holders of
below-investment-grade and unrated debt securities because such securities may
be unsecured and may be subordinated to other creditors of the issuer. In
addition, in recent years some Latin American countries have defaulted on their
sovereign debt.
A Portfolio may have difficulty disposing of certain high yield,
high risk securities because there may be a thin trading market for such
securities. The secondary trading market for high yield, high risk securities is
generally not as liquid as the secondary market for higher rated securities.
Reduced secondary market liquidity may have an adverse impact on market price
and a Portfolio's ability to dispose of particular issues when necessary to meet
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Below investment-grade and unrated debt securities frequently have
call or redemption features which would permit an issuer to repurchase the
security from a Portfolio. If a call were exercised by the issuer during a
period of declining interest rates, the Portfolio likely would have to replace
such called security with a lower yielding security, thus decreasing the net
investment income to the Portfolio and dividends to shareholders.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of below
investment-grade and unrated securities especially in a market characterized by
low trading volume. Factors adversely affecting the market value of high yield,
high risk securities are likely to adversely affect a Portfolio's net asset
value ("NAV"). In addition, a Portfolio may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of an obligation.
An economic downturn could severely affect the ability of highly
leveraged issuers of below investment-grade securities to service their debt
obligations or to repay their obligations upon maturity. Factors having an
adverse impact on the market value of below-investment-grade bonds will have an
adverse effect on a Portfolio's NAV to the extent it invests in such securities.
In addition, the Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings.
The secondary market for below investment-grade bonds, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for investment grade securities. This reduced liquidity may
have an adverse effect on the ability of the Portfolio to dispose of a
particular security when necessary to meet its redemption requests or other
liquidity needs. Under adverse market or economic conditions, the secondary
market for below investment-grade bonds could contract further, independent of
any specific adverse changes in the condition of a particular issuer. As a
result, the Advisers could find it difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of below-investment-grade or
comparable unrated securities, under such circumstances, may be less than the
prices used in calculating the Portfolio's NAV.
Since investors generally perceive that there are greater risks
associated with the medium-rated and below investment-grade securities, the
yields and prices of such securities may tend to fluctuate more than those for
highly rated securities because changes in the perception of these issuers'
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creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of
fixed-income securities is the supply and demand for similarly rated securities.
In addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Portfolio's NAV.
Medium rated, below investment-grade and comparable unrated
securities tend to offer higher yields than higher rated securities with the
same maturities because the historical financial condition of the issuers of
such securities may not have been as strong as that of other issuers. Since
these securities generally involve greater risks of loss of income and principal
than higher rated securities, investors should consider carefully the relative
risks associated with investment in securities which carry medium to lower
ratings and in comparable unrated securities. In addition to the risk of
default, there are the related costs of recovery on defaulted issues. A
Portfolio may attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income
and principal, as well as broad economic trends and corporate developments.
Downgraded Debt Securities. Subsequent to its purchase by a
Portfolio, a debt issue may cease to be rated or its rating may be reduced below
the minimum required for purchase. Neither event will require the sale of such
securities by a Portfolio, but the Advisers will consider such event in
determining whether the Portfolio should continue to hold the securities. To the
extent that the ratings given by Moody's, S&P, Fitch IBCA or Duff & Phelps
Credit Rating Co. ("Duff") may change as a result of changes in such
organizations or their rating systems, a Portfolio will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this SAI.
Options, in General. Each Portfolio (other than the Money Market
Portfolio) may, but is not required to, use derivatives to reduce risk or
enhance return, including options on securities and financial indices. A
Portfolio may invest up to 5% of its total assets, represented by the premium
paid, in the purchase of put and call options. A Portfolio may write covered put
or call option contracts in an amount up to 20% of its net assets at the time
such option contracts are written.
Options on Securities. A Portfolio may purchase put and call
options and write covered put and call options on debt and equity securities,
financial indices (including stock indices), U.S. and foreign government debt
securities and foreign currencies. These may include options traded on U.S.
or foreign exchanges and options traded on U.S. or foreign over-the-counter
markets ("OTC options"), including OTC options with primary U.S. government
securities dealers recognized by the Federal Reserve Bank of New York.
The purchaser of a call option has the right, for a specified period
of time, to purchase the securities subject to the option at a specified price
(the "exercise price" or "strike price"). By writing a call option, a Portfolio
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities to the purchaser against receipt of the
exercise price. When a Portfolio writes a call option, it loses the potential
for gain on the underlying securities in excess of the exercise price of the
option during the period that the option is open.
A Portfolio may purchase call options on securities in order to fix
the cost of a future purchase. A Portfolio also may purchase call options as a
means of enhancing returns by, for example,
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participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit a Portfolio's potential loss to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Portfolio either sells or exercises the option, any
profit eventually realized will be reduced by the premium paid.
The purchaser of a put option has the right, for a specified period
of time, to sell the securities subject to the option to the writer of the put
at the specified exercise price. By writing a put option, a Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
A Portfolio may purchase put options on securities in order to
attempt to hedge against a decline in the market value of securities it holds. A
put option would enable a Portfolio to sell the underlying security at a
predetermined exercise price; thus the potential for loss to the Portfolio below
the exercise price would be limited to the option premium paid. If the market
price of the underlying security were higher than the exercise price of the put
option, any profit a Portfolio realizes on the sale of the security would be
reduced by the premium paid for the put option less any amount for which the put
option may be sold.
The writer of an option retains the amount of the premium, although
this amount may be offset or exceeded, in the case of a covered call option, by
a decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
A Portfolio may wish to protect certain portfolio securities against
a decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other carefully selected securities, the values of which the
Advisers expect will have a high degree of positive correlation to the values of
such portfolio securities. If the Advisers' judgment is correct, changes in the
value of the put options should generally offset changes in the value of the
portfolio securities being hedged. If the Advisers' judgment is not correct, the
value of the securities underlying the put option may decrease less than the
value of the Portfolio's investments and therefore the put option may not
provide complete protection against a decline in the value of the Portfolio's
investments below the level sought to be protected by the put option.
A Portfolio may similarly wish to hedge against appreciation in the
value of securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other carefully selected securities the values of which the Advisers
expect will have a high degree of positive correlation to the values of the
securities that the Portfolio intends to acquire. In such circumstances, the
Portfolio will be subject to risks analogous to those summarized above in the
event that the correlation between the value of call options so purchased and
the value of the securities intended to be acquired by the Portfolio is not as
close as anticipated and the value of the securities underlying the call options
increases less than the value of the securities acquired.
A Portfolio may write options on securities in connection with
buy-and-write transactions; that is, it may purchase a security and concurrently
write a call option against that security. If the call option is exercised, the
Portfolio's maximum gain will be the premium it received for writing the option,
adjusted upwards or downwards by the difference between the security's purchase
price and the exercise price of the option. If the option is not exercised and
the price of the underlying security declines, the amount of the decline will be
offset in part, or entirely, by the premium received.
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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 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."
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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.
Options on Securities Indices. A Portfolio also may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase. Through the writing or purchase of index options, a
Portfolio can achieve many of the same objectives as through the use of options
on individual securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities will probably not correlate
perfectly with movements in the level of an index and, therefore, the Portfolio
bears the risk that a loss on an index option would not be completely offset by
movements in the price of such securities.
When a Portfolio writes an option on a securities index, it will be
required to deposit with its custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where a Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks
relating to transactions in financial futures contracts described below. Also,
an option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
Options Straddles. A Portfolio may purchase and write covered
straddles on securities or bond indices. A long straddle is a combination of a
call and a put option purchased on the same security where the exercise price of
the put is less than or equal to the exercise price of the call. A Portfolio
would enter into a long straddle when the Adviser believes that it is likely
that the price of the underlying security will be more volatile during the term
of the options than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the exercise
price of the put is less than or equal to the exercise price of the call and
where the same issue of security or currency is considered cover for both the
put and the call. A Portfolio would enter into a short straddle when the Adviser
believes that it is unlikely that the price of the underlying security will be
as volatile during the term of the options as the option pricing implies. In the
case of a straddle written by a Portfolio, the amount maintained in the
segregated account will equal the amount, if any, by which the put is
"in-the-money."
Special Characteristics and Risks of Options Trading. A Portfolio
may effectively terminate its right or obligation under an option by entering
into a closing transaction. If a Portfolio wishes to terminate its obligation to
purchase or sell securities under a put or call option it has written, it
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may purchase a put or call option of the same series (i.e., an option identical
in its terms to the option previously written); this is known as a closing
purchase transaction. Conversely, in order to terminate its right to purchase or
sell specified securities or currencies under a call or put option it has
purchased, a Portfolio may write an option of the same series as the option
held; this is known as a closing sale transaction. Closing transactions
essentially permit a Portfolio to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. Whether a profit or
loss is realized from a closing transaction depends on the price movement of the
underlying security or currency and the market value of the option.
The following considerations are important in deciding whether to
use options to enhance income or to hedge a Portfolio's investments:
(1) The value of an option position will reflect, among other
things, the current market price of the underlying security, or bond index, the
time remaining until expiration, the relationship of the exercise price to the
market price, the historical price volatility of the underlying security, or
bond index and general market conditions. For this reason, the successful use of
options as a hedging strategy depends upon the Adviser's ability to forecast the
direction of price fluctuations in the underlying securities or, in the case of
bond index options, fluctuations in the market sector represented by the
selected index.
(2) Exchange-traded options normally have expiration dates of up to
90 days and OTC options normally have expiration dates up to one year. The
exercise price of the options may be below, equal to or above the current market
value of the underlying securities, bond index or currencies. Purchased options
that expire unexercised have no value. Unless an option purchased by a Portfolio
is exercised or unless a closing transaction is effected with respect to that
position, the Portfolio will realize a loss in the amount of the premium paid
and any transaction costs.
(3) A position in an exchange-listed option may be closed out only
on an exchange that provides a secondary market for identical options. Although
a Portfolio intends to purchase or write only those options for which there
appears to be an active secondary market, a liquid secondary market may not
exist for any particular option at any specific time because of: (a)
insufficient trading interest in certain options; (b) restrictions on
transactions imposed by an exchange; (c) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (d) interruption of the normal operations on an exchange;
(e) inadequacy of the facilities of an exchange or clearinghouse, such as The
Options Clearing Corporation (the "O.C.C.") to handle current trading volume; or
(f) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
O.C.C. as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms.
Closing transactions may be effected with respect to options traded
in the OTC markets (currently the primary markets for options on debt
securities) only by negotiating directly with the other party to the option
contract, or in a secondary market for the option if such a market exists.
Although a Portfolio will enter into OTC options only with dealers that are
expected to be capable of entering into closing transactions with the Portfolio,
the Portfolio may not be able to liquidate an OTC option at a favorable price at
any time prior to expiration.
In the event of the bankruptcy of a broker through which a Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. In the
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event of insolvency of the counter-party, the Portfolio may be unable to
liquidate an OTC option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that a Portfolio
would have to exercise those options which it has purchased in order to realize
any profit. Transactions are entered into by a Portfolio only with brokers or
financial institutions that the Adviser deems to be creditworthy.
With respect to options written by a Portfolio, the inability to
enter into a closing transaction may result in material losses to the Portfolio.
For example, because a Portfolio must maintain a covered position with respect
to any call option it writes on a security, securities index or currency, the
Portfolio may not sell the underlying security or currency (or invest any cash,
or liquid securities used to cover a securities index option) during the period
it is obligated under the option. This requirement may impair the Portfolio's
ability to sell the underlying security or make an investment at a time when
such a sale or investment might be advantageous.
(4) Securities index options are settled exclusively in cash. If a
Portfolio writes a call option on an index, the Portfolio will not know in
advance the difference, if any, between the closing value of the index on the
exercise date and the exercise price of the call option itself and thus will not
know the amount of cash payable upon settlement. In addition, a holder of a
securities index option who exercises it before the closing index value for that
day is available runs the risk that the level of the underlying index may
subsequently change.
(5) A Portfolio's activities in the options markets may result in
higher portfolio turnover rates and additional brokerage costs; however, the
Portfolio may also save on commissions by using options as a hedge rather than
buying or selling individual securities in anticipation or as a result of market
movements.
(6) The hours of trading for options may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Risks of Options on Foreign Currencies. Options on foreign
currencies involve the currencies of two nations and therefore, developments in
either or both countries affect the values of options on foreign currencies.
Risks include those described in the Prospectus under "Risk Factors -- Foreign
Securities," including government actions affecting currency valuation and the
movements of currencies from one country to another. The quantity of currency
underlying option contracts represent odd lots in a market dominated by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while round-the-clock interbank currency markets
are open, and this can create price and rate discrepancies.
Futures Contracts, in General. Each Portfolio (other than the Money
Market Portfolio) may, but is not required to, use derivatives to reduce risk or
enhance return, including futures contracts on securities and indices and
related options.
Futures Contracts and Related Options. A Portfolio may enter into
futures contracts for the purchase or sale of securities and financial indices
and currencies in accordance with the Portfolio's investment objective. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire a specified quantity of the
securities underlying the contract at a specified price at a specified future
date. A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver a specified quantity of the
securities underlying the contract at a specified price at a specified future
date. At the time a futures contract is
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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 affected by the
liquidity of these markets. Although a Portfolio generally would purchase or
sell only those futures contracts and options thereon for which there appeared
to be a liquid market, a liquid market on an exchange may not exist for any
particular futures contract or option at any particular time. In the event no
liquid market exists for a particular futures contract or option thereon in
which the Portfolio maintains a position, it would not be possible to effect a
closing transaction in that contract or to do so at a satisfactory price and the
Portfolio would have to either make or take delivery under the futures contract
or, in the case of a written call option, wait to sell the underlying securities
until the option expired or was exercised, or, in the case of a purchased
option, exercise the option. In the case of a futures contract or an option on a
futures contract which a Portfolio had written and which it was unable to close,
it would be required to maintain margin deposits on the futures contract or
option and to make variation margin payments until the contract is closed.
Risks inherent in the use of these strategies include (1) dependence
on the Advisers' ability to predict correctly movements in the direction of
interest rates, securities prices and markets; (2) imperfect correlation between
the price of futures contracts and options thereon and movement in the prices of
the securities being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; (5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of a Portfolio
to sell a portfolio security at a time that otherwise would be favorable for it
to do so. In the event it did sell the security and eliminated its "cover," it
would have to replace its "cover" with an appropriate futures contract or option
or segregate securities with the required value, as described in "Limitations on
the Purchase and Sale of Futures Contracts and Related Options -- Segregation
Requirements."
Although futures prices themselves have the potential to be
extremely volatile, in the case of any strategy involving futures contracts and
options thereon when the Advisers' expectations are not met, assuming proper
adherence to the segregation requirement, the volatility of the investment as a
whole should be no greater than if the same strategy had been pursued in the
cash market.
Exchanges on which futures and related options trade may impose
limits on the positions that a Portfolio may take in certain circumstances. In
addition, the hours of trading of financial futures contracts and options
thereon may not conform to the hours during which a Portfolio may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
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Pursuant to the requirements of the Commodity Exchange Act, all
futures contracts and options thereon must be traded on an exchange. Since a
clearing corporation effectively acts as the counterparty on every futures
contract and option thereon, the counter party risk depends on the strength of
the clearing or settlement corporation associated with the exchange.
Additionally, although the exchanges provide a means of closing out a position
previously established, a liquid market may not exist for a particular contract
at a particular time. In the case of options on futures, if such a market does
not exist, a Portfolio, as the holder of an option on futures contracts, would
have to exercise the option and comply with the margin requirements for the
underlying futures contract to utilize any profit, and if the Portfolio were the
writer of the option, its obligation would not terminate until the option
expired or the Portfolio was assigned an exercise notice.
Limitations on the Purchase and Sale of Futures Contracts and
Related Options.
CFTC Limits. In accordance with Commodity Futures Trading Commission
("CFTC") regulations, a Portfolio is not permitted to purchase or sell futures
contracts or options thereon for return enhancement or risk management purposes
if immediately thereafter the sum of the amounts of initial margin deposits on
existing futures and premiums paid for options on futures exceed 5% of the
liquidation value of the Portfolio's total assets (the "5% CFTC limit"). This
restriction does not apply to the purchase and sale of futures contracts and
options thereon for bona fide hedging purposes.
Segregation Requirements. To the extent a Portfolio enters into
futures contracts, the SEC requires it to maintain a segregated asset account
with its custodian (or a futures commission merchant) sufficient to cover the
Portfolio's obligations with respect to such futures contracts, which will
consist of cash and liquid securities marked-to-market daily, in an amount equal
to the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Portfolio with
the custodian (or a futures commission merchant) with respect to such futures
contracts. Offsetting the contract by another identical contract eliminates the
segregation requirement.
With respect to options on futures, there are no segregation
requirements for options that are purchased and owned by a Portfolio. However,
written options, since they involve potential obligations of the Portfolio, may
require segregation of its assets if the options are not "covered" as described
under "Options on Futures Contracts." If a Portfolio writes a call option that
is not "covered," it must segregate and maintain with the custodian (or a
futures commission merchant) for the term of the option cash or liquid
securities equal to the fluctuating value of the optioned futures. If a
Portfolio writes a put option that is not "covered," the segregated amount would
have to be at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Portfolio with the custodian or a futures
commission merchant) with respect to such option.
Securities, currencies or other options or futures positions used
for cover and securities held in a segregated account cannot be sold or closed
out while the option or futures strategy is outstanding, unless they are
replaced with similar assets. As a result, there is a possibility that the use
of cover or segregation involving a large percentage of a Portfolio's assets
could impede fund management or the Portfolio's ability to meet current
obligations.
Uses of Futures Contracts. Futures contracts will be used for
bona fide hedging, risk management and return enhancement purposes.
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
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sell futures contracts on securities, the values of which historically have
correlated closely or are expected to correlate closely to the values of its
portfolio securities. Such a sale would have an effect similar to selling an
equivalent value of portfolio securities. If market values decrease, the value
of a Portfolio's securities will decline, but the value of the futures contracts
will increase at approximately an equivalent rate, thereby keeping the
Portfolio's NAV from declining as much as it otherwise would have. In the case
of debt securities, a Portfolio could accomplish similar results by selling
securities with longer maturities and investing in securities with shorter
maturities. However, since the futures market may be more liquid than the cash
market, the use of futures contracts as a hedging technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities. If in fact market values rise rather than fall, the value of the
futures contract will fall but the value of the securities should rise and
should offset all or part of the loss. If futures contracts are used to hedge
100% of the securities position and correlate precisely with the securities
position, there should be no loss or gain with a rise (or fall) in market
values. However, if only 50% of the securities position is hedged with futures,
then the value of the remaining 50% of the securities position would be subject
to change because of market fluctuations. Whether securities positions and
futures contracts correlate precisely is a significant risk factor.
Anticipatory Position Hedging. When a Portfolio expects that market
values may decline and it intends to acquire securities, a Portfolio might
purchase futures contracts. The purchase of futures contracts for this purpose
would constitute an anticipatory hedge against increases in the price of the
securities which a Portfolio subsequently acquires and would normally qualify as
a bona fide hedge not subject to the 5% CFTC limit. Since fluctuations in the
value of appropriately selected futures contracts should approximate that of the
securities that would be purchased, a Portfolio could take advantage of the
anticipated rise in the cost of the securities without actually buying them. The
Portfolio could therefore make the intended purchases of the securities in the
cash market and concurrently liquidate the futures positions.
Risk Management and Return Enhancement -- Debt Securities. A
Portfolio might sell interest rate futures contracts covering bonds. This has
the same effect as selling bonds in the portfolio and holding cash and reduces
the duration of the portfolio. (Duration measures the price sensitivity of the
portfolio to interest rates. The longer the duration, the greater the impact of
interest rate changes on the portfolio's price.) This should lessen the risks
associated with a rise in interest rates. In some circumstances, this may serve
as a hedge against a loss of principal, but is usually referred to as an aspect
of risk management.
A Portfolio might buy interest rate futures contracts covering bonds
with a longer maturity than its portfolio average. This would tend to increase
the duration and should increase the gain in the overall portfolio if interest
rates fall. This is often referred to as risk management rather than hedging
but, if it works as intended, has the effect of increasing principal value. If
it does not work as intended because interest rates rise instead of fall, the
loss will be greater than would otherwise have been the case. Futures contracts
used for these purposes are not considered bona fide hedges and, therefore, are
subject to the 5% CFTC limit.
A Portfolio may use interest rate futures contracts to hedge its
fund against changes in the general level of interest rates and in other
circumstances permitted by the CFTC. A Portfolio may purchase an interest rate
futures contract when it intends to purchase debt securities but has not yet
done so. This strategy may minimize the effect of all or part of an increase in
the market price of the debt securities that the Portfolio intends to purchase
in the future. A rise in the price of the debt securities prior to their
purchase may be either offset by an increase in the value of the futures
contract purchased by a Portfolio or avoided by taking delivery of the debt
securities under the futures contract. Conversely, a fall in the market price of
the underlying debt securities may result in a corresponding decrease in the
value of the futures position. A Portfolio may sell an interest rate futures
contract in order to continue to receive
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the income from a debt security, while endeavoring to avoid part or all of the
decline in market value of that security that would accompany an increase in
interest rates.
A Portfolio may sell bond index futures contracts in anticipation of
a general market or market sector decline that could adversely affect the market
value of the Portfolio's securities. To the extent that a portion of a
Portfolio's portfolio correlates with a given index, the sale of futures
contracts on that index could reduce the risks associated with a market decline
and thus provide an alternative to the liquidation of securities positions. For
example, if a Portfolio correctly anticipates a general market decline and sells
bond index futures to hedge against this risk, the gain in the futures position
should offset some or all of the decline in the value of the Portfolio. A
Portfolio may purchase bond index futures contracts if a significant market or
market sector advance is anticipated. Such a purchase of a futures contract
would serve as a temporary substitute for the purchase of individual debt
securities, which debt securities may then be purchased in an orderly fashion.
This strategy may minimize the effect of all or part of an increase in the
market price of securities that a Portfolio intends to purchase. A rise in the
price of the securities should be partly or wholly offset by gains in the
futures position.
The settlement price of a futures contract is generally a function
of the spot market price of the underlying security and a cost of financing,
adjusted for any interest, dividends or other income received on the underlying
instrument over the life of the contract. It is therefore possible to earn a
return approximating that of debt securities of a similar tenor to that of a
forward contract by security or basket of securities and selling a futures
contract for such security or basket. A Portfolio may enter into such future
strategies, using securities other than debt obligations, in cases where (a)
government regulations restrict foreign investment in fixed income securities
but not in other securities, such as common stocks, or commodities; and (b) in
the Adviser's opinion both the cash and futures markets are sufficiently liquid.
Options on Futures Contracts. A Portfolio may enter into options on
futures contracts for certain bona fide hedging, risk management and return
enhancement purposes. This includes the ability to purchase put and call options
and write (i.e., sell) "covered" put and call options on futures contracts that
are traded on commodity and futures exchanges.
If a Portfolio purchases an option on a futures contract, it has the
right but not the obligation, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call or a
short position if the option is a put) at a specified exercise price at any time
during the option exercise period.
Unlike purchasing an option, which is similar to purchasing
insurance to protect against a possible rise or fall of security prices or
currency values, the writer or seller of an option undertakes an obligation upon
exercise of the option to either buy or sell the underlying futures contract at
the exercise price. The writer of a call option has the obligation upon exercise
to assume a short futures position and a writer of a put option has the
obligation to assume a long futures position. Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the 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
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considered "covered" with respect to a call option it writes on a futures
contract if the Portfolio owns the securities or currency which is deliverable
under the futures contract or an option to purchase that futures contract having
a strike price equal to or less than the strike price of the "covered" option. A
Portfolio will be considered "covered" with respect to a put option it writes on
a futures contract if it owns an option to sell that futures contract having a
strike price equal to or greater than the strike price of the "covered" option.
To the extent a Portfolio is not "covered" as described above with
respect to written options, it will segregate and maintain with its custodian
for the term of the option cash or liquid securities as described under
"Limitations of the Purchase and Sale of the Futures Contracts and Related
Options -- Segregation Requirements."
Uses of Options on Futures Contracts. Options on futures contracts
would be used for bona fide hedging, risk management and return enhancement
purposes.
Position Hedging. A Portfolio may purchase put options on interest
rate, currency or other financial index futures contracts to hedge its portfolio
against the risk of a decline in the market value of the securities it owns.
Anticipatory Hedging. A Portfolio may also purchase call options
on futures contracts as a hedge against an increase in the value of
securities it intends to acquire.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of securities a Portfolio
intends to acquire. If the futures price at expiration of the option is above
the exercise price, a Portfolio retains the full amount of the option premium
which provides a partial hedge against any increase that may have occurred in
the price of the securities the Portfolio intended to acquire. If the market
price of the underlying futures contract is below the exercise price when the
option is exercised, a Portfolio would incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities it intends to
acquire.
Whether options on futures contracts are subject to or exempt from
the 5% CFTC limit depends on whether the purposes of the options constitutes a
bona fide hedge.
Risk Management and Return Enhancement. Writing a put option that
does not relate to securities a Portfolio intends to acquire would be a return
enhancement strategy which would result in a loss if market values fall.
Similarly, writing a covered call option on a futures contract is
also a return enhancement strategy. If the market price of the underlying
futures contract at expiration of a written call is below the exercise price, a
Portfolio would retain the full amount of the option premium, 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.
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Futures Straddles. A Portfolio may also purchase and write covered
straddles on interest rate, foreign currency or bond index futures contracts. A
long straddle is a combination of a call and a put purchased on the same futures
contract where the exercise price of the put option is less than the exercise
price of the call option. A Portfolio would enter into a long straddle when it
believes that it is likely that interest rates or foreign currency exchange
rates will be more volatile during the term of the options than the option
pricing implies. A short straddle is a combination of a call and put written on
the same futures contract where the exercise price of the put option is less
than the exercise price of the call option and where the same security or
futures contract is considered for both the put and the call. The Portfolio
would enter into a short straddle when it believes that it is unlikely that
interest rates or foreign currency exchange rates will be as volatile during the
term of the options as the option pricing implies.
Special Characteristics and Risks of Futures Trading. No price is
paid upon entering into a futures contract. Instead, upon entering into a
futures contract, a Portfolio will be required to deposit with its custodian the
initial margin. Unlike margin in securities transactions, margin on futures
contracts a Portfolio has written does not involve borrowing to finance the
futures transactions. Rather, initial margin on futures contracts or on such
options is in the nature of a performance bond or good-faith deposit on the
contract that will be returned to the Portfolio upon termination of the
transaction, assuming all contractual obligations have been satisfied.
Similarly, variation margin does not involve borrowing to finance the futures,
but rather represents a daily settlement of a Portfolio's obligations to or from
a clearing organization.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures. A Portfolio will
incur brokerage fees and related transaction costs when it purchases or sells
futures contracts and premiums.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract may vary either up or
down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and, therefore, does not limit potential losses because
futures prices could move to the daily limit for several consecutive trading
days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Portfolio to close a
position and, in the event of adverse price movements, the Portfolio would have
to make daily cash payments of variation margin (except in the case of purchased
options). However, in the event futures contracts have been used to hedge fund
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
The following considerations are important in deciding whether to
use futures contracts:
(1) Successful use by a Portfolio of futures contracts will depend
upon the Adviser's ability to predict movements in the direction of the overall
securities, currency and interest rate markets, which requires skills and
techniques that are different from those needed to predict changes in the prices
of individual securities. Moreover, futures contracts relate not to the current
price level of the underlying instrument or currency but to the anticipated
levels at some point in the future. There is, in addition, the risk that the
movements in the price of the futures contract will not correlate with the
movements in prices of the securities or currencies being hedged. For example,
if the price of the futures contract moves less than the price of the securities
or currencies that are the subject of the hedge, the hedge will not be fully
effective; however, if the price of securities or currencies being hedged has
moved in an unfavorable direction, a Portfolio would be in a better position
than if it had not hedged at all. If the price of the
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securities being hedged has moved in a favorable direction, the advantage may be
partially offset by losses on the futures position. In addition, if a Portfolio
has insufficient cash, it may have to sell portfolio investments to meet daily
variation margin requirements. Any such sale of assets may or may not be made at
prices that reflect the rising market. Consequently, the Portfolio may need to
sell assets at a time when such sales are disadvantageous to the Portfolio. If
the price of the futures contract moves more than the price of the underlying
securities or currencies, a Portfolio will experience either a loss or a gain on
the futures contract that may or may not be completely offset by movements in
the price of the securities or currencies that are the subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(3) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Although each Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it may not be possible to close a futures position, and in the event
of adverse price movements, a Portfolio would continue to be required to make
variation margin payments.
(4) As is the case with options, a Portfolio's activities in the
futures markets may result in higher fund turnover rates and additional
transaction costs in the form of added brokerage commissions; however, the
Portfolio may save on commissions by using futures contracts or options thereon
as a hedge rather than buying or selling individual securities or currencies in
anticipation or as a result of market movements.
Guideline for Futures. No Portfolio will purchase or sell futures
contracts if, immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing futures positions and initial margin
deposits would exceed 5% of the market value of the Portfolio's total assets.
This guideline may be modified by the board without shareholder vote. Adoption
of this guideline will not limit the percentage of the Portfolio's assets at
risk to 5%.
Forward Foreign Currency Contracts. Each Portfolio, other than the
Money Market Portfolio, may enter into forward contracts. The High Yield
Portfolio may invest up to 5% of its total assets in these instruments. A
Portfolio may engage in foreign currency hedging strategies, including among
others, settlement hedging, transaction hedging, position hedging, proxy hedging
and cross-
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hedging. A "settlement hedge" or "transaction hedge" is designed to protect the
Portfolio against an adverse change in foreign currency values between the date
a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for a
fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A
Portfolio may also use forward contracts to purchase or sell a foreign currency
in anticipation of future purchases or sales of securities denominated in
foreign currency, even if the Adviser has not yet selected the specific
investments.
A Portfolio may also use forward contracts to hedge against a
decline in the value of existing investments denominated in a foreign currency.
For example, if a Portfolio owns securities denominated in a particular
currency, it could enter into a forward contract to sell that particular
currency in return for U.S. dollars to hedge against possible declines in the
particular currency's value. Such a hedge, sometimes referred to as a "position
hedge," would tend to offset both positive and negative currency fluctuations,
but would not offset changes in security values caused by other factors. A
Portfolio could also hedge the position by selling another currency (or basket
of currencies) expected to perform similarly to a particular currency. This type
of hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated. With regard to a
Portfolio's use of proxy hedges, historical correlations between the movement of
certain foreign currencies relating to the U.S. dollar may not continue. Thus,
at any time poor correlation may exist between movements in the exchange rates
of the foreign currencies underlying the Portfolio's proxy hedges and the
movements in the exchange rates of the foreign currencies in which the Portfolio
assets that are the subject of such proxy-hedges are denominated.
A Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if a
Portfolio had sold a security denominated in one currency and purchased an
equivalent security denominated in another. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause a Portfolio to
assume the risk of fluctuations in the value of the currency it purchases.
Successful use of currency management strategies will depend on the
Adviser's skill in analyzing currency values. Currency management strategies may
substantially change a Portfolio's investment exposure to changes in currency
exchange rates and could result in losses to the Portfolio if currencies do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged a Portfolio by selling that currency in
exchange for dollars, the Portfolio would not participate in the currency's
appreciation. If the Adviser hedges currency exposure through proxy hedges, a
Portfolio could realize currency losses from both the hedge and the security
position if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Portfolio's exposure to a foreign currency and that currency's value
declines, the Portfolio will realize a loss. The Adviser's use of currency
management strategies may not be advantageous to a Portfolio and the Adviser may
not hedge at appropriate times.
A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
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At the maturity of a forward contract, a Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
A Portfolio may enter into forward currency contracts to purchase or
sell foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. For example, a Portfolio may purchase a forward
currency contract to lock in the U.S. dollar price of a security denominated in
a foreign currency that the Portfolio intends to acquire. In addition, a
Portfolio may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security denominated
in a foreign currency.
The cost to a Portfolio of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. When a Portfolio enters into a forward currency contract, it
relies on the counterparty to make or take delivery of the underlying currency
at the maturity of the contract. Failure by the counterparty to do so would
result in the loss of any expected benefit of the transaction.
Settlement of hedging transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, a Portfolio might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
A Portfolio may also enter into forward contracts to enhance return
if the Advisers anticipate a change in a foreign currency's value. When entered
into to seek to enhance return, forward contracts are considered speculative.
A Portfolio may also create non-speculative "synthetic" positions. A
synthetic position is deemed not to be speculative if the position is covered by
segregation of short-term liquid assets. A synthetic position is the duplication
of a cash market transaction when the Adviser deems it to be advantageous for
cost liquidity or transactional efficiency reasons. A cash market transaction is
the purchase or sale of a security or other asset for cash. For example, a
Portfolio may experience large cash inflows which may be redeemed from the
Portfolio in a relatively short period. In this case, the Portfolio can leave
the amounts uninvested in anticipation of the redemption or the Portfolio can
invest in securities for a relatively short period, incurring transaction costs
on the purchase and subsequent sale. Alternatively, the Portfolio could create a
synthetic position by investing in a futures contract on a security, such as a
bond denominated in a foreign currency or on a securities index gaining
investment exposure to the relevant market while incurring lower overall
transaction costs. Since the financial markets in emerging countries are not as
developed as in the United States, these financial investments may not be
available to a Portfolio and the Portfolio may be unable to hedge certain risks
or enter into certain transactions. A Portfolio would enter into such
transactions if the markets for these instruments were sufficiently liquid and
there was an acceptable degree of correlation to the cash market. By segregating
cash, a Portfolio's futures contract position would generally be no more
leveraged or riskier than if it had invested in the cash market i.e., purchased
securities.
As is the case with futures contracts, holders and writers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures, by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Secondary markets
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generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, a Portfolio may not in fact
be able to close out a forward currency contract at a favorable price prior to
maturity. In addition, in the event of insolvency of the counterparty, a
Portfolio might be unable to close out a forward currency contract at any time
prior to maturity. In either event, the Portfolio would continue to be subject
to market risk with respect to the position, and would continue to be required
to maintain a position in securities denominated in the foreign currency or to
maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency contract has been established. Thus, a Portfolio might need
to purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Unless a Portfolio engages in currency hedging transactions, it will
be subject to the risk of changes in relation to the U.S. dollar of the value of
the currencies in which its assets are denominated. A Portfolio may from time to
time seek to protect, during the period prior to the remittance, the value of
the amount of interest, dividends and net realized capital gains received or to
be received in a local currency that it intends to remit out of the foreign
country by investing in high-quality short-term U.S. dollar-denominated debt
securities of such country and/or participating in the forward currency market
for the purchase of U.S. dollars in the country. Suitable U.S.
dollar-denominated investments may not be available at the time the Adviser
wishes to use them to hedge amounts to be remitted. In addition,
dollar-denominated securities may not be available in some or all emerging
countries, that the forward currency market for the purchase of U.S. dollars in
many emerging countries is not highly developed and that in certain emerging
countries no forward market for foreign currencies currently exists or that such
market may be closed to investment by a Portfolio.
A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts, when required under applicable laws, will be
established with the Portfolio's Custodian. For the purpose of determining the
adequacy of the assets in the account, the deposited assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional cash or assets will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the Portfolio. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate these contracts. In such event, a Portfolio's
ability to utilize forward foreign currency exchange contracts may be
restricted.
The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the Portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
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Forward contracts involve the risk that anticipated currency movements will not
be accurately predicted, causing the Portfolio to sustain losses on these
contracts and transaction costs. A Portfolio may enter into a forward contract
and maintain a net exposure on such contract only if (1) the consummation of the
contract would not obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency or (2) the Portfolio maintains cash or liquid
assets in a segregated account in an amount not less than the value of the
Portfolio's total assets committed to the consummation of the contract which
value must be marked to market daily. Each Portfolio will comply with guidelines
established by the SEC with respect to coverage of forward contracts entered
into by the Portfolio (including SEC guidelines in respect of forward contracts
subject to netting arrangements) and, if such guidelines so require, will set
aside liquid assets in a segregated account with its custodian in the amount
prescribed. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment decisions
made with regard to overall diversification strategies. However, the Adviser
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of a Portfolio will be
served.
At or before the maturity date of a forward contract requiring a
Portfolio to sell a currency, the Portfolio may either sell the portfolio
security and use the sale proceeds to make delivery of the currency or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency that it is obligated to
deliver. Similarly, a Portfolio may close out a forward contract requiring it to
purchase a specified currency by entering into a second contract entitling it to
sell the same amount of the same currency on the maturity date of the first
contract. A Portfolio would realize a gain or loss as a result of entering into
such an offsetting forward currency contract under either circumstance to the
extent the exchange rate or rates between the currencies involved moved between
the execution dates of the first contract and the offsetting contract.
The cost to a Portfolio of engaging in forward currency contracts
will vary with factors such as the currencies involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. The use of forward currency contracts will not
eliminate fluctuations in the prices of the underlying securities a Portfolio
owns or intends to acquire, but it will fix a rate of exchange in advance. In
addition, although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currencies, at the same time they limit any
potential gain that might result should the value of the currencies increase.
Although a Portfolio will value its assets daily in terms of U.S.
dollars, the Portfolio does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. A Portfolio may convert foreign
currency from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency to
the dealer.
A Portfolio generally will not enter into a forward contract with a
term of greater than one year.
Swaps, Caps, Floors and Collars. The Income, High Yield, EMD, Large
Cap, Small Cap and Balanced Portfolios each may engage in swaps. The High Yield
and the Balanced Portfolios each may invest up to 5% of its total assets in
these instruments. A Portfolio may enter into currency swaps, mortgage swaps,
index swaps and interest rate swaps, caps, floors and collars. A Portfolio may
enter
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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; the Adviser believes that swaps do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the Portfolio's borrowing restrictions.
A Portfolio will not enter into swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to a swap transaction, a Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The use of interest rate, mortgage, index and currency swaps, as
well as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Adviser is incorrect in
its forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Portfolio would be less favorable than it would have
been if this investment technique were not used. The SEC currently takes the
position that swaps, caps, floors and collars are illiquid and thus subject to a
Portfolio's 15% limitation on investments in illiquid securities.
Lending Portfolio Securities. Each Portfolio, other than the Money
Market Portfolio, may lend its portfolio securities. The High Yield Portfolio
may lend portfolio securities with a market value of up to 30% of its total
assets and each other Portfolio that can lend portfolio securities can do so
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up to 33-1/3% of its total assets. A Portfolio may lend its portfolio securities
to brokers, dealers and other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount equal to at least 100%
of the current market value of the securities loaned. By lending its portfolio
securities, a Portfolio can increase its income through the investment of the
cash collateral. For purposes of this policy, a Portfolio considers collateral
consisting of U.S. government securities or irrevocable letters of credit issued
by banks whose securities meet the Portfolio's investment standards to be the
equivalent of cash. From time to time, a Portfolio may return to the borrower
(or a third party that is unaffiliated with such Portfolio) and that is acting
as a "placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the lender must receive at least
100% cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the lender must be able to terminate the loan at any time;
(4) the lender must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions payable on the loaned securities, and
any increase in market value; (5) the lender may pay only reasonable custodian
fees in connection with the loan; and (6) while voting rights on the loaned
securities may pass to the borrower, the Board must terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs. The Portfolios (other than the EMD Portfolio) have
appointed Custodial Trust Company ("CTC"), an affiliate of BSAM, as Lending
Agent. CTC receives a transaction fee for its services.
Non-Diversified Status. A non-diversified fund, within the meaning
of the 1940 Act, means that the fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a single issuer.
The Adviser intends to limit a non-diversified Portfolio's investments, however,
in order to qualify as a "regulated investment company" for the purposes of
Subchapter M of the Code. See "Taxes." To qualify, a non-diversified Portfolio
must comply with certain requirements, including limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the value of the Portfolio's total assets will be invested in the securities of
a single issuer, and (ii) with respect to 50% of the value of its total assets,
not more than 5% of the value of the Portfolio's total assets will be invested
in the securities of a single issuer and the Portfolio will not own more than
10% of the outstanding voting securities of a single issuer. To the extent that
a non-diversified Portfolio assumes large positions in the securities of a small
number of issuers, the Portfolio's return may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial condition
or in the market's assessment of the issuers.
Short Selling. The Insiders Select Fund and the Income, High Yield,
S&P STARS, Large Cap and Small Cap Portfolios may engage in short sales. Short
sales are transactions in which an investor sells a security it does not own in
anticipation of a decline in the market value of that security. To complete such
a transaction, the investor must borrow the security to make delivery to the
buyer. The investor then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
investor. Until the security is replaced, the investor is required to pay to the
lender amounts equal to any dividend which accrues during the period of the
loan. To borrow the security, an investor also may be required to pay a premium,
which would increase the cost of the security sold. The proceeds of the short
sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until a Portfolio replaces a borrowed security in connection with a
short sale, the Portfolio will: (a) maintain daily a segregated account,
containing liquid securities, at such a level that the amount deposited in the
account plus the amount deposited with the broker as collateral always equals
the
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current value of the security sold short; or (b) otherwise cover its short
position in accordance with positions taken by the staff of the SEC.
A Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Portfolio replaces the borrowed security. A Portfolio will realize
a gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest a
Portfolio may be required to pay in connection with a short sale. Each Portfolio
may purchase call options to provide a hedge against an increase in the price of
a security sold short by a Portfolio.
Each Portfolio anticipates that the frequency of short sales will
vary substantially in different periods, and it does not intend that any
specified portion of its assets, as a matter of practice, will be invested in
short sales. However, no securities will be sold short if, after effect is given
to any such short sale, the total market value of all securities sold short
would exceed 25% of the value of a Portfolio's net assets. No Portfolio may sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of its net assets. No
Portfolio may sell short the securities of any class of an issuer to the extent,
at the time of the transaction, of more than 2% of the outstanding securities of
that class.
Short Sales "Against the Box." The Insiders Select Fund and the
Income, S&P STARS, Large Cap, Small Cap and Balanced Portfolios at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box and neither the High Yield Portfolio nor the International
Equity Portfolios at any time will have more than 25% of its net assets in
deposits on short sales against the box. A Portfolio may make short sales
"against the box," a transaction in which a Portfolio enters into a short sale
of a security which the Portfolio owns. The proceeds of the short sale will be
held by a broker until the settlement date, at which time a Portfolio delivers
be security to close the short position. A Portfolio receives the net proceeds
from the short sales. It currently is anticipated that each Portfolio will make
short sales against the box for purposes of protecting the value of the
Portfolio's net assets.
Additional Information about the S&P STARS Portfolio's Investment
Strategies. As described in the Prospectus, the S&P STARS Portfolio need not
sell a security whose S&P STARS ranking has been downgraded and the Portfolio
may purchase additional shares of a four star security that was rated five stars
at the time it was initially purchased. If the S&P STARS ranking of that
security is downgraded to three stars or less, however, that security is counted
toward the 15% of total assets that the S&P STARS Portfolio may invest without
regard to STARS ranking.
Similarly, the S&P STARS Portfolio need not buy back a one star
security it has sold short if the STARS ranking of the security is upgraded and
the Portfolio may sell short additional shares of a two star security that was
rated one star at the time it was initially sold short. If the S&P STARS ranking
of that security is upgraded to three or more stars, however, that security is
counted toward the 15% of total assets that the S&P STARS Portfolio may invest
without regard to STARS ranking.
At any time that the S&P STARS Portfolio's holdings of securities
rated three stars (or less) and/or short positions in securities rated three
stars (or more) exceed 15% of its total assets, the Portfolio may not acquire or
sell short additional shares of such securities until the amount so invested
declines below 15% of total assets.
Investment Restrictions. Each Portfolio has adopted certain
investment restrictions as fundamental policies. These restrictions cannot be
changed without the approval of a majority of the
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Portfolio's outstanding voting shares, as defined in the 1940 Act). Investment
restrictions that are not fundamental policies may be changed by vote of a
majority of the Trustees at any time. If a percentage restriction is adhered to
at the time of investment, a later change in percentage resulting from a change
in values or assets will not constitute a violation of such restriction.
Fundamental Restrictions
1. Concentration
The Money Market Portfolio may not purchase any securities which
would cause 25% or more of the value of its total assets at the time of such
purchase to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that there is
no limitation with respect to investments in U.S. government securities or in
bank instruments issued by domestic banks.
The Insiders Select Fund and the Income, High Yield, S&P STARS,
Large Cap, Small Cap, Focus List, Balanced and International Equity Portfolios
each may not purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. government securities.
The EMD Portfolio may not invest more than 25% of the value of its
total assets in the securities of one or more issuers conducting their principal
business activities in the same industry. This limitation is not applicable to
investments in obligations of the U.S. government or any of its agencies or
instrumentalities. For purposes of the EMD Portfolio's Investment Restriction
relating to Concentration, as long as the staff of the SEC considers securities
issued or guaranteed as to principal and interest by any single foreign
government or any supranational organization in the aggregate to be securities
of issuers in the same industry, the Portfolio intends to comply with such SEC
staff position.
2. Diversification
The Money Market Portfolio may not purchase securities of any one
issuer if as a result more than 5% of the value the Portfolio's assets would be
invested in the securities of such issuer, except that up to 25% of the value of
the Portfolio's total assets may be invested without regard to such 5%
limitation and provided that there is no limitation with respect to investments
in U.S. government securities and domestic bank instruments.
The Income, Large Cap and Small Cap Portfolios 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, Large Cap and Small Cap Portfolios 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.
41
<PAGE>
4. Commodities
The Money Market Portfolio may not purchase or sell commodities
contracts, or invest in oil, gas or mineral exploration or development programs
or in mineral leases.
The EMD Portfolio may not purchase or sell commodities or commodity
contracts, except that the Portfolio may (a) purchase and sell futures
contracts, including those relating to securities, currencies and indices, and
(b) purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
Each Portfolio, other than the Money Market and EMD Portfolios, may
not invest in commodities, except that each such Portfolio may purchase and sell
options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
5. Real Estate
The Money Market Portfolio may not purchase or sell real estate or
real estate limited partnerships, provided that the Portfolio may purchase
securities of issuers which invest in real estate or interests therein.
The EMD Portfolio may not purchase, hold or deal in real estate,
including limited partnership interests, or oil, gas or other mineral leases,
although the Portfolio may purchase and sell securities that are secured by real
estate or interests therein and may purchase mortgage-related securities and may
hold and sell real estate acquired by the Portfolio as a result of the ownership
of securities.
Each Portfolio, other than the Money Market and EMD Portfolios, may
not purchase, hold or deal in real estate, real estate limited partnership
interests, or oil, gas or other mineral leases or exploration or development
programs, but each such Portfolio may purchase and sell securities that are
secured by real estate or issued by companies that invest or deal in real estate
or real estate investment trusts.
6. Borrowing
The Money Market Portfolio may not borrow money, except that the
Portfolio may (i) borrow money for temporary or emergency purposes from banks
or, subject to specific authorization by the SEC, from funds advised by the
Adviser to an affiliate of the Adviser, and (ii) engage in reverse repurchase
agreements; provided that (i) and (ii) in combination do not exceed one-third of
the value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings).
The EMD Portfolio may not borrow money, except from banks, and only
if after such borrowing there is asset coverage of at least 300% for all
borrowings of the Portfolio; or mortgage, pledge or hypothecate its assets
except in connection with such borrowings. This restriction shall not prevent
the Portfolio from entering into reverse repurchase agreements, provided that
reverse repurchase agreements and any other transactions constituting borrowing
by the Portfolio may not exceed 10% of the Portfolio's total assets. In the
event that the asset coverage for the Portfolio's borrowings falls below 300%,
the Portfolio will reduce within three days the amount of its borrowings in
order to provide for 300% asset coverage. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options, and, if
applicable, futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and neither
such arrangements nor the purchase or sale of futures are deemed to be the
issuance of a senior security for purposes of the Investment Limitation related
to Senior Securities.)
42
<PAGE>
Each Portfolio, other than the Money Market and EMD Portfolios, may
not borrow money, except to the extent permitted under the 1940 Act. The 1940
Act permits an investment company to borrow in an amount up to 33-1/3% of the
value of such company's total assets. For purposes of this Investment
Restriction, the entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.
7. Lending
The Money Market Portfolio may not make loans, except that the
Portfolio may (i) purchase or hold debt obligations in accordance with its
investment objective and policies, (ii) enter into repurchase agreements for
securities, (iii) subject to specific authorization by the SEC, lend money to
other funds advised by the Adviser or an affiliate of the Adviser.
The EMD Portfolio may not make loans, except that the Portfolio may
(a) purchase and hold debt instruments (including bonds, debentures or other
debt instruments or interests therein, government obligations, short-term
commercial paper, certificates of deposit and bankers acceptances) in accordance
with its investment objectives and policies, (b) invest in emerging country
loans, participations and assignments, (c) enter into repurchase agreements with
respect to portfolio securities, and (d) make loans of portfolio securities.
Each Portfolio, other than the Money Market and EMD Portfolios, may
not make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, each such Portfolio may lend its
portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the Board.
8. Underwriting
The Money Market Portfolio may not act as an underwriter of
securities, except insofar as the Portfolio may be deemed an underwriter under
applicable securities laws in selling portfolio securities.
The EMD Portfolio may not underwrite securities of other issuers,
except insofar as the Portfolio may be deemed to be an underwriter under the
Securities Act in selling portfolio securities.
Each Portfolio, other than the Money Market and EMD Portfolios, may
not act as an underwriter of securities of other issuers, except to the extent
each such Portfolio may be deemed an underwriter under the Securities Act, by
virtue of disposing of portfolio securities.
9. Senior Securities
The Money Market, High Yield, Focus List, Balanced and International
Equity Portfolios each may not issue any senior security (as such term is
defined in Section 18(f) of the 1940 Act) except that (a) each such Portfolio
may engage in transactions that may result in the issuance of senior securities
to the extent permitted under applicable regulations and interpretations of the
1940 Act or an exemptive order; (b) each such Portfolio may acquire other
securities, the acquisition of which may result in the issuance of a senior
security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; and (c) subject to the Investment Restriction
related to Borrowing, each such Portfolio may borrow money as authorized by the
1940 Act.
43
<PAGE>
The Insiders Select Fund and the Income, S&P STARS, Large Cap and
Small Cap Portfolios each may not issue any senior security (as such term is
defined in Section 18(f) of the 1940 Act).
The EMD Portfolio may not issue any senior security (as such term is
defined in Section 18(f) of the 1940 Act) except as otherwise permitted in the
Investment Restrictions related to Borrowing, Short Sales and Lending; and, in
the case of the Investment Restrictions related to Short Sales and Lending,
provided the coverage requirements enunciated by the SEC are followed.
10. Margin
The Insiders Select Fund and the Income, S&P STARS, Large Cap and
Small Cap Portfolios each may not purchase securities on margin, but each such
Portfolio may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes.
11. Unseasoned Issuers
The S&P STARS Portfolio may not purchase securities of any company
having less than three years' continuous operations (including operations of any
predecessor) if such purchase would cause the value of the Portfolio's
investments, in all such companies to exceed 5% of the value of its total
assets.
12. Management or Control
The S&P STARS Portfolio may not invest in the securities of a
company for the purpose of exercising management or control, but it will vote
the securities it owns in its portfolio as a shareholder in accordance with its
views.
Non-Fundamental Restrictions.
1. Pledging Assets
Each Portfolio, other than the Money Market and EMD Portfolios 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.
The Insiders Select Fund and the Income, S&P STARS, Large Cap and
Small Cap Portfolios each may not purchase, sell or write puts, calls or
combinations thereof, except as described in the Prospectus and SAI.
44
<PAGE>
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 and EMD Portfolios, may
not purchase securities of other investment companies, except to the extent
permitted under the 1940 Act.
4. Unseasoned Issuers
The EMD Portfolio may not invest more than 10% of the value of its
total assets in securities of issuers having a record, together with
predecessors, of less then three years of continuous operation.
The Insiders Select Fund and the Large Cap Portfolio each may not
purchase securities of any company having less than three years' continuous
operations (including operations of any predecessor) if such purchase would
cause the value of the Portfolio's investments in all such companies to exceed
5% of the value of its total assets.
5. Management or Control
The EMD Portfolio may not make investments for the purpose of
exercising control or management. Investments by the Portfolio in wholly-owned
investment entities created under the laws of certain countries will not be
deemed the making of investments for the purpose of exercising control or
management.
The Insiders Select Fund and the Large Cap and Small Cap Portfolios
each may not invest in the securities of a company for the purpose of exercising
management or control, but each such Portfolio will vote the securities it owns
in its portfolio as a shareholder in accordance with its views.
6. Illiquid Securities
The Money Market Portfolio may not knowingly invest more than 10% of
the value of its assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no readily
available market quotations.
The Insiders Select Fund and the Income, S&P STARS, Large Cap and
Small Cap Portfolios 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, Focus List, Balanced and International Equity
Portfolios each may not knowingly invest more than 15% of the value of its
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
7. Margin
The Money Market Portfolio may not purchase securities on margin,
make short sales of securities, or maintain a short position.
45
<PAGE>
The High Yield, Focus List, Balanced and International Equity
Portfolios each may not purchase securities on margin, but each such Portfolio
may make margin deposits in connection with transactions in options, forward
contracts, futures contracts, including those relating to indexes, and options
on futures contracts or indexes.
8. Short Sales
The EMD Portfolio may not make short sales of securities, except
short sales against-the-box, or maintain a short position. (The Portfolio does
not currently intend to make short sales against-the-box.)
The Focus List, Balanced and International Equity Portfolios each
may not make short sales of securities, other than short sales "against the
box."
9. Investments while Borrowing.
The Money Market, High Yield, Focus List, Balanced and
International Equity Portfolios each may not make additional investments when
borrowing exceeds 5% of Portfolio assets.
10. Warrants
The Money Market Portfolio may not invest in warrants.
MANAGEMENT OF THE TRUST
Trustees and officers of the Trust, together with information as to
their principal business occupations during at least the last five years, are
shown below. There are also two Advisory Trustees who attend meetings and serve
on committees but do not vote. The Board has nominated these Advisory Trustees
to serve as Trustees, pending approval of the Trust's shareholders at a meeting
scheduled for April 17, 2000.
Each Trustee who is an "interested person" of the Trust, as defined
in the 1940 Act, is indicated by an asterisk. Sen. Dixon may be considered an
interested person because the law firm with which he is affiliated has performed
legal services for Bear Stearns.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Position
Name, (age) and address with Trust Principal Occupation
- --------------------------------------------------------------------------------
Peter M. Bren (65) Trustee Since 1969, President of The Bren Co.
126 East 56th Street (realty); until 1969, President of Koll,
New York, NY 10021 Bren Realty Advisors and Senior Partner
of Lincoln Properties.
- --------------------------------------------------------------------------------
Alan J. Dixon (71) * Trustee Since 1993, Partner, Bryan Cave (St.
7535 Claymont Court, Apt. Louis law firm); from 1981 to 1992,
#2 United States Senator from Illinois.
Belleville, IL 62223
- --------------------------------------------------------------------------------
46
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Position
Name, (age) and address with Trust Principal Occupation
- --------------------------------------------------------------------------------
John R. McKernan, Jr. (51) Trustee Since 1999, Vice Chairman, Education
P.O. Box 15213 Management Corporation; from 1995 to
Portland, ME 02110 1999, Chairman and Chief Executive
Officer of McKernan Enterprises (merchant
banking); from 1987 to 1995, Governor of
Maine.
- --------------------------------------------------------------------------------
M.B. Oglesby, Jr. (57) Trustee Since 1999, Consultant and Chairman of
700 13th St., N.W., Suite Oglesby Properties, Inc.; since 1997,
400 Washington, D.C. 20005 President and Chief Executive Officer,
Association of American Railroads; from
1996 to 1997, Vice Chairman of Cassidy &
Associates; from 1989 to 1996, Senior Vice
President of RJR Nabisco, Inc.; from 1988
to 1989, White House Deputy Chief of
Staff.
- --------------------------------------------------------------------------------
Michael Minikes (56) * Trustee, Senior Managing Director of Bear
245 Park Avenue Chairman Stearns; Treasurer of The Bear Stearns
New York, NY 10167 of the Companies Inc.; Director of Bear
Board Stearns; since 1997, Chairman of the Board
of Trustees of The Bear Stearns Funds;
since 1999, Co-President of Bear, Stearns
Securities Corp.
- --------------------------------------------------------------------------------
John S. Levy (64) Advisory Since 1996, Managing Partner,
Fayerweather Capital Trustee Fayerweather Capital Partners (a private
Partners investment partnership); from 1984 to
595 Madison Avenue 1995, Managing Director and Chief
New York, NY 10022 Administrative Officer of the Financial
Services Division of Lehman Brothers
Inc. and Senior Executive Vice President
and Co-Director of International
Division of Shearson Lehman/American
Express.
- --------------------------------------------------------------------------------
Robert E. Richardson (58) Advisory Retired; from 1990 to 1999, Vice
20 Auger Drive Trustee President, Broker/Dealer Department,
Suffern, NY 10901 Mellon Bank, N.A.
- --------------------------------------------------------------------------------
Doni L. Fordyce (40) President Since 1996, Senior Managing Director of
575 Lexington Avenue Bear Stearns; until 1996, Vice
New York, NY 10022 President, Asset Management Group,
Goldman, Sachs & Co.
- --------------------------------------------------------------------------------
Barry Sommers (30) Executive Since 1997, Managing Director and Head
575 Lexington Avenue Vice of Marketing and Sales for Bear Stearns
New York, NY 10022 President Funds; from 1995 to 1997, Vice
President, Mutual Fund Sales, Goldman,
Sachs & Co.
- --------------------------------------------------------------------------------
Stephen A. Bornstein (56) Vice Managing Director of Bear Stearns, Legal
575 Lexington Avenue President Department; since 1997, General Counsel,
New York, NY 10022 and BSAM.
Secretary
- --------------------------------------------------------------------------------
47
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Position
Name, (age) and address with Trust Principal Occupation
- --------------------------------------------------------------------------------
Frank J. Maresca (41) Vice Since 1997, Managing Director of Bear
575 Lexington Avenue President Stearns; Associate Director prior
New York, NY 10022 and thereto; since 1997, Chief Executive
Treasurer Officer and President of BSFM; Executive
Vice President prior thereto.
- --------------------------------------------------------------------------------
Vincent L. Pereira (34) Assistant Since 1999, Managing Director of Bear
575 Lexington Avenue Treasurer Stearns; Associate Director prior
New York, NY 10022 thereto; since 1997, Executive Vice
President, Treasurer and Secretary of
BSFM; Vice President of BSFM prior
thereto.
- --------------------------------------------------------------------------------
Prior to July 29,1999, the Trust paid its Trustees and Advisory
Trustees who are not employees of BSAM or its affiliates an annual retainer of
$5,000 and a per meeting fee of $500 and reimbursed them for their expenses. The
Trust does not compensate its officers. Prior to July 29, 1999, the EMD
Portfolio was a series of Bear Stearns Investment Trust ("BSIT"), another
registered investment company advised by BSAM. For the fiscal year ended March
31, 1999, Messrs. Bren, McKernan and Oglesby also served as a trustee of BSIT.
Accordingly, the following table shows the aggregate amount of compensation paid
to each Trustee by the Trust and BSIT, where applicable, for the fiscal year
ended March 31, 1999.
TRUSTEE COMPENSATION
(3)
Pension or (5)
Retirement Total
(2) Benefits (4) Compensation
Aggregate Accrued as Estimated from the Trust
Compensation Part of Annual and BSIT Paid
(1) from Trust's Benefits from to
Name of Board Member Trust * Expenses Retirement Board Members
- -------------------- ------- -------- ---------- -------------
Peter M. Bren $8,000 None None $20,000
Alan J. Dixon $8,000 None None $8,000
John S. Levy ** None None None None
John R. McKernan, Jr. $8,000 None None $20,000
Michael Minikes None None None None
M.B. Oglesby, Jr. $8,000 None None $20,000
Robert E. Richardson** None None None None
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $5,750 for the Trustees, as a group.
** Messrs. Levy and Richardson commenced service on the Board as Advisory
Trustees as of February 7, 2000.
Effective April 1, 2000, the Trust will pay its Trustees and
Advisory Trustees who are not employees of BSAM or its affiliates an annual
retainer of $12,500, $1,000 per in-person meeting, $750 per telephone meeting,
$500 per Audit Committee meeting (whether in-person or by telephone), and will
reimburse them for their expenses.
48
<PAGE>
Board members and officers of the Trust, as a group, owned less than
1% of any Portfolio's shares outstanding on July 12, 1999.
The Board maintains an Audit Committee, whose members currently are
Messrs. Bren (Chairman), McKernan and Oglesby. The function of the Audit
Committee is to recommend independent auditors and monitor accounting and
financial matters.
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. The Board has adopted a retirement policy that (i) requires a Trustee to
retire before reaching the age of 75 and (ii) prohibits a Trustee who has
reached the age of 72 from standing for re-election to the Board.
No meetings of shareholders of the Trust will be held for the sole
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Under the 1940 Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Trust may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Trust's Agreement and Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Trust's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Management of the
Portfolios." Information in this section relating to fees and expenses paid by
the EMD Portfolio as of March 31, 1999 represent amounts paid by the Portfolio's
predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
General. On December 3, 1997, BSFM, the registered investment
adviser of the Portfolios, changed its name to BSAM. On December 4, 1997, BSFM
formed a new corporate entity under the laws of Delaware to conduct mutual fund
administrative work for the Trust and other affiliated and non-affiliated
investment companies.
S&P STARS Portfolio. Prior to June 25, 1997, the Portfolio invested
all of its assets into the S&P STARS Master Series of S&P STARS Fund (the
"Master Series"), rather than directly in a portfolio of securities in an
arrangement typically referred to as a "master-feeder" structure. Active
portfolio management was performed at the Master Series level and BSFM was
retained by the Master Series rather than the Portfolio. At a meeting held on
June 18, 1997, a majority of the shareholders of the Portfolio approved an
investment advisory contract between BSAM and the Portfolio and BSAM began
active management of the Portfolio's investments. Historical information
provided below for periods prior to June 25, 1997 pertaining to items such as
advisory fees, portfolio turnover, and brokerage expenses reflects those items
as incurred by the Master Series.
Investment Advisory Agreement. BSAM provides investment advisory
services to each Portfolio pursuant to Investment Advisory Agreements with the
Trust (each an "Advisory Agreement") dated as shown in the following table.
49
<PAGE>
Advisory Agreement Date(s)
- -------------------------------------------------------------------------------
Income, Large Cap, Small Cap Portfolios February 22, 1995, as revised May
4, 1995
- -------------------------------------------------------------------------------
Money Market Portfolio June 2, 1997
- -------------------------------------------------------------------------------
S&P STARS Portfolio June 25, 1997
- -------------------------------------------------------------------------------
Balanced, High Yield, International September 9, 1997
Equity Portfolios
- -------------------------------------------------------------------------------
Focus List Portfolio December 29, 1997
- -------------------------------------------------------------------------------
Insiders Select Fund January 20, 1998
- -------------------------------------------------------------------------------
EMD Portfolio July 29, 1999
- -------------------------------------------------------------------------------
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 7, 2000. 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, Portfolio Manager and Senior Managing Director; Doni L. Fordyce,
Director, Chief Operating Officer, Executive Vice President and Senior
Managing Director; Stephen A. Bornstein, General Counsel, Executive Vice
President and Managing Director; 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.
Advisory Fee
- --------------------------------------------------------------------------------
Money Market Portfolio 0.20%
- --------------------------------------------------------------------------------
Income Portfolio 0.45%
- --------------------------------------------------------------------------------
High Yield Portfolio 0.60%
- --------------------------------------------------------------------------------
EMD Portfolio 1.00% of assets up to $50 million, 0.85%
of assets between $50 million and $100 million and
0.55% of assets above $100 million
- --------------------------------------------------------------------------------
50
<PAGE>
Advisory Fee
- --------------------------------------------------------------------------------
S&P STARS Portfolio 0.75%
- --------------------------------------------------------------------------------
Focus List Portfolio 0.65%
- --------------------------------------------------------------------------------
Large Cap Portfolio 0.75%
- --------------------------------------------------------------------------------
Small Cap Portfolio 0.75%
- --------------------------------------------------------------------------------
Insiders Select Fund 1.00%
- --------------------------------------------------------------------------------
Balanced Portfolio 0.65%
- --------------------------------------------------------------------------------
International Equity 1.00%
Portfolio
- --------------------------------------------------------------------------------
Insiders Select Fund. The monthly fee that the Insiders Select Fund
will pay BSAM will be adjusted monthly if the Portfolio's performance
outperforms or underperforms the S&P MidCap 400 Index. This adjustment may
increase or decrease the total advisory fee payable to BSAM by an annual rate of
up to 0.50% of the value of the Portfolio's average daily net assets. The
following table details this adjustment.
INSIDERS SELECT FULCRUM FEE SCHEDULE
- -------------------------------------------------------------------------------
Percentage Point Difference Between Designated Class Basic Performance Total
Performance (Net of Expenses Including Fee Adjustment Fee
Advisory Fees) and Percentage (%) Rate(%) (%)
Change in the S&P MidCap 400 Index
- -------------------------------------------------------------------------------
+3.00 percentage points or more 1.00% 0.50% 1.50%
- -------------------------------------------------------------------------------
+2.75 percentage points or more but less than 1.00% 0.40% 1.40%
+ 3.00 percentage points
- -------------------------------------------------------------------------------
+2.50 percentage points or more but less than 1.00% 0.30% 1.30%
+ 2.75 percentage points
- -------------------------------------------------------------------------------
+2.25 percentage points or more but less than 1.00% 0.20% 1.20%
+ 2.50 percentage points
- -------------------------------------------------------------------------------
+2.00 percentage points or more but less than 1.00% 0.10% 1.10%
+ 2.25 percentage points
- -------------------------------------------------------------------------------
Less than + 2.00 percentage points but more than 1.00% 0% 1.00%
- -2.00 percentage points
- -------------------------------------------------------------------------------
- -2.00 percentage points or less but more than 1.00% -0.10% 0.90%
- -2.25 percentage points
- -------------------------------------------------------------------------------
- -2.25 percentage points or less but more than 1.00% -0.20% 0.80%
- -2.50 percentage points
- -------------------------------------------------------------------------------
- -2.50 percentage points or less but more than 1.00% -0.30% 0.70%
- -2.75 percentage points
- -------------------------------------------------------------------------------
- -2.75 percentage points or less but more than 1.00% -0.40% 0.60%
- -3.00 percentage points
- -------------------------------------------------------------------------------
- -3.00 percentage points or less 1.00% -0.50% 0.50%
- -------------------------------------------------------------------------------
The following table shows the investment advisory fees that the
Portfolios paid to BSAM and the amounts that BSAM waived for the last three
fiscal years ended March 31.
ADVISORY FEES PAID TO BSAM
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Paid Waived Paid Waived Paid Waived
- --------------------------------------------------------------------------------
Money Market $33,827 $400,797 $0 $120,582* N/A N/A
- --------------------------------------------------------------------------------
Income $0 $50,882 $0 $91,715 $0 $98,957
- --------------------------------------------------------------------------------
51
<PAGE>
ADVISORY FEES PAID TO BSAM
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
High Yield $25,136 $416,687 $0 $28,723** N/A N/A
- --------------------------------------------------------------------------------
EMD $88,623 $335,209 $208,721 $227,031+ $118,207 $260,294+
- --------------------------------------------------------------------------------
S&P STARS $1,291,152 $716,763 $617,316 $645,637 $47,973 $699,997
- --------------------------------------------------------------------------------
Insiders $759 $321,688 $0 $157,031 $0 $182,313
Select Fund
- --------------------------------------------------------------------------------
Large Cap $0 $165,850 $0 $140,641 $0 $151,578
- --------------------------------------------------------------------------------
Small Cap $67,550 $400,694 $0 $425,409 $0 $285,539
- --------------------------------------------------------------------------------
Focus List $0 $63,550 $0 $6,748*** N/A N/A
- --------------------------------------------------------------------------------
Balanced $0 $101,976 $0 $12,178*** N/A N/A
- --------------------------------------------------------------------------------
International $0 $114,148 $0 $14,726*** N/A N/A
Equity
- --------------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March
31, 1998.
** From January 2, 1998 (commencement of investment operations) to March
31, 1998.
*** From December 29, 1997 (commencement of investment operations) to
March 31, 1998.
+ This amount includes an administration fee that BSAM paid to BSFM.
In addition, BSAM reimbursed the following amounts for the last
three fiscal years ended March 31, in order to maintain applicable voluntary
expense limitations.
EXPENSES REIMBURSED BY BSAM
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Money Market $142,863 $191,174* N/A
- ----------------------------------------------------------------------------
Income $299,061 $275,119 $280,261
- ----------------------------------------------------------------------------
High Yield $121,391 $41,870** N/A
- ----------------------------------------------------------------------------
EMD $137,134 $158,832 $0
- ----------------------------------------------------------------------------
Insiders Select $42,908 $164,325 $243,945
Fund
- ----------------------------------------------------------------------------
Large Cap $157,111 $185,275 $161,196
- ----------------------------------------------------------------------------
Small Cap $28,865 $20,648 $86,666
- ----------------------------------------------------------------------------
Focus List $218,241 $46,255*** N/A
- ----------------------------------------------------------------------------
Balanced $224,243 $46,910*** N/A
- ----------------------------------------------------------------------------
International $157,011 $44,515*** N/A
Equity
- ----------------------------------------------------------------------------
* 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.
52
<PAGE>
Sub-Investment Advisory Agreement. Marvin & Palmer Associates, Inc.
(the "Sub-Adviser") provides investment advisory services to the International
Equity Portfolio pursuant to the Sub-Investment Advisory Agreement with BSAM
dated September 9, 1997. The Sub-Advisory Agreement had an initial term of one
year from the date of execution and will continue automatically for successive
annual periods ending on September 8th of each year, provided such continuance
is specifically approved at least annually by (i) the Board or (ii) a vote of a
majority of the Portfolio's outstanding voting securities(as defined in the 1940
Act), provided that in either case its continuance also is approved by a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust, BSAM or the Sub-Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Board most
recently approved the Sub-Advisory Agreement on February 7, 2000. 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 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.
On September 30, 1999, the SEC entered a Consent Order in In the
Matter of Marvin & Palmer Associates, Inc. et al. (Admin. Proc. File No.
3-10072). Without admitting or denying the allegations, the Sub-Adviser and
David F. Marvin, its Chairman and Chief Executive Officer, consented to the
Order in which the SEC found that the Sub-Adviser, Mr. Marvin and two
unrelated parties violated, or aided in the violation of Sections 206(1),
206(2) and 207 of the Investment Advisers Act of 1940, as amended, in
connection with the alleged failure of the Sub-Adviser to properly disclose a
soft dollar arrangement with a third party. The Consent Order, among other
things, censured the Sub-Adviser and Mr. Marvin and ordered the Sub-Adviser
to pay disgorgement and prejudgment interest in the aggregate amount of
$976,980. The Sub-Adviser and Mr. Marvin were ordered to pay civil money
penalties in the amounts of $50,000 and $25,000, respectively. Neither the
Sub-Adviser nor Mr. Marvin is prohibited from acting as, or being associated
with, an investment adviser.
Administration Agreement. BSFM provides certain administrative
services to the Trust pursuant to the Administration Agreement with the Trust
dated February 22, 1995, as revised April 11, 1995, June 2, 1997, September 8,
1997, February 4, 1998 and July 29, 1999. The Administration Agreement was last
approved as of February 7, 2000 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
53
<PAGE>
daily net assets of the Money Market Portfolio. The following table shows the
administration fees that the Portfolios paid to BSFM for the last three fiscal
years ended March 31.
Administration Fees paid to BSFM
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Money Market $108,656 $30,167* N/A
- ----------------------------------------------------------------------------
Income $16,960 $30,572 $32,986
- ----------------------------------------------------------------------------
High Yield $110,456 $7,181** N/A
- ----------------------------------------------------------------------------
EMD+ $0 $0 $0
- ----------------------------------------------------------------------------
S&P STARS $401,582 $252,557 $149,100
- ----------------------------------------------------------------------------
Insiders Select $68,666 $35,492 $35,873
Fund
- ----------------------------------------------------------------------------
Large Cap $33,079 $28,128 $30,232
- ----------------------------------------------------------------------------
Small Cap $99,413 $85,085 $57,108
- ----------------------------------------------------------------------------
Focus List $14,665 $1,557*** N/A
- ----------------------------------------------------------------------------
Balanced $23,533 $2,810*** N/A
- ----------------------------------------------------------------------------
International $17,122 $2,209*** N/A
Equity
- ----------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
+ Prior to July 29, 1999, BSAM paid BSFM this fee from its management fee.
Administrative Services Agreement. PFPC provides certain
administrative services to the Portfolios pursuant to the Administrative
Services Agreement with the Trust dated February 22, 1995, as revised September
8, 1997 and July 29, 1999. The Administrative Services Agreement may be
terminated upon 60 days' notice by the Trust or PFPC. PFPC may assign its rights
or delegate its duties under the Administrative Services Agreement to any
wholly-owned direct or indirect subsidiary of PNC Bank, National Association or
PNC Bank Corp., provided that (i) PFPC gives the Trust 30 days' notice; (ii) the
delegate (or assignee) agrees with PFPC and the Trust to comply with all
relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or
assignee) promptly provide information requested by the Trust in connection with
such delegation.
For administrative and accounting services, the Trust has agreed to
pay PFPC a monthly fee, on behalf of each Portfolio (other than the Money Market
Portfolio), equal to an annual rate of 0.10% of the Portfolio's average daily
net assets up to $200 million, 0.075% of the next $200 million, 0.05% of the
next $200 million and 0.03% of net assets above $600 million, subject to a
minimum annual fee of $150,000 per Portfolio (other than the Money Market
Portfolio). The Trust has agreed to pay PFPC a monthly fee, on behalf of the
Money Market Portfolio, equal to an annual rate of 0.075% of the Portfolio's
average daily net assets up to $150 million, 0.04% of the next $150 million,
0.02% of the next $300 million and 0.0125% of net assets above $600 million,
subject to a minimum monthly fee of $6,250. The following table shows the
administrative services fees that the Portfolios paid to PFPC for the last three
fiscal years ended March 31.
54
<PAGE>
Administration Fees paid to PFPC
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Money Market $139,740 $39,813* N/A
- ----------------------------------------------------------------------------
Income $103,612 $98,944 $99,469
- ----------------------------------------------------------------------------
High Yield $105,728 $5,468** N/A
- ----------------------------------------------------------------------------
EMD $92,305 $80,121 $85,124
- ----------------------------------------------------------------------------
S&P STARS $256,593 $197,706 $65,999
- ----------------------------------------------------------------------------
Insiders Select $127,397 $123,259 $107,174
Fund
- ----------------------------------------------------------------------------
Large Cap $100,173 $100,107 $99,570
- ----------------------------------------------------------------------------
Small Cap $147,784 $134,255 $119,822
- ----------------------------------------------------------------------------
Focus List $50,847 $5,214*** N/A
- ----------------------------------------------------------------------------
Balanced $64,618 $5,367*** N/A
- ----------------------------------------------------------------------------
International $55,768 $5,215*** N/A
Equity
- ----------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31,
1998.
** From January 2, 1998 (commencement of investment operations) to March 31,
1998.
*** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
Distribution Plans. Rule 12b-1 adopted by the SEC under Section 12
of the 1940 Act provides, among other things, that an investment company may
bear expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. The Board has adopted a distribution plan with respect
to Class A, Class B and Class C shares (the "Distribution Plans"). The Board
believes that there is a reasonable likelihood that the Distribution Plans will
benefit each Portfolio and the holders of its Class A, Class B and Class C
shares.
The Board reviews a quarterly report of the amounts expended under
the Distribution Plans, and the purposes for which such expenditures were
incurred. In addition, each Distribution Plan provides that it may not be
amended to increase materially the costs which holders of a class of shares may
bear pursuant to such Plan without approval of such effected shareholders and
that other material amendments of the Plan must be approved by the Board, and by
the Trustees who are neither "interested persons" (as defined in the 1940 Act)
of the Trust nor have any direct or indirect financial interest in the operation
of the Plan or in the related Plan agreements, by vote cast in person at a
meeting called for the purpose of considering such amendments. In addition,
because Class B shares automatically convert into Class A shares after eight
years, the Trust is required by a SEC rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Distribution Plan
that would materially increase the amount to be paid by Class A shareholders
under such Plan. Such approval must be by a "majority" of the Class A and Class
B shares (as defined in the 1940 Act), voting separately by class. Each
Distribution Plan and related agreement is subject to annual approval by such
vote cast in person at a meeting called for the purpose of voting on such Plan.
An amended and restated distribution plan was most recently approved on February
7, 2000. 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
55
<PAGE>
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 each class of shares of
each Portfolio paid for the fiscal year ended March 31, 1999 under the relevant
Distribution Plan, including (i) amounts paid to broker-dealers, and (ii)
amounts retained by the Distributor for commissions it advanced to dealers for
fund share sales, and other distribution expenses including advertising,
printing, mailing prospectuses to prospective shareholders, compensation to
sales personnel, and interest, carrying, or other financing charges. These
tables include amounts paid for personal services rendered to shareholders of
the Portfolios. Prior to February 1999, amounts paid for shareholder servicing
were paid through the Distribution Plans with respect to Class A and Class C
shares of the Income, Large Cap, Small Cap and S&P STARS Portfolios and The
Insiders Select Fund, and through separate Shareholder Servicing Plans with
respect to the other Portfolios (see "Shareholder Servicing Plan," below).
RULE 12b-1 PAYMENTS
Class A
- ------------------------------------------------------------------------
Total Payments Broker-dealers Distributor
- ------------------------------------------------------------------------
Income $15,836 $11,276 $4,560
- ------------------------------------------------------------------------
High Yield $138,476 $13,924 $124,552
- ------------------------------------------------------------------------
EMD $113,931 $86,913 $27,018
- ------------------------------------------------------------------------
S&P STARS $682,524 $489,767 $192,757
- ------------------------------------------------------------------------
Insiders Select Fund $124,069 $83,259 $40,810
- ------------------------------------------------------------------------
Large Cap $46,716 $33,523 $13,193
- ------------------------------------------------------------------------
Small Cap $111,413 $87,549 $40,810
- ------------------------------------------------------------------------
Focus List $21,863 $2,435 $19,428
- ------------------------------------------------------------------------
Balanced $23,454 $2,672 $20,782
- ------------------------------------------------------------------------
International Equity $30,684 $3,611 $27,073
- ------------------------------------------------------------------------
RULE 12b-1 PAYMENTS
Class B
- ------------------------------------------------------------------------
Total Payments Broker-dealers Distributor
- ------------------------------------------------------------------------
Income $4,599 $36 $4,563
- ------------------------------------------------------------------------
High Yield $148,999 $1,881 $147,118
- ------------------------------------------------------------------------
EMD $12,295 $185 $12,110
- ------------------------------------------------------------------------
S&P STARS $193,055 $2,594 $190,461
- ------------------------------------------------------------------------
Insiders Select Fund $68,310 $602 $67,708
- ------------------------------------------------------------------------
Large Cap $12,841 $134 $12,707
- ------------------------------------------------------------------------
Small Cap $21,972 $179 $21,793
- ------------------------------------------------------------------------
Focus List $31,426 $896 $30,530
- ------------------------------------------------------------------------
Balanced $14,094 $559 $13,535
- ------------------------------------------------------------------------
International Equity $26,946 $1,337 $25,609
- ------------------------------------------------------------------------
56
<PAGE>
RULE 12b-1 PAYMENTS
Class C
- ------------------------------------------------------------------------
Total Payments Broker-dealers Distributor
- ------------------------------------------------------------------------
Income $17,360 $11,983 $5,377
- ------------------------------------------------------------------------
High Yield $183,211 $11,093 $172,118
- ------------------------------------------------------------------------
EMD $33,433 $21,054 $12,379
- ------------------------------------------------------------------------
S&P STARS $714,370 $510,458 $203,912
- ------------------------------------------------------------------------
Insiders Select Fund $130,390 $85,454 $44,936
- ------------------------------------------------------------------------
Large Cap $55,531 $42,660 $12,871
- ------------------------------------------------------------------------
Small Cap $151,596 $115,051 $36,545
- ------------------------------------------------------------------------
Focus List $22,616 $3,367 $19,249
- ------------------------------------------------------------------------
Balanced $9,368 $2,286 $7,082
- ------------------------------------------------------------------------
International Equity $25,834 $6,123 $19,711
- ------------------------------------------------------------------------
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, Small
Cap and S&P STARS Portfolios and The Insiders Select Fund.
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
57
<PAGE>
in proprietary trading and advise accounts and funds which have investment
objectives similar to those of the Portfolios and/or which engage in and compete
for transactions in the same types of securities, currencies and instruments as
the Portfolios. BSAM, Bear Stearns and its affiliates will not have any
obligation to make available any accounts managed by them, for the benefit of
the management of the Portfolios. The results of the Portfolios' investment
activities, therefore, may differ from those of Bear Stearns and its affiliates
and it is possible that the Portfolios could sustain losses during periods in
which BSAM, Bear Stearns and its affiliates and other accounts achieve
significant profits on their trading for proprietary and other accounts. From
time to time, the Portfolios' activities may be limited because of regulatory
restrictions applicable to Bear Stearns and its affiliates, and/or their
internal policies designed to comply with such restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the Prospectus entitled "How to Buy Shares" and
"How to Sell Shares." Information in this section relating to sales and
redemption charges retained by Bear Stearns with respect to the EMD Portfolio as
of March 31, 1999 represent amounts related to sales and redemptions of the
Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
Distributor. Bear Stearns serves as the Portfolios' distributor on a
best efforts basis pursuant to an agreement dated February 22, 1995, as revised
September 8, 1997, February 4, 1998 and July 29, 1999, which is renewable
annually.
The following table shows the approximate amounts that Bear Stearns
retained from sales loads on Class A Shares ("FESL") and on contingent deferred
sales charges ("CDSC") on Class B and Class C Shares for the three fiscal years
ended March 31. In some states, banks or other institutions effecting
transactions in Portfolio shares may be required to register as dealers pursuant
to state law.
SALES LOADS RETAINED BY BEAR STEARNS
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Income
FESL -- A $35,200 $11,400 $17,600
CDSC -- B $600 $0 N/A
CDSC -- C $2,000 $100 $100
- ---------------------------------------------------------------------------
High Yield
FESL -- A $525,500 $155,700* N/A
CDSC -- A $9,000 $0
CDSC -- B $58,800 $0
CDSC -- C $33,700 $0
- ---------------------------------------------------------------------------
EMD
FESL -- A $46,300 $88,900 $110,800
CDSC -- B $13,000 $0 N/A
CDSC -- C $2,200 $1,900 $2,400
- ---------------------------------------------------------------------------
58
<PAGE>
SALES LOADS RETAINED BY BEAR STEARNS
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
S&P STARS
FESL -- A $2,061,000 $1,022,800 $904,000
CDSC -- B $24,500 $0 N/A
CDSC -- C $68,300 $25,800 $30,000
- ---------------------------------------------------------------------------
Insiders Select Fund $389,100 $236,000 $163,000
FESL -- A $69,800 $0 N/A
CDSC -- B $14,400 $2,600 $14,300
CDSC -- C
- ---------------------------------------------------------------------------
Large Cap
FESL -- A $86,200 $68,300 $43,100
CDSC -- B $9,000 $0 N/A
CDSC -- C $4,500 $600 $3,200
- ---------------------------------------------------------------------------
Small Cap
FESL -- A $165,300 $214,800 $227,500
CDSC -- B $14,200 $0 N/A
CDSC -- C $7,600 $4,100 $2,700
- ---------------------------------------------------------------------------
Focus List
FESL -- A $111,800 $71,600** N/A
CDSC -- B $30,300 $0
CDSC -- C $700 $0
- ---------------------------------------------------------------------------
Balanced
FESL -- A $43,000 $32,300** N/A
CDSC -- B $1,500 $0
CDSC -- C $0 $0
- ---------------------------------------------------------------------------
International
Equity $92,700 $58,100** N/A
FESL -- A $6,700 $0
CDSC -- B $700 $0
CDSC -- C
- ---------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31,
1998.
** From December 29, 1997 (commencement of investment operations) to March 31,
1998.
Purchase Order Delays. The effective date of a purchase order may be
delayed if PFPC, the Portfolios' transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads-Class A.
The sales charge may vary depending on the dollar amount invested in
each Portfolio. The public offering price for Class A shares of each Portfolio
is the NAV of that class plus a sales load, which is imposed in accordance with
the following schedules.
59
<PAGE>
FRONT END SALES LOAD SCHEDULE AND DEALER CONCESSIONS
Fixed Income Portfolios
- --------------------------------------------------------------------------------
TOTAL SALES LOAD
-----------------------------
Amount of Transaction As a % of As a % of Dealer
offering price NAV concessions as
per share a % of
offering price
- --------------------------------------------------------------------------------
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 to less than $3,000,000* 0.00 0.00 1.25
$3,000,000 to less than $5,000,000 0.00 0.00 0.75
$5,000,000 and above 0.00 0.00 0.50
Equity Portfolios
- --------------------------------------------------------------------------------
TOTAL SALES LOAD
-----------------------------
Amount of Transaction As a % of As a % of Dealer
offering price NAV concessions as
per share a % of
offering price
- --------------------------------------------------------------------------------
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 to less than $3,000,000* 0.00 0.00 1.25
$3,000,000 to less than $5,000,000 0.00 0.00 0.75
$5,000,000 and above 0.00 0.00 0.50
- --------
* There is no initial sales charge on purchases of $1,000,000 or more of Class
A shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems
those shares up to one year after the date of purchase, a CDSC of 1.00% will
be imposed at the time of redemption. Letter of Intent and Right of
Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will
remain the same for all dealers. From time to time, Bear Stearns may make or
allow additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares. Dealers
may receive a larger percentage of the sales load from Bear Stearns than they
receive for selling most other funds.
As described in the Prospectus, an investor may buy Class A shares
of a Portfolio at NAV if the purchase is (a) for $1,000,000 or more or (b) made
within 60 days of selling a mutual fund that charges a sales load or is subject
to a CDSC and not distributed by Bear. In connection with such purchases, Bear
Stearns will offer to pay dealers, from its own resources, up to 1.25% of the
amount purchased. However, Bear Stearns will not pay this amount if the investor
is a managed account over which BSAM has investment discretion, or if BSAM is
responsible for the asset allocation with respect to such managed account.
60
<PAGE>
In addition, Class A shares of a Portfolio at NAV by the following
customers of a broker that operates a master account for purchasing and
redeeming, and otherwise provides shareholder services in respect of Portfolio
shares pursuant to agreements with the Trust or Bear Stearns: (i) investment
advisers and financial planners who place trades for their own accounts or for
the accounts of their clients and who charge a management, consulting or other
fee, (ii) clients of such investment advisers and financial planners if such
clients place trades through accounts linked to master accounts of such
investment advisers or financial planners on the books and records of such
broker, and (iii) retirement and deferred compensation plans, and trusts used to
fund such plans, including, but not limited to, plans or trusts defined in
sections 401(a), 403(b) or 457 of the Code, and "rabbi trusts," provided, in
each case, the purchase transaction is effected through such broker. The broker
may charge a fee for transactions in Portfolio shares. In connection with such
purchases, Bear Stearns will offer to pay dealers, from its own resources, the
following percentages of the amount purchased: 1.25% of purchases up to
$2,999,999; 0.75% of purchases between $3,000,000 and $4,999,999; and 0.50% of
purchases above $5,000,000.
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.
COMPUTATION OF OFFERING PRICE
Fixed Income Portfolios
- ---------------- --------- -------- --------
High
Income Yield EMD
- ---------------- --------- -------- --------
NAV $12.15 $11.36 $9.27
- ---------------- --------- -------- --------
Sales Charge -
4.50% (4.71% 0.57 0.54 0.44
of NAV)
- ---------------- --------- -------- --------
Offering Price $12.72 $11.90 $9.71
- ---------------- --------- -------- --------
Equity Portfolios
- ----------------------------------------------------------------------------
S&P Insiders Large Small Focus Int'l
STARS Select Cap Cap List Balanced Equity
- ----------------------------------------------------------------------------
NAV $24.39 $17.02 $19.74 $17.93 $17.32 $13.11 $15.14
- ----------------------------------------------------------------------------
Sales Charge -
5.50% (5.82% 1.42 0.99 1.15 1.04 1.01 0.76 0.88
of NAV)
- ----------------------------------------------------------------------------
Offering Price $25.81 $18.01 $20.89 $18.97 $18.33 $13.87 $16.02
- ----------------------------------------------------------------------------
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
61
<PAGE>
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.
Expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution Plan
and Shareholder Servicing Plan fees, (b) printing and postage expenses related
to preparing and distributing Portfolio materials, shareholder reports,
prospectuses and proxies to current shareholders of a specific class; (c) SEC
and state 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 legal expenses relating solely to a specific
class; and (f) Trustees' fees incurred as a result of issues relating to a
specific class. Any expenses of a Portfolio not allocated to a particular class
is allocated to each class of the Portfolio on the basis of the NAV of that
class in relation to the net asset value of the Portfolio. The Adviser,
Distributor, Administrator and any other provider of services to the Trust may
waive or reimburse the expenses of a particular class or classes, as long as
such waiver does not result in cross subsidization between the classes.
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.
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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
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
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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 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 Trust's Valuation Committee, pursuant to
procedures approved by the Board. The Board will review the method of valuation
quarterly. In making their good faith valuation of restricted securities, the
Valuation Committee generally will take the
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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 Valuation Committee.
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.
If a Portfolio has a net capital loss (i.e., an excess of capital
losses over capital gains) for any year, the amount thereof may be carried
forward up to eight years and treated as a short-term capital loss which can be
used to offset capital gains in such future years. As of March 31, 1999, the EMD
Portfolio, High Yield Portfolio, Money Market Portfolio, Focus List Portfolio
and Balanced Portfolio had capital loss carryforwards of $780,615, $175,885,
$34,543, $653,420 and $5,846, respectively, each of which expire in 2007. Under
Code Sections 382 and 383, if a Portfolio has an ownership change, then the
Portfolio's use of its capital loss carryforwards in any year following the
ownership change will be limited to an amount equal to the net asset value of
the Portfolio immediately prior to the ownership
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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
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short sale (which includes for certain purposes the acquisition of a put option)
or is substantially identical to another asset so used, (2) the asset is
otherwise held by the Portfolio as part of a straddle (which term generally
excludes a situation where the asset is stock and Portfolio grants a qualified
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto), or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. In addition, a
Portfolio may be required to defer the recognition of a loss on the disposition
of an asset held as part of a straddle to the extent of any unrecognized gain on
the offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or
loss recognized by a Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss.
Certain transactions that may be engaged in by a Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
Section 1256 Contracts. Section 1256 Contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such Section 1256 Contracts
have not terminated (by delivery, exercise, entering into a closing transaction,
or otherwise) as of such date. Any gain or loss recognized as a consequence of
the year-end deemed disposition of Section 1256 Contracts is taken into account
for the taxable year together with any other gain or loss that previously was
recognized upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
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
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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
(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
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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).
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
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Code Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the
case of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Portfolio has an option to
sell, is under a contractual obligation to sell, has made and not closed a short
sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option
to buy, or has otherwise diminished its risk of loss by holding other positions
with respect to, such (or substantially identical) stock; (2) to the extent that
the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is paid
is treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Portfolio or (2) by application
of Code Section 246(b) which in general limits the dividends-received deduction
to 70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items). With respect to the Money
Market Portfolio, International Equity Portfolio and the EMD Portfolio, only an
insignificant portion of the Portfolio will be invested in stock of domestic
corporations; therefore the ordinary dividends distributed by the Portfolio
generally will not qualify for the dividends-received deduction for corporate
shareholders.
A Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. If net capital gain is distributed and designated
as a capital gain dividend, it will be taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder has held his or
her shares or whether such gain was recognized by the Portfolio prior to the
date on which the shareholder acquired his shares. The Code provides, however,
that under certain conditions only 50% of the capital gain recognized upon a
Portfolio's disposition of domestic qualified small business stock will be
subject to tax.
Conversely, if a Portfolio elects to retain its net capital gain,
the Portfolio will be subject to tax thereon (except to the extent of any
available capital loss carryovers) at the 35% corporate tax rate. If a Portfolio
elects to retain its net capital gain, it is expected that the Portfolio also
will elect to have shareholders of record on the last day of its taxable year
treated as if each received a distribution of his pro rata share of such gain,
with the result that each shareholder will be required to report his pro rata
share of such gain on his tax return as long-term capital gain, will receive a
refundable tax credit for his pro rata share of tax paid by the Portfolio on the
gain, and will increase the tax basis for his shares by an amount equal to the
deemed distribution less the tax credit.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only
to the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for non-corporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ( AMTI ) over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders generally will be required
to take the full amount of any dividend received from a Portfolio into account
(without a dividends-received deduction) in determining their adjusted current
earnings.
Investment income that may be received by a Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known: If more than 50% of the value of the Portfolio's total
assets at the close of its taxable year consist of the stock or securities of
foreign corporations, the Portfolio may elect to pass through to the Portfolio's
shareholders the amount of foreign taxes paid by the Portfolio. If the Portfolio
so elects, each shareholder would be required to
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<PAGE>
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.
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<PAGE>
For this purpose, the special holding period rules of Code Section 246(c)(3) and
(4) (discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of shares.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a
Portfolio, (2) disposes of such shares less than 91 days after they are acquired
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right acquired in connection with the
acquisition of the shares disposed of, then the sales load on the shares
disposed of (to the extent of the reduction in the sales load on the shares
subsequently acquired) shall not be taken into account in determining gain or
loss on such shares but shall be treated as incurred on the acquisition of the
subsequently acquired shares.
Foreign Shareholders. Taxation of a shareholder who, as to the
United States, is a nonresident alien individual, foreign trust or estate,
foreign corporation, or foreign partnership ( foreign shareholder ), depends on
whether the income from a Portfolio is effectively connected with a U.S.
trade or business carried on by such shareholder.
If the income from a Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to such foreign shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount
of the dividend. Furthermore, such a foreign shareholder in the International
Equity Portfolio, S&P STARS Portfolio or Focus List Portfolio may be subject to
U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross income resulting from the Portfolio's election to treat any foreign taxes
paid by it as paid by its shareholders, but may not be allowed a deduction
against such gross income or a credit against the U.S. withholding tax for the
foreign shareholder's pro rata share of such foreign taxes which it is treated
as having paid. Such a foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of a Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from a Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Portfolio may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a
Portfolio, including the applicability of foreign taxes.
Effect of Future Legislation, State and Local Tax Considerations.
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
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<PAGE>
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies may differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolios.
DIVIDENDS -- MONEY MARKET PORTFOLIO
The Money Market Portfolio's net investment income for dividend
purposes consists of (i) interest accrued and original issue discount earned on
the Portfolio's assets, (ii) plus the amortization of market discount and minus
the amortization of market premium on such assets, (iii) less accrued expenses
directly attributable to the Portfolio and the general expenses (e.g. legal,
accounting and trustees' fees) of the Trust prorated to the Portfolio on the
basis of its relative net assets. Any realized short-term capital gains may also
be distributed as dividends to Portfolio investors.
The Trust uses its best efforts to maintain the NAV of the Money
Market Portfolio at $1.00. As a result of a significant expense or realized or
unrealized loss incurred by the Portfolio, the Portfolio's NAV may fall below
$1.00.
PORTFOLIO TRANSACTIONS
Information in this section relating to the portfolio turnover of,
and brokerage commissions paid by, the EMD Portfolio as of March 31, 1999
represent the portfolio turnover of, and brokerage commissions paid by, the
Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
Money Market Portfolio. Subject to the general control of the Board,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Money Market
Portfolio. The Adviser purchases portfolio securities for the Portfolio either
directly from the issuer or from dealers who specialize in money market
instruments. Such purchases are usually without brokerage commissions. In making
portfolio investments, the Adviser seeks to obtain the best net price and the
most favorable execution of orders. To the extent that the execution and price
offered by more than one dealer are comparable, the Adviser may, in its
discretion, effect transactions in portfolio securities with dealers who provide
the Trust with research advice or other services.
The Adviser may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from the Money Market Portfolio prior to their maturity at
their original costs plus interest (interest may sometimes be adjusted to
reflect the actual maturity of the securities) if the Adviser believes that the
Portfolio's anticipated need for liquidity makes such action desirable. Certain
dealers (but not issuers) have charged and may in the future charge a higher
price for commercial paper where they undertake to repurchase prior to maturity.
The payment of a higher price in order to obtain such an undertaking reduces the
yield which might otherwise be received by the Portfolio on the commercial
paper. The Board has authorized the Adviser to pay a higher price for commercial
paper where it secures such an undertaking if the Adviser believes that the
prepayment privilege is desirable to assure the Portfolio's liquidity and such
an undertaking cannot otherwise be obtained.
Investment decisions for the Money Market Portfolio are made
independently from those for another of the other Portfolios or other investment
company series or accounts managed by the
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<PAGE>
Adviser. Such other accounts may also invest in the same securities as the
Portfolio. When purchases or sales of the same security are made at
substantially the same time on behalf of such other accounts, transactions are
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to each account, including the
Portfolio. In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtainable
for the Portfolio. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts in order to obtain best execution.
The Money Market Portfolio will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase agreements with Bear Sterns or the Adviser or any of their
affiliated persons (as defined in the 1940 Act), except as permitted by the SEC.
In addition, with respect to such transactions, securities, deposits and
agreements, the Portfolio will not give preference to service providers with
which the Portfolio enters into agreements.
The Money Market Portfolio may seek profits through short-term
trading. The Portfolio's annual portfolio turnover will be relatively high, but
brokerage commissions are normally not paid on money market instruments and the
Portfolio turnover is not expected to have a material effect on its net income.
The Portfolio's turnover rate is expected to be zero for regulatory reporting
purposes.
Fixed Income Portfolios. BSAM assumes general supervision over
placing orders on behalf of each Portfolio for the purchase or sale of
investment securities. Purchases and sales of portfolio securities usually are
principal transactions. Fixed Income Portfolio securities ordinarily are
purchased directly from the issuer or from an underwriter or a market maker for
the securities. Usually no brokerage commissions are paid by the Fixed Income
Portfolios for such purchases. Purchases of portfolio securities from
underwriters include a commission or concession paid by the issuer to the
underwriter and the purchase price paid to market makers for the securities may
include the spread between the bid and asked price. Fixed Income Portfolio
transactions are allocated to various dealers by its portfolio managers in their
best judgment.
Equity Portfolios. The Adviser assumes general supervision over
placing orders on behalf of each Equity Portfolio for the purchase or sale of
investment securities. Allocation of brokerage transactions, including their
frequency, is made in the Adviser's best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt execution of
orders at the most favorable net price. Subject to this consideration, the
brokers selected will include those that supplement the Adviser's research
facilities with statistical data, investment information, economic facts and
opinions. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and the Adviser's fees are not reduced
as a consequence of the receipt of such supplemental information. A commission
paid to such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in terms of the
transaction or the overall responsibility of the Adviser to a Portfolio and its
other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long-term.
Such supplemental information may be useful to the Adviser in
serving each Equity Portfolio and the other funds which it advises and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Adviser in carrying out its obligations to
each Equity Portfolio. Sales of Portfolio shares by a broker may be taken into
consideration, and brokers also will be selected because of their ability to
handle special executions such as are involved in large block trades or broad
distributions, provided the primary consideration is met. Large block trades
may, in certain cases, result from two or more funds advised or administered by
the Adviser being engaged
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<PAGE>
simultaneously in the purchase or sale of the same security. Certain of the
Adviser's transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to each Equity Portfolio for transactions
in securities of domestic issuers. When transactions are executed in the
over-the-counter market, each Portfolio will deal with the primary market makers
unless a more favorable price or execution otherwise is obtainable. Foreign
exchange transactions of each Equity Portfolio are made with banks or
institutions in the interbank market at prices reflecting a mark-up or mark-down
and/or commission.
Portfolio Turnover. The portfolio turnover rate is a measure of the
average buying and selling activity in a Portfolio. It refers to the percentage
of the Portfolio that is bought and sold each year. Portfolio turnover may vary
from year to year as well as within a year. The following table shows the
portfolio turnover rate for each Portfolio for the last three fiscal years ended
March 31.
PORTFOLIO TURNOVER
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Income 107% 245% 263%
- ---------------------------------------------------------------------------
High Yield 102% 140%* N/A
- ---------------------------------------------------------------------------
EMD 82% 129% 223%
- ---------------------------------------------------------------------------
S&P STARS 76% 173% 220%
- ---------------------------------------------------------------------------
Insiders Select 100% 116% 128%
Fund
- ---------------------------------------------------------------------------
Large Cap 38% 62% 137%
- ---------------------------------------------------------------------------
Small Cap 84% 90% 57%
- ---------------------------------------------------------------------------
Focus List 84% 29%** N/A
- ---------------------------------------------------------------------------
Balanced 46% 13%** N/A
- ---------------------------------------------------------------------------
International 115% 3%** N/A
Equity
- ---------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to
March 31, 1998.
** From December 27, 1997 (commencement of investment operations) to March
31, 1998.
In periods in which extraordinary market conditions prevail, the
Adviser will not be deterred from changing investment strategy as rapidly as
needed, in which case higher portfolio turnover rates can be anticipated which
would result in greater brokerage expenses. The overall reasonableness of
brokerage commissions paid is evaluated by the Adviser based upon its knowledge
of available information as to the general level of commissions paid by other
institutional investors for comparable services.
To the extent consistent with applicable provisions of the 1940 Act
and the rules and exemptions adopted by the SEC thereunder, the Board has
determined that transactions for each Portfolio may be executed through Bear
Stearns if, in the judgment of the Adviser, the use of Bear Stearns is likely to
result in price and execution at least as favorable as those of other qualified
broker-dealers, and if, in the transaction, Bear Stearns charges the Portfolio a
rate consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, Bear Stearns may directly execute such
transactions for each Portfolio on the floor of any national securities
exchange, provided (i) the Board has
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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 last three fiscal years ended March 31 (including the
amount paid to Bear Stearns) For the fiscal year ended March 31, 1999, the table
also shows the percentage of total commissions paid to Bear Stearns and
commissions paid as a percentage of total transactions. No brokerage commissions
were paid by the Money Market or Income Portfolios for the following periods.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
BROKERAGE COMMISSIONS
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
% paid to
Bear % of total
Total paid Stearns transactions Total paid Total paid
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Yield
Total $3,600 $0 N/A
----- ------
(Paid to Bear Stearns) ($900) 25.00% 0.44% ($0)
- -------------------------------------------------------------------------------------------------------------
EMD
Total $2,972 $0 $0
-----
(Paid to Bear Stearns) ($0) 0% 0.26% ($0) ($0)
- -------------------------------------------------------------------------------------------------------------
S&P STARS
Total $780,970 $521,114 $474,679
-----
(Paid to Bear Stearns) ($500,570) 64.10% 0.18% ($305,271) ($368,764)
- -------------------------------------------------------------------------------------------------------------
Insiders Select
Total $161,821 $59,364 $39,790
-----
(Paid to Bear Stearns) ($15,902) 9.83% 0.19% ($12,445) ($8,925)
- -------------------------------------------------------------------------------------------------------------
Large Cap
Total $23,164 $26,799 $59,523
-----
(Paid to Bear Stearns) ($1,602) 6.92% 0.14% ($522) ($1,300)
- -------------------------------------------------------------------------------------------------------------
Small Cap
Total $120,832 $302,476 $102,411
-----
(Paid to Bear Stearns) ($3,540) 2.93% 0.27% ($1,728) ($9,000)
- -------------------------------------------------------------------------------------------------------------
Focus List
Total $23,472 $8,274* N/A
-----
(Paid to Bear Stearns) ($23,472) 100.00% 0.16% ($8,238)
- -------------------------------------------------------------------------------------------------------------
Balanced
Total $12,605 $5,528* N/A
-----
(Paid to Bear Stearns) ($5,688) 45.12% 0.16% ($2,598)
- -------------------------------------------------------------------------------------------------------------
International Equity
Total $67,305 $16,474* N/A
-----
(Paid to Bear Stearns) ($259) 0.38% 0.24% ($0)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* From December 29, 1997 (commencement of investment operations) to March 31,
1998.
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The following information shows the percentage of commissions for
which a Portfolio received research services during the fiscal year ended
March 31, 1999: S&P STARS Portfolio: 20%; Insiders Select Fund: 83%; Large
Cap Portfolio: 66%; Small Cap Portfolio: 87%; Focus List Portfolio: 100%;
Balanced Portfolio: 14%; International Equity Portfolio: 80%.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Risk/Return Summary --
Performance." Performance information in this section relating to the EMD
Portfolio as of March 31, 1999 represents the performance information of the
Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT.
Money Market Portfolio. The "yield" and "effective yield" of the
Money Market Portfolio are calculated separately for each class of shares and in
accordance with the formulas prescribed by the SEC. The seven-day yield for each
class of shares in the Portfolio is calculated by determining the net change in
the value of a hypothetical preexisting account in the Portfolio having a
balance of one share of the class involved at the beginning of the period,
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and multiplying the base period return
by 365/7. The net change in the value of an account in the Portfolio includes
the value of additional shares purchased with dividends from the original share
and dividends declared on the original share and any such additional shares, net
of all fees charged to all shareholder accounts in proportion to the length of
the base period and the Portfolio's average account size, but not include gains
and losses or realized appreciation and depreciation.
In addition, the effective annualized yield may be computed on a
compounded basis (calculated as described above) with respect to each class of a
Portfolio's shares by adding 1 to the base period return, raising the sum to a
power equal to 365/7, and subtracting 1 from the result, according to the
following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1
Similarly, based on calculations described above, 30-day (or
one-month) yields and effective yields may also be calculated.
From time to time, in advertisements or in reports to investors, the
Money Market Portfolio's yield may be quoted and compared to that of other money
market funds or accounts with similar investment objectives and to stock or
other relevant indices. For example, the yield of the Portfolio may be compared
to the IBC Money Fund Average, which is an average compiled by IBC MONEY FUND
REPORT(R) of Holliston, Massachusetts 01746, a widely-recognized independent
publication that monitors the performance of money market funds, or to the
average yields reported by the Bank Rate Monitor from money market deposit
accounts offered by the 50 leading banks and thrift institutions in the top five
standard metropolitan statistical areas.
The Money Market Portfolio's yield will fluctuate, and any quotation
of yield should not be considered as indicative of its future performance. Since
yields fluctuate, yield data cannot necessarily be used to compare an investment
in Portfolio shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Investors should remember that performance and yield are
generally functions of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses net of waivers and expense
reimbursements, and market conditions. Any fees charged by banks with respect to
customer
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<PAGE>
accounts investing in shares of the Portfolio will not be included in yield
calculations; such fees, if charged, would reduce the actual yield from that
quoted.
Current Yield. The current yield for each class reflects the waiver
and reimbursement of certain fees and expenses by the investment adviser. The
current yield of a Fixed Income Portfolio is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
6
YIELD =2[(a - b + 1)- 1]
-----
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
The following table shows the current yield for the 30-day period
ended March 31, 1999 for each class of shares of the Fixed Income Portfolios,
with and without the fee waivers and expense reimbursements described in this
SAI under "Management Arrangements -- Investment Advisory Agreement."
CURRENT YIELD FOR THE 30-DAY PERIOD ENDED MARCH 31, 1999
- ---------------------------------------------------------------------------
Income High Yield EMD
- ---------------------------------------------------------------------------
With Without With Without With Without
waivers waivers waivers waivers waivers waivers
- ---------------------------------------------------------------------------
Class A 5.90% 2.78% 9.51% 8.73% 12.68% 6.14%
- ---------------------------------------------------------------------------
Class B 5.40% 2.11% 9.30% 8.49% 12.00% 5.46%
- ---------------------------------------------------------------------------
Class C 5.40% 2.11% 9.30% 8.49% 12.00% 5.46%
- ---------------------------------------------------------------------------
Class Y 6.40% 3.11% N/A N/A N/A N/A
- ---------------------------------------------------------------------------
Average annual total return of each Portfolio for the 1-, 5-, and
10-year periods (or for periods of the Portfolio's operations) would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1+T) = ERV
Where
P = a hypothetical initial payment of $1,000. T = average annual
total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10-year periods at the
end of the 1-, 5-, or 10-year periods (or fractional portion).
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<PAGE>
A class' average annual total return figures calculated in
accordance with such formula assume that in the case of Class A the maximum
sales load has been deducted from the hypothetical initial investment at the
time of purchase or in the case of Class B the maximum applicable CDSC has been
paid upon redemption at the end of the period.
Total return of each Portfolio is calculated by subtracting the
amount of the Portfolio's NAV (maximum offering price in the case of Class A)
per share at the beginning of a stated period from the NAV at the end of the
period (after giving effect to the reinvestment of dividends and distributions
during the period and any applicable CDSC), and dividing the result by the NAV
(maximum offering price in the case of Class A) per share at the beginning of
the period. Total return also may be calculated based on the NAV at the
beginning of the period instead of the maximum offering price per share at the
beginning of the period for Class A shares or without giving effect to any
applicable CDSC at the end of the period for Class B and C shares. In such
cases, the calculation would not reflect the deduction of the sales load with
respect to Class A shares or any applicable CDSC with respect to Class B and C
shares, which, if reflected, would reduce the performance quoted.
CODE OF ETHICS
BSAM, the Sub-Adviser (collectively the "Advisers") and the Trust,
on behalf of each Portfolio, has adopted a Code of Ethics, that establishes
standards by which certain access persons of the Trust must abide relating to
personal securities trading conduct. Under each Adviser's Code of Ethics, access
persons which include, among others, trustees and officers of the Trust and
employees of the Advisers, are prohibited from engaging in certain conduct,
including: (1) the purchase or sale of any security for his or her account or
for any account in which he or she has any direct or indirect beneficial
interest, without prior approval by the Trust or the applicable Adviser, as the
case may be, or without the applicability of certain exemptions; (2) the
recommendation of a securities transaction without disclosing his or her
interest in the security or issuer of the security; (3) the commission of fraud
in connection with the purchase or sale of a security held by or to be acquired
by each Portfolio; and (4) the purchase of any securities in an initial public
offering or private placement transaction eligible for purchase or sale by each
Portfolio without prior approval by the Trust or the applicable Adviser, as the
case may be. Certain transactions are exempt from item (1) of the previous
sentence, including: (1) in the case of BSAM's Code of Ethics, any securities
transaction, or series of related transactions, involving 500 or fewer shares of
(i) an issuer with an average monthly trading volume of 100 million shares or
more, or (ii) an issuer that has a market capitalization of $1 billion or
greater; and (2) transactions in exempt securities or the purchase or sale of
securities purchased or sold in exempt transactions.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of each Portfolio first, shall avoid potential or
actual conflicts of interest with each Portfolio, and shall not take unfair
advantage of their relationship with each Portfolio. Under certain
circumstances, the Adviser to each Portfolio may aggregate or bunch trades with
other clients provided that no client is materially disadvantaged. Access
persons of BSAM are required by the Code of Ethics to file quarterly reports of
personal securities investment transactions. Access persons of the Sub-Adviser
are required to preclear securities transactions for all non-exempt securities
and transactions. An access person is not required to report a transaction over
which he or she had no control. Furthermore, a trustee of the Trust who is not
an "interested person" (as defined in the 1940 Act) of the Trust is not required
to report a transaction if such person did not know or, in the ordinary course
of his duties as a Trustee of the Trust, should have known, at the time of the
transaction, that, within a 15 day period before or after such transaction, the
security that such person purchased or sold was either purchased or sold, or was
being considered for purchase or sale, by each Portfolio. The Code of Ethics
specifies that certain designated supervisory persons and/or designated
compliance officers shall supervise implementation and
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enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE TRUST
S&P STARS Portfolio.
BSAM has the right to use the S&P, Standard & Poor's and STARS
trademarks for a fee in connection with the management of mutual funds and
access to STARS through S&P's publicly available subscription service. Bear
Stearns and S&P entered into a License Agreement dated October 1, 1994 that,
among other things, (i) grants Bear Stearns the non-exclusive right to use
certain of S&P's proprietary trade names and trademarks for investment companies
based, in whole or in part, on the STARS System, (ii) gives S&P the right to
terminate the Agreement if Bear Stearns breaches its material terms, S&P ceases
to publish STARS, legislative or regulatory changes negatively affect S&P's
ability to license its trade names or trademarks, or certain litigation, (iii)
provides that Bear Stearns will pay to S&P annual license fees based on a
percentage of the net assets of any investment companies subject to the
Agreement and (iv) provides for a partial reduction of the license fees to
offset certain marketing expenses incurred by Bear Stearns in connection with
the Portfolio.
STARS is the centerpiece of OUTLOOK, S&P's flagship investment
newsletter that has a high net worth readership of 25,000 weekly subscribers.
STARS reaches more than 74,000 brokers and investment professionals on their
desktop computers through MarketScope, S&P's on-line, real-time equity
evaluation service, which is accessed more than one million times daily.
S&P has more than 130 years' experience in providing financial
information and analysis, offers more than 60 products and employs more than 50
experienced equity analysts. These analysts consider fundamental factors that
are expected to impact growth, including industry and macroeconomic conditions
and a company's operations, balance sheet, ability to finance growth,
competitive market advantages, earnings per share growth and strength of
management.
"Standard & Poor's(R)," "S&P(R)," and "STARS(R)" are trademarks of
Standard & Poor's and have been licensed for use by Bear Stearns. The S&P STARS
Portfolio is not sponsored, managed, advised, sold or promoted by S&P.
Focus List Portfolio.
The Adviser may be prohibited from buying an attractive stock in the
Focus List for legal reasons and thus miss an investment opportunity.
Current members of the Focus List Committee are Kathryn Booth and
Elizabeth Mackay, CFA. Ms. Booth is the Director of Global Equity Research
and a Senior Managing Director of Bear Stearns. She is a member of the
Investment Committee and co-chairperson of the Stock Selection Committee.
Ms. Booth also manages the Bear Stearns research department's Model
Portfolio. Ms. Mackay is a Managing Director and the Chief Investment
Strategist for Bear Stearns. Her focus is domestic financial markets. Ms.
Mackay determines Bear Stearns' overall asset allocation and advises on
market trends and specific investment themes.
General.
The Trust was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated
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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.
As discussed under "Management of the Trust," each Portfolio
ordinarily will not hold shareholder meetings; however, shareholders under
certain circumstances may have the right to call a meeting of shareholders for
the purpose of voting to remove Trustees. To date, the Board has authorized the
creation of eleven Portfolios. All consideration received by the Trust for
shares of a Portfolio and all assets in which such consideration is invested
will belong to that Portfolio (subject only to the rights of creditors of the
Trust) and will be subject to the liabilities related thereto. The assets
attributable to, and the expenses of, a Portfolio (and as to classes within the
Portfolio) are treated separately from those of the other Portfolios (and
classes). The Trust has the ability to create, from time to time, new Portfolios
without shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the holders of the outstanding voting securities of an investment
company, such as the Trust, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
Portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, Rule 18f-2 exempts the
selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The term "majority of the outstanding shares" of a Portfolio means
the vote of the lesser of (i) 67% or more of the shares of the Portfolio present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
The Trust will send annual and semi-annual financial statements to
all its shareholders.
As of July 2, 1999, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of Portfolio shares. Unless
otherwise noted, the Trust believes that the following information reflects
record ownership only. A shareholder who beneficially owns, directly or
indirectly, more than 25% of a Portfolio's voting securities may be deemed a
"control person" (as defined in the 1940 Act) of the Portfolio. Accordingly,
Bear Stearns may be deemed to be a control person of the
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following Portfolio classes, because it beneficially owns more than 25% of that
Portfolio class's voting securities: Balanced Portfolio, Class B and C; and
International Equity Portfolio, Class B and C.
- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Money Market Portfolio, Bear Stearns Securities Corp. 19.93%
Class Y FBO 049-4 1205-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 15.94%
FBO 049-41206-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Custodial Trust Company 12.43%
101 Carnegie Center
Princeton, NJ 08540
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.97%
FBO 320-17266-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.09%
FBO 0494122013
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Income Portfolio, Class A Bear Stearns Securities Corp. 17.49%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Dorothy J. Pintar 5.65%
140 Country View Drive (beneficial
Robinson Twp, PA 15136-1251 ownership)
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.29%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11291-3859
- -------------------------------------------------------------------------------
Income Portfolio, Class B Bear Stearns Securities Corp. 13.59%
FBO 130-45003-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
First Albany Corporation 11.25%
A C 5976-5265 (beneficial
FBO James A. Moran Jr. ownership)
30 South Pearl Street
Albany, NY 12207
- -------------------------------------------------------------------------------
Wexford Clearing Services Corp. 5.30%
FBO Enid M. Frandzel Trustee (beneficial
Frandzel Family Trust ownership)
UA DTD 03/07/96
22960 Cass Avenue
Woodland Hills, CA 91364-3917
- -------------------------------------------------------------------------------
Income Portfolio, Class C Bear Stearns Securities Corp. 8.56%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.40%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Income Portfolio, Class Y Bear Stearns Securities Corp. 15.79%
FBO 049-40863-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 11.59%
FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 11.32%
FBO 051-98474-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 9.93%
FBO 051-35282-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 9.18%
FBO 046-03216-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 6.56%
FBO 049-40716-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
High Yield Portfolio, Mark Pinto 9.42%
Class A Trust Fox & Co (beneficial
DTD 12/16/67 ownership)
P.O. Box 976
New York, NY 10268
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.18%
FBO 220-23312-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
High Yield Portfolio, Bear Stearns Securities Corp. 6.19%
Class C FBO 720-57204-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
EMD Portfolio, Class A Bear Stearns Securities Corp. 12.79%
FBO 220-23312-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Northern Trust Co. 9.20%
FBO HFLP
PO Box 92956
Chicago, IL 60675
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.68%
FBO 820-11116-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 7.53%
FBO 102-00500-25
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 5.36%
FBO Spec. A/C. for Benefit of
Customers, Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
EMD Portfolio, Class B Lewco Securities Corp. 11.57%
FBO AC. H10-684246-1-01
34 Exchange Place, 4th Floor
Jersey City, NJ 07311
- -------------------------------------------------------------------------------
Dain Rauscher Custodian 5.32%
Paul C. Goldsmith (beneficial
A/c.3608-2770 ownership)
Rollover IRA Account
10 Kent Way
Mill Valley, CA 94941
- -------------------------------------------------------------------------------
Dain Rauscher Inc. FBO 5.53%
Wilbert E. Kellner Trustee (beneficial
The Wilbert E. Kellner Trust ownership)
U A DTD 07-26-1990
863 Oracle Oak
Sunnyvale, CA 94086
- -------------------------------------------------------------------------------
S&P STARS Portfolio, Custodial Trust Company 79.98%
Class Y Attn: Jonathan Brown Acct./Ctrl
101 Carnegie Center
Princeton, NJ 08540
- -------------------------------------------------------------------------------
Insiders Select Fund, Bear Stearns Securities Corp. 10.67%
Class Y FBO 048-33878-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 8.10%
FBO 722-90359-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.62%
FBO 748-51026-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.50%
FBO 048-151146-28
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.01%
FBO 748-51683-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Large Cap Portfolio, Bear Stearns Securities Corp. 18.79%
Class A FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Large Cap Portfolio, Raymond James Assoc. Inc. CSDN 7.71%
Class B Larry A. Lafranchi IRA (beneficial
14 Wabanaki Way ownership)
Andover, MA 01810
- -------------------------------------------------------------------------------
Raymond James Assoc. Inc. CSDN 5.46%
Edward D. Walsh Jr. IRA (beneficial
6 Standish Circle ownership)
Andover, MA 01810
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp. 5.14%
FBO 905-98627-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Large Cap Portfolio, Bear Stearns Securities Corp 7.12%
Class C FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Large Cap Value, Class Y Strafe & Co. FAO Trust 15.91%
FBO Danielle Young (beneficial
DTD 8/21/90 6863471800 ownership)
PO Box 160
Westerville, OH 43086
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 7.91%
FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 7.29%
FBO 051-37142-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 6.03%
FBO 049-41202-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.97%
FBO 039-54877-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Small Cap Portfolio, Custodial Trust Company 24.12%
Class Y Attn: Jonathan Brown Acct/Cntrl
101 Carnegie Center
Princeton, NJ 08540
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.89%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Focus List Portfolio, Bear Stearns Securities Corp 8.32%
Class A FBO 001-00279-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Focus List Portfolio, Bear Stearns Securities Corp 14.09%
Class B FBO 001-00279-10 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Ed Blakey Investments LLC 10.61%
1314 Bay Ridge Drive (beneficial
Benton, LA 71006-3482 ownership)
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.43%
FBO 610-49812-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Focus List Portfolio, Bear Stearns Securities Corp 18.80%
Class C FBO 001-00279-10 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Balanced Portfolio, Class A Bear Stearns Securities Corp 17.06%
FBO 051-26132-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 16.07%
FBO 028-29991-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 15.27%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Balanced Portfolio, Class B Bear Stearns Securities Corp 33.72%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Balanced Portfolio, Class C Bear Stearns Securities Corp 48.00%
FBO 001-00315-16 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
First Clearing Corporation 12.90%
A C 4113-3712
Joe A. Dewberry
4265 County Road 268
Five Points, AL 36855-2801
- -------------------------------------------------------------------------------
Balanced Portfolio Class Y Bear Stearns Securities Corp 18.08%
FBO 049-40122-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 13.94%
FBO 049-40474-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 13.75%
FBO 051-32810-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 10.48%
FBO 049-40526-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 9.93%
FBO 051-37445-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Portfolio and class Name and address Percentage owned
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.74%
FBO 051-37549-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
International Equity Bear Stearns Securities Corp 24.76%
Portfolio, Class A FBO 037-13145-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 17.13%
FBO 001-00317-14 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 12.88%
FBO 049-40985-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 9.35%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 8.19%
FBO 226-00040-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
Bear Stearns Securities Corp 5.62%
FBO 037-13788-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
International Equity Bear Stearns Securities Corp 59.57%
Portfolio, Class B FBO 001-00317-14 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
International Equity Bear Stearns Securities Corp 65.73%
Portfolio, Class C FBO 001-00317-14 (beneficial
1 Metrotech Center North ownership)
Brooklyn, NY 11201-3859
- -------------------------------------------------------------------------------
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CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT,
COUNSEL AND INDEPENDENT AUDITORS
CTC, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate
of Bear Stearns, is the custodian for each Portfolio other than the EMD
Portfolio. Under a custody agreement, CTC holds each Portfolio's securities and
keeps all necessary accounts and records. For its services, each Portfolio pays
CTC an annual fee of the greater of 0.015% of the value of the domestic assets
held in custody or $5,000, such fee to be payable monthly based upon the total
market value of such assets, as determined on the last business day of the
month. In addition, CTC receives certain securities transactions charges that
are payable monthly.
Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, is the custodian of the EMD Portfolio's securities and cash
and also maintains the Portfolio's accounting records. Brown Brothers Harriman &
Co. has appointed sub-custodians from time to time to hold certain securities
purchased by the Portfolio in foreign countries and to hold cash and currencies
for the Portfolio.
PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington,
Delaware 19809, is each Portfolio's transfer agent, dividend disbursing agent
and registrar. Neither CTC nor PFPC participates in determining the investment
policies of any Portfolio or which securities are to be purchased or sold by any
Portfolio.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Trust.
Deloitte & Touche LLP, Two World Financial Center, New York, New
York 10281-1434, independent auditors, are the independent auditors of the
Trust.
FINANCIAL STATEMENTS
The Trust's annual report to shareholders, and the annual report of
BSIT, with respect to the EMD Portfolio, for the fiscal year ended March 31,
1999 are separate documents supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference into this SAI.
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<PAGE>
Appendix
The following describes ratings assigned to debt securities by S&P,
Moody's, Fitch IBCA, Duff and Thomson BankWatch.
S&P Bond Ratings
AAA. Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC and C. Debt rated in these categories is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation, and C the highest degree of speculation. While
such debt likely will have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI. The rating CI is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
S&P's letter ratings may be modified by the addition of a plus (+)
or minus (-) sign designation, which is used to show relative standing within
the major rating categories, except in the AAA (Prime Grade) category.
S&P Commercial Paper Ratings
A-1. The designation A-1 indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation.
A-2. Capacity for timely payment on issues with an A-2 designation
is strong. However, the relative degree of safety is not as high as for issues
designated A-1.
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
A-1
<PAGE>
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds that are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
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.
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P-2. Issuers (or relating supporting institutions) rated Prime-2
(P-2) have a strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch IBCA International Credit Ratings
Fitch IBCA's international credit ratings are applied to the
spectrum of corporate, structured, and public finance. They cover sovereign
(including supranational and subnational), financial, bank, insurance, and other
corporate entities and the securities they issue, as well as municipal and other
public finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
International credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
Fitch IBCA International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative, "BB' ratings indicate that there is a possibility of
credit risk developing particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
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B Highly speculative, `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates that
default of some king appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values are
highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of
their obligations. Entities rated `DDD' have the highest prospect for resumption
of performance or continued operation with or without a formal reorganization
process. Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.
Fitch IBCA International Short-Term Credit Ratings
A short term rating has a time horizon of less than 12 months for
most obligations, or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; they may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic obligations.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Fitch IBCA may append a "+" or "-" to a rating to denote relative
status within major rating categories. Such suffixes are not added to the `AAA'
long-term rating category, to categories below `CCC', or to short-term ratings
other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
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RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Duff Bond Ratings
AAA. Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA. Bonds rated AA are considered high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A. Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB. Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
BB, B, CCC, DD, and DP. Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and may be in default or have considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
Duff Commercial Paper Ratings
Duff-1. The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty
of timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor.
Duff-2. Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound liquidity factors and
company fundamentals. Risk factors are small.
Thomson BankWatch Bond Ratings
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long-term debt and
preferred stock which are issued by U.S. commercial banks, thrifts and non-bank
banks; non-U.S. 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.
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A. The designation indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB. The lowest investment-grade category; indicates an
acceptable capacity to repay principal and interest. "BBB" issues are more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BB. While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations.
B. Issues rated "B" show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
CCC. Issues rated "CCC" clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
CC. "CC" is applied to issues that are subordinate to other
obligations rated "CCC" and are afforded less protection in the event of
bankruptcy or reorganization.
D. In default
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.
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