-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BLq5P1hHtOhbdGWbDjwxVDuR8Lsc0nlE+Wb+Lw8YtRADyogFJtUVBEy1s+4CzzeD A+sY8TzRdWLOszswGdJJcA== 0000912057-97-019204.txt : 19970603 0000912057-97-019204.hdr.sgml : 19970603 ACCESSION NUMBER: 0000912057-97-019204 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970602 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS FUNDS CENTRAL INDEX KEY: 0000931145 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-08798 FILM NUMBER: 97617651 BUSINESS ADDRESS: STREET 1: 245 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10167 MAIL ADDRESS: STREET 2: 245 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10167 N-30D 1 N-30D BEAR STEARNS The Bear Stearns Funds 245 PARK AVENUE NEW YORK, NY 10167 1.800.766.4111 Robert S. Reitzes Chairman of the Board and President Peter B. Fox Executive Vice President William J. Montgoris Executive Vice President Peter M. Bren Trustee Alan J. Dixon Trustee John R. McKernan, Jr. Trustee M.B. Oglesby, Jr. Trustee Stephen A. Bornstein Vice President Donalda L. Fordyce Vice President Frank J. Maresca Vice President and Treasurer Ellen T. Arthur Secretary Vincent L. Pereira Assistant Treasurer Eileen M. Coyle Assistant Secretary INVESTMENT ADVISER SUB-INVESTMENT ADVISER AND ADMINISTRATOR Symphony Asset Management Bear Stearns Funds 555 California Street Management Inc. Suite 2975 245 Park Avenue San Francisco, CA 94104 New York, NY 10167 DISTRIBUTOR CUSTODIAN Bear, Stearns & Co. Inc. Custodial Trust Company 245 Park Avenue 101 Carnegie Center New York, NY 10167 Princeton, NJ 08540 TRANSFER AND DIVIDEND COUNSEL DISBURSEMENT AGENT Kramer, Levin, Naftalis & Frankel PFPC Inc. 919 Third Avenue Bellevue Corporate Center New York, NY 10022 400 Bellevue Parkway Wilmington, DE 19809 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, NY 10281 This report is submitted for the general information of the shareholders of the Portfolio. It is not authorized for distribution to prospective investors in the Portfolio unless it is preceded or accompanied by a current prospectus which includes details regarding the Portfolio's objectives, policies, sales commissions and other information. Total investment return is based on historical results and is not intended to indicate future performance. The investment return and principal value of an investment in the Portfolio will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than original cost. BSF-R-010-04 THE INSIDERS SELECT FUND ANNUAL REPORT MARCH 31, 1997 THE BEAR STEARNS FUNDS The Insiders Select Fund LETTER TO SHAREHOLDERS April 21, 1997 Dear Shareholders: We are pleased to present the annual report to shareholders for The Insiders Select Fund (the "Portfolio") for the fiscal year ended March 31, 1997. For this fiscal year, the Portfolio's class A shares (without giving effect to the sales charge) had a total return of 18.31%*, the class C shares (without giving effect to the contingent deferred sales charge) had a total return of 17.69% and the class Y shares returned 18.81%. The Portfolio's benchmark, the S&P 500 Composite Index (the "S&P 500"), returned 19.73% for the period. Additional performance data for each class of shares can be found in the "Financial Highlights" section of this report. We lagged our benchmark due to the fact that roughly 20% of the Portfolio was comprised of mid-cap stocks, which, as a whole, underperformed the larger stocks represented in the S&P 500. The Insiders Select Fund seeks to invest in companies where corporate insider accumulation is coupled with attractive stock valuation. Insiders include corporate officers and directors, as well as major shareholders. Insider accumulation has been quite selective over the past 12 months as the bull market in equities has driven up prices in many stocks. Insiders tend to be value-oriented investors and as such, find bargain-hunting difficult in a raging bull market. However, the correction in the stock market in late March made valuations more favorable. During the last quarter, our focus was on selectively accumulating stocks in the financial services, retail, pharmaceutical and technology sectors. Despite the fact that many of these stocks performed well over the past year, we think they still offer good earnings growth potential. We continue to favor smaller regional banks, many of which remain reasonably priced. Many health-care stocks have underperformed the market over the past year, and we are investing in stocks of those companies where insider accumulation is picking up. Looking ahead, we will continue to invest in sectors where insider accumulation is strong. We expect insider buying activity to pick up if the equity market corrects further. We value the confidence you have placed in us and would be pleased to address any questions or concerns you may have. Please feel free to call us at 1-800-766-4111. Sincerely, [SIG] [SIG] Robert S. Reitzes Praveen Gottipalli, Portfolio Manager Chairman of the Board and President Symphony Asset Management The Bear Stearns Funds Sub-Investment Adviser
* For the 12 months ended March 31, 1997, the Portfolio's class A shares had a total return of 12.69% including the initial maximum 4.75% sales charge. 1 THE BEAR STEARNS FUNDS The Insiders Select Fund COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS A SHARES CLASS C SHARES S&P 500 COMPOSITE INDEX June 16, 1995 $9,525.00 $10,000.00 $10,000.00 June 30, 1995 $9,580.56 $10,066.66 $10,099.36 Sept. 30, 1995 $10,469.56 $10,975.00 $10,900.86 Dec. 31, 1995 $10,802.30 $11,316.66 $11,554.74 March 31, 1996 $11,120.01 $11,633.33 $12,154.46 June 30, 1996 $11,683.95 $12,000.00 $12,688.09 Sept. 30, 1996 $12,208.18 $12,733.33 $13,064.72 Dec. 31, 1996 $13,111.41 $13,662.60 $14,122.63 Mar. 31, 1997 $13,157.00 $13,691.00 $14,490.67 $9,525 Investment made on June 16, 1995 Past performance is not predictive of future performance CONSUMER PRICE INDEX June 16, 1995 $10,000.00 June 30, 1995 $10,026.30 Sept. 30, 1995 $10,072.32 Dec. 31, 1995 $10,131.49 March 31, 1996 $10,230.11 June 30, 1996 $10,302.43 Sept. 30, 1996 $10,381.33 Dec. 31, 1996 $10,466.80 Mar. 31, 1997 $10,512.82 $9,525 Investment made on June 16, 1995 Past performance is not predictive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL (3) ----------------- ------------- The Insiders Select Fund(2) Class A shares(4)............................................ 12.69% 16.52% Class C shares............................................... 17.69 19.13 S&P 500 Composite Index(1)....................................... 19.73 22.96 Consumer Price Index(1).......................................... 2.76 2.83
- --------- (1) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses to maintain the expense limitation, as set forth in the notes to financial statements. Total returns shown include fee waivers and reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3) For the period June 16, 1995 (commencement of investment operations) through March 31, 1997. (4) Reflects the initial maximum 4.75% sales charge. Without the applicable sales charge, the average annual total returns would have been 18.31% and 16.52%, respectively, for each period shown. 2 THE BEAR STEARNS FUNDS The Insiders Select Fund COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS Y SHARES S&P 500 COMPOSITE INDEX Jun 20, 1995 10,000 10,000 Jun 30, 1995 9,967 10,012 Sept. 30, 1995 10,891 10,792 Dec. 31, 1995 11,259 11,440 Mar. 31, 1996 11,598 12,051 Jun 30, 1996 12,202 12,590 Sept. 30, 1996 12,756 12,975 Dec. 31, 1996 13,723 14,054 Mar. 31, 1997 13,779 14,428 Past performance is not predivtive of future performance CONSUMER PRICE INDEX Jun 20, 1995 10,000 Jun 30, 1995 10,027 Sept. 30, 1995 10,073 Dec. 31, 1995 10,132 Mar. 31, 1996 10,231 Jun 30, 1996 10,303 Sept. 30, 1996 10,382 Dec. 31, 1996 10,467 Mar. 31, 1997 10,513 Past performance is not predivtive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL (3) ----------------- ------------- The Insiders Select Fund(2) Class Y shares............................................... 18.81% 19.69% S&P 500 Composite Index(1)....................................... 19.73 22.62 Consumer Price Index(1).......................................... 2.76 2.84
- --------- (1) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur expenses and/or are not available for investment. (2) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes for the financial statements. Total returns shown include fee waivers and reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3) For the period June 20, 1995 (initial public offering date) through March 31, 1997. 3 THE BEAR STEARNS FUNDS The Insiders Select Fund MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Aerospace & Defense (5.35%) 5.35% Banks (6.36%) 6.36% Chemicals & Fertilizers (1.14%) 1.41% Computers & Office Equipment (3.14%) 3.14% Computer Services (2.76%) 2.76% Credit & Finance (10.23%) 10.23% Drugs & Hospital Supplies (12.97%) 12.97% Electrical Equipment (1.82%) 1.82% Electronics (4.27%) 4.27% Entertainment & Liesure (1.54%) 1.54% Healthcare (2.53%) 2.53% Lodging (2.32%) 2.32% Miscellaneous Manufacturing (1.94%) 1.94% Oil & Natural Gas (11.76%) 11.76% Publishing - Newspaper (1.34%) 1.34% Retailing - Department Stores (3.68%) 3.68% Retailing - Grocery Stores (3.75%) 3.75% Telecommunications (3.90%) 3.90% Tools (1.18%) 1.18% Cash & Cash Equivalents (4.21%) 4.21% Other (13.54%) 13.54%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ---- -------------------------------------------------- --------------------------- ---------- 1. Merck & Co., Inc. ................................ Drugs & Hospital Supplies 3.65 2. Safeway Inc. ..................................... Retailing -- Grocery Stores 2.77 3. Texaco Inc. ...................................... Oil & Natural Gas 2.77 4. Microsoft Corp. .................................. Computer Services 2.76 5. Mobil Corp. ...................................... Oil & Natural Gas 2.72 6. Johnson & Johnson................................. Drugs & Hospital Supplies 2.65 7. Travelers Group, Inc. ............................ Credit & Finance 2.65 8. Intel Corp. ...................................... Electronics 2.62 9. City National Corp. .............................. Banks 2.39 10. Boeing Co. (The).................................. Aerospace & Defense 2.29
4 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS--95.79% AEROSPACE & DEFENSE - 5.35% 5,800 Boeing Co. (The) ........................................... $ 572,025 2,000 General Dynamics Corp. ..................................... 134,750 5,500 Rockwell International Corp. ............................... 356,812 3,600 United Technologies Corp. .................................. 270,900 ----------- 1,334,487 ----------- APPLIANCES - HOUSEHOLD - 0.46% 5,600 Maytag Corp. ............................................... 115,500 ----------- AUTOMOTIVE PARTS & EQUIPMENT - 0.73% 3,500 TRW Inc. ................................................... 181,125 ----------- BANKS - 6.36% 4,100 BankAmerica Corp. .......................................... 413,075 27,100 City National Corp. ........................................ 596,200 2,100 First American Corp. - Tennessee.*.......................... 133,613 1,300 Republic New York Corp. .................................... 114,563 7,500 Summit Bancorp ............................................. 328,125 ----------- 1,585,576 ----------- BUILDING & CONSTRUCTION PRODUCTS - 0.57% 3,800 Lowes Companies ............................................ 142,025 ----------- CASINO SERVICES - 0.43% 6,600 International Game Technology .............................. 106,425 ----------- CHEMICALS & FERTILIZERS - 1.41% 6,100 Cytec Industries Inc.*...................................... 231,038 2,700 Praxair, Inc. .............................................. 121,163 ----------- 352,201 ----------- COMMERCIAL SERVICES - 0.96% 4,900 Dun & Bradstreet Corp. ..................................... 124,338 5,500 Ogden Corp. ................................................ 116,188 ----------- 240,526 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMPUTERS & OFFICE EQUIPMENT - 3.14% 6,500 Cadence Design Systems, Inc.*............................... $ 223,437 7,900 Data General Corp.*......................................... 134,300 3,200 Pitney Bowes, Inc. ........................................ 188,000 5,300 Seagate Technology, Inc.*................................... 237,838 ----------- 783,575 ----------- COMPUTER SERVICES - 2.76% 7,500 Microsoft Corp.*............................................ 687,656 ----------- COSMETICS & TOILETRIES - 0.44% 4,200 Alberto-Culver Co., Class B ................................ 109,725 ----------- CREDIT & FINANCE - 10.23% 8,800 Conseco Inc. ............................................... 313,500 8,500 Equitable Companies, Inc. .................................. 231,625 4,500 Freemont General Corp. ..................................... 126,563 5,900 Morgan Stanley Group Inc. .................................. 346,625 3,100 NAC Re Corp. ............................................... 110,437 7,700 Price (T. Rowe) Associates ................................. 285,862 3,400 Student Loan Marketing Association ......................... 323,850 4,000 SunAmerica Inc. ............................................ 150,500 13,800 Travelers Group, Inc. ...................................... 660,662 ----------- 2,549,624 ----------- DIVERSIFIED OPERATIONS - 0.92% 2,300 Kansas City Southern Industries, Inc. ...................... 115,000 2,100 Tyco International Ltd. .................................... 115,500 ----------- 230,500 ----------- DRUGS & HOSPITAL SUPPLIES - 12.97% 4,400 Abbott Laboratories ........................................ 246,950 3,700 Becton, Dickinson & Co. .................................... 166,500 7,200 Bristol-Myers Squibb Co. ................................... 424,800 6,700 Eli Lilly & Co. ............................................ 551,075 12,500 Johnson & Johnson .......................................... 660,938 10,800 Merck & Co.,Inc. ........................................... 909,900 4,100 Monsanto Co. ............................................... 156,825 1,600 Schering-Plough Corp. ...................................... 116,400 ----------- 3,233,388 -----------
The accompanying notes are an integral part of the financial statements. 5 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) ELECTRICAL EQUIPMENT - 1.82% 1,500 Harris Corp. ............................................... $ 115,312 5,000 Honeywell, Inc. ............................................ 339,375 ----------- 454,687 ----------- ELECTRONICS - 4.27% 2,300 Applied Materials, Inc.*.................................... 106,663 4,700 Intel Corp. ................................................ 653,888 4,000 Solectron Corp.*............................................ 200,500 1,400 Texas Instruments, Inc. .................................... 104,825 ----------- 1,065,876 ----------- ELECTRONICS - MILITARY - 0.96% 6,400 Coltec Industries, Inc.*.................................... 118,400 5,200 Tracor, Inc.*............................................... 120,900 ----------- 239,300 ----------- ENGINES - COMBUSTION - 0.47% 2,300 Cummins Engine Co., Inc. ................................... 117,875 ----------- ENTERTAINMENT & LEISURE - 1.54% 4,200 Brunswick Corp. ............................................ 112,875 7,500 MGM Grand, Inc.*............................................ 271,875 ----------- 384,750 ----------- FOOD - MISCELLANEOUS/DIVERSIFIED - 0.69% 2,200 Ralston-Ralston Purina Group ............................... 171,875 ----------- HEALTHCARE - 2.53% 16,500 Humana, Inc. ............................................... 363,000 5,600 United Healthcare Corp. .................................... 266,700 ----------- 629,700 ----------- HUMAN RESOURCES - 0.43% 6,700 Olsten Corp. ............................................... 108,038 ----------- INSTRUMENTS - SCIENTIFIC - 0.44% 1,700 Perkin-Elmer Corp. ......................................... 109,437 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ LODGING - 2.32% 14,900 Hilton Hotels Corp. ........................................ $ 361,325 6,500 Promus Hotel Corp.*......................................... 216,125 ----------- 577,450 ----------- MACHINERY - FARM - 1.14% 2,700 Deere & Co. ................................................ 117,450 5,500 Dresser Industries, Inc. ................................... 166,375 ----------- 283,825 ----------- MACHINERY - INDUSTRIAL - 0.62% 2,300 Dover Corp. ................................................ 120,750 800 Ingersoll-Rand Co. ......................................... 34,900 ----------- 155,650 ----------- MISCELLANEOUS MANUFACTURING - 1.94% 3,500 Case Corp. ................................................. 177,625 8,400 Harsco Corp. ............................................... 305,550 ----------- 483,175 ----------- METAL PROCESSORS & FABRICATORS - 0.89% 4,300 Allegheny Teledyne Inc. .................................... 120,937 3,300 Trinity Industries.......................................... 100,238 ----------- 221,175 ----------- OIL & NATURAL GAS - 11.76% 3,200 Baker Hughes, Inc. ......................................... 122,800 2,800 Columbia Gas Systems, Inc. ................................. 162,050 5,200 Mobil Corp. ................................................ 679,250 13,900 Oneok, Inc. ................................................ 361,400 3,900 Pacific Enterprises ........................................ 117,975 5,500 Rowan Companies, Inc.*...................................... 124,437 2,300 Royal Dutch Petroleum Co. .................................. 402,500 1,500 Schlumberger, Ltd. ......................................... 160,875 6,300 Texaco Inc. ................................................ 689,850 2,400 Tidewater, Inc. ............................................ 110,400 ----------- 2,931,537 ----------- PAPER & PAPER RELATED PRODUCTS - 1.12% 2,800 Kimberly-Clark Corp. ....................................... 278,250 -----------
The accompanying notes are an integral part of the financial statements. 6 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) PUBLISHING - BOOKS - 0.96% 4,700 McGraw-Hill Companies, Inc. ................................ $ 240,287 ----------- PUBLISHING - NEWSPAPER - 1.34% 5,700 Media General Inc., Class A ................................ 161,738 500 Washington Post Co. ........................................ 172,000 ----------- 333,738 ----------- RESPIRATORY PRODUCTS - 0.47% 6,700 Nellcor Puritan Bennett Inc.*............................... 118,088 ----------- RETAILING - DEPARTMENT STORES - 3.68% 6,600 Costco Inc.*................................................ 182,325 6,500 Federated Department Stores, Inc.*.......................... 213,687 3,500 Fred Meyer, Inc.*........................................... 144,375 7,500 Sears, Roebuck & Co. ....................................... 376,875 ----------- 917,262 ----------- RETAILING - GROCERY STORES - 3.75% 5,500 American Stores, Inc. ...................................... 244,750 14,900 Safeway Inc.*............................................... 690,988 ----------- 935,738 ----------- TELECOMMUNICATIONS - 3.90% 800 360 Degrees Communications Co.*............................. 13,800 6,700 Equifax Inc. ............................................... 182,575 11,300 Loral Space & Communications*............................... 159,612 11,100 Octel Communications Corp.*................................. 176,212 6,500 SBC Communications Inc. .................................... 342,062 6,500 Scientific-Atlanta Inc. .................................... 99,125 ----------- 973,386 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ TOOLS - 1.18% 2,100 Snap-On, Inc. .............................................. $ 81,375 5,600 Stanley Works (The) ........................................ 212,100 ----------- 293,475 ----------- UTILITIES - 0.84% 6,100 Texas Utilities Co. ....................................... 208,925 ----------- Total Common Stocks (cost - $21,642,520)........................................ 23,885,832 ----------- SHORT-TERM INVESTMENTS - 3.33% INVESTMENT COMPANIES - 3.33% 581,257 Federated Investors, Trust for Short-Term U.S. Government Securities**................................................ 581,257 84,713 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares**...................................... 84,713 164,645 The Treasurers Fund Inc., U.S. Treasury Money Market Portfolio**................................................. 164,645 ----------- Total Short-Term Investments (cost - $830,615)........................................... 830,615 ----------- Total Investments (cost - $22,473,135) - 99.12%............................... 24,716,447 Other assets in excess of liabilities - 0.88%............... 218,628 ----------- Net Assets - 100.00%........................................ $24,935,075 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 7 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 ASSETS Investments, at value (cost - $22,473,135)...... $24,716,447 Receivable for investments sold................. 210,209 Receivable for Portfolio shares sold............ 76,276 Receivable from investment adviser.............. 32,013 Dividends and interest receivable............... 31,609 Deferred organization expenses and other assets......................................... 164,856 ----------- Total assets.............................. 25,231,410 ----------- LIABILITIES Payable for investments purchased............... 154,532 Distribution fee payable (class A and C shares)........................................ 41,745 Payable for Portfolio shares repurchased........ 19,674 Administration fee payable...................... 3,326 Custodian fee payable........................... 3,583 Accrued expenses................................ 73,475 ----------- Total liabilities......................... 296,335 ----------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 1,714 Paid-in capital................................. 21,598,953 Accumulated net realized gain from investments.................................... 1,091,096 Net unrealized appreciation on investments...... 2,243,312 ----------- Net assets................................ $24,935,075 ----------- ----------- CLASS A Net assets...................................... $13,859,782 ----------- Shares of beneficial interest outstanding....... 950,505 ----------- Net asset value per share....................... $14.58 ----------- ----------- Maximum offering price per share (net asset value plus sales charge of 4.75%* of the offering price)................................ $15.31 ----------- ----------- CLASS C Net assets...................................... $ 9,518,756 ----------- Shares of beneficial interest outstanding....... 657,363 ----------- Net asset value and offering price per share**........................................ $14.48 ----------- ----------- CLASS Y Net assets...................................... $ 1,556,537 ----------- Shares of beneficial interest outstanding....... 106,150 ----------- Net asset value, offering and redemption value per share...................................... $14.66 ----------- -----------
- -------- * On investments of $50,000 or more, the offering price is reduced. ** Redemption price per share is equal to the net asset value per share less any applicable contingent deferred sales charge. The accompanying notes are an intergral part of the financial statements. 8 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 INVESTMENT INCOME Dividends (net of withholding taxes of $879).... $ 359,727 Interest........................................ 60,861 ---------- 420,588 ---------- EXPENSES Advisory fees................................... 182,313 Distribution fees - class A..................... 65,276 Distribution fees - class C..................... 94,265 Transfer agent fees and expenses................ 125,229 Accounting fees................................. 107,174 Federal and state registration fees............. 72,508 Reports and notices to shareholders............. 52,000 Legal and auditing fees......................... 43,000 Amortization of organization expenses........... 36,394 Administration fees............................. 35,873 Custodian fees and expenses..................... 22,999 Insurance expenses.............................. 16,199 Trustees' fees and expenses..................... 3,401 Other........................................... 5,386 ---------- Total expenses before waivers and reimbursements............................. 862,017 Less: waivers and reimbursements.......... (426,258) ---------- Total expenses after waivers and reimbursements............................. 435,759 ---------- Net investment loss............................. (15,171) ---------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND SECURITY SOLD SHORT Net realized gain from investments.............. 3,006,957 Net change in unrealized appreciation on: Investments................................... 757,844 Security sold short........................... 34,192 ---------- Net realized and unrealized gain on investments and security sold short........................ 3,798,993 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $3,783,822 ---------- ----------
The accompanying notes are an intergral part of the financial statements. 9 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FOR THE JUNE 16, FISCAL YEAR 1995* ENDED THROUGH MARCH 31, MARCH 31, 1997 1996 ------------ ------------ INCREASE IN NET ASSETS FROM OPERATIONS Net investment income/(loss).................... $ (15,171) $ 28,761 Net realized gain from investments.............. 3,006,957 891,092 Net change in unrealized apppreciation on investments and security sold short............ 792,036 1,451,276 ------------ ------------ Net increase in net assets resulting from operations..................................... 3,783,822 2,371,129 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class A shares................................ (8,066) (8,222) Class Y shares................................ (1,784) (3,479) ------------ ------------ (9,850) (11,701) ------------ ------------ Net realized capital gains Class A shares................................ (1,540,623) -- Class C shares................................ (1,088,043) -- Class Y shares................................ (170,326) -- ------------ ------------ (2,798,992) -- ------------ ------------ SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 7,652,245 26,820,998 Cost of shares repurchased...................... (9,576,787) (5,837,996) Shares issued in reinvestment of dividends...... 2,531,683 10,500 ------------ ------------ Net increase in net assets derived from shares of beneficial interest transactions............ 607,141 20,993,502 ------------ ------------ Total increase in net assets.................... 1,582,121 23,352,930 NET ASSETS Beginning of period............................. 23,352,954 24 ------------ ------------ End of period................................... $24,935,075 $23,352,954** ------------ ------------ ------------ ------------
- -------- * Commencement of investment operations. ** Includes undistributed net investment income of $17,060. The accompanying notes are an intergal part of the financial statements. 10 THE BEAR STEARNS FUNDS The Insiders Select Fund FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD JUNE 16, 1995* FOR THE FISCAL YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 --------------------------------- --------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C -------- --------- -------- -------- --------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period........................... $ 14.00 $ 13.96 $ 14.02 $ 12.00 $ 12.00 -------- --------- -------- -------- --------- Net investment income/(loss)(1)................................ 0.02 (0.06) 0.08 0.03 (0.01) Net realized and unrealized gain on investments and security sold short(2)........................ 2.48 2.47 2.49 1.98 1.97 -------- --------- -------- -------- --------- Net increase in net assets resulting from operations........... 2.50 2.41 2.57 2.01 1.96 -------- --------- -------- -------- --------- Dividends and distributions to shareholders from Net investment income........................................ (0.01) -- (0.02) (0.01) -- Net realized capital gains................................... (1.91) (1.89) (1.91) -- -- -------- --------- -------- -------- --------- (1.92) (1.89) (1.93) (0.01) -- -------- --------- -------- -------- --------- Net asset value, end of period................................. $ 14.58 $ 14.48 $ 14.66 $ 14.00 $ 13.96 -------- --------- -------- -------- --------- -------- --------- -------- -------- --------- Total investment return(3)..................................... 18.31% 17.69% 18.81% 16.75% 16.33% -------- --------- -------- -------- --------- -------- --------- -------- -------- --------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)...................... $13,860 $ 9,519 $ 1,557 $12,132 $ 9,928 Ratio of expenses to average net assets(1)..................... 1.65% 2.15% 1.15% 1.65%(5) 2.15%(5) Ratio of net investment income/(loss) to average net assets(1)..................................................... 0.11% (0.38)% 0.60% 0.38%(5) (0.12)%(5) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements............... 1.82% 1.81% 1.81% 1.87%(5) 1.92%(5) Portfolio turnover rate........................................ 128.42% 128.42% 128.42% 93.45%(6) 93.45%(6) Average commission rate per share(7)........................... $0.0264 $0.0264 $0.0264 $0.0294 $0.0294 FOR THE PERIOD JUNE 20, 1995* THROUGH MARCH 31, 1996 --------------- CLASS Y --------------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period........................... $ 12.12 ------- Net investment income/(loss)(1)................................ 0.07 Net realized and unrealized gain on investments and security sold short(2)........................ 1.87 ------- Net increase in net assets resulting from operations........... 1.94 ------- Dividends and distributions to shareholders from Net investment income........................................ (0.04) Net realized capital gains................................... -- ------- (0.04) ------- Net asset value, end of period................................. $ 14.02 ------- ------- Total investment return(3)..................................... 15.98%(4) ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)...................... $ 1,293 Ratio of expenses to average net assets(1)..................... 1.15%(5) Ratio of net investment income/(loss) to average net assets(1)..................................................... 0.97%(4)(5) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements............... 2.04%(4)(5) Portfolio turnover rate........................................ 93.45%(6) Average commission rate per share(7)........................... $0.0294
- --------- * Commencement of investment operations. Class Y shares commenced its initial public offering on June 20, 1995. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A and C shares, due to timing differences in the commencement of the initial public offering of class Y shares. (5) Annualized. (6) Not annualized. (7) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period. The accompanying notes are an integral part of the financial statements. 11 THE BEAR STEARNS FUNDS The Insiders Select Fund NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business trust on September 29, 1994 and is registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company. The Fund currently has five separate portfolios in operation: three diversified portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio and two non-diversified portfolios, The Insiders Select Fund ("Insiders" or the "Portfolio") and S&P STARS Portfolio (collectively, the "Portfolios"). Each portfolio is treated as a separate entity for certain matters under the Investment Company Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As of the date hereof, the Portfolio offers three classes of shares, which have been designated as class A, C and Y shares. ORGANIZATIONAL MATTERS--Prior to commencing investment operations on June 16, 1995, the Portfolio did not have any transactions other than those relating to organizational matters and the sale of one class A share and one class C share of beneficial interest of the Portfolio to Bear, Stearns & Co. Inc. ("Bear Stearns" or the "Distributor"). Costs of $181,965 which were incurred by the Portfolio in connection with the organization, registration with the Commission and initial public offering of its shares, have been deferred and are being amortized using the straight-line method over the period of benefit not exceeding sixty months, beginning with the commencement of investment operations of the Portfolio. In the event that the Distributor or any transferee of the Distributor redeems any of its original shares in the Portfolio prior to the end of the sixty month period, the proceeds of the redemption payable in respect of such shares shall be reduced by the pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of the redemption) of the unamortized deferred organization expenses as of the date of such redemption. In the event that the Portfolio is liquidated prior to the end of the sixty month period, the Distributor or the transferee of the Distributor shall bear the unamortized deferred organization expenses. PORTFOLIO VALUATION--The Portfolio calculates the net asset value of and completes orders to purchase or repurchase its shares of beneficial interest on each business day, with the exception of those days on which the New York Stock Exchange is closed. Portfolio securities, including covered call options written by the Portfolio, are valued at the last sale price on the securities exchange or national securities market on which such securities primarily are traded. Securities not listed on an exchange or national securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices, except in the case of open short positions where the asked price is used for valuation purposes. Bid price is used when no asked price is available. Short-term investments are carried at amortized cost, which approximates market value, unless this method does not represent fair 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 or under the direction of the Portfolio's Board of Trustees. Expenses and fees, including the investment advisory, administration and distribution fees, are accrued daily and taken into account for the purpose of determining the net asset value of the Portfolio's shares. Because of the differences in operating expenses incurred by each class, the per share net asset value of each class will differ. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are recorded on the trade date (the date on which the order to buy or sell is executed). Realized gains and losses from securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. The Portfolio's net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day (after adjusting for current capital share activity of the respective classes). 12 SHORT SELLING--When the Portfolio makes a short sale, an amount equal to the proceeds received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the short sale. Short sales represent obligations of the Portfolio to make future delivery of specific securities and, correspondingly, create an obligation to purchase the security at market prices prevailing at the later delivery date (or to deliver the security if already owned by the Portfolio). Upon the termination of a short sale, the Portfolio will recognize a gain, limited to the price at which the Portfolio sold the security short, if the market price is less than the proceeds originally received. The Portfolio will recognize a loss, unlimited in magnitude, if the market price at termination is greater than the proceeds originally received. As a result, short sales create the risk that the Portfolio's ultimate obligation to satisfy the delivery requirements may exceed the amount of the proceeds initially received or the liability recorded in the financial statements. The Portfolio had no securities short sold at March 31, 1997. U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all of its taxable income and to comply with the other requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing during each calendar year substantially all of its ordinary income and capital gains, if any, the Portfolio intends not to be subject to a U.S. federal excise tax. DIVIDENDS AND DISTRIBUTIONS--The Portfolio intends to distribute at least annually to shareholders substantially all of its net investment income. Distribution of net realized gains, if any, will be declared and paid at least annually by the Portfolio. Dividends and distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within capital accounts based on their US federal tax-basis treatment; temporary differences do not require reclassification. At March 31, 1997, the Portfolio reclassified within the composition of net assets a net operating loss of $7,961 to accumulated realized gains. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the fiscal year ended March 31, 1997, Bear Stearns Funds Management Inc. ("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., served as the investment adviser pursuant to an Investment Advisory Agreement with the Portfolio. BSFM has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc., as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day investment activities. BSFM and Symphony are referred to herein collectively as the "Advisers." BSFM is entitled to receive from the Portfolio a monthly fee equal to an annual rate of 1.00% of the Portfolio's average daily net assets from which BSFM, in turn, pays Symphony a monthly fee equal to an annual rate of 0.45% of the Portfolio's average daily net assets. In addition, starting in the thirteenth month of operation, BSFM is entitled to a monthly performance adjustment fee which may increase or decrease the total advisory fee by up to 0.50% per year of the value of the Portfolio's average daily net assets. The performance adjustment fee reduced the total advisory fee by $56,841 or 0.24% of the value of the Portfolio's average net assets due to underperformance in comparison to the S&P 500 Composite Index during the period. During the fiscal year ended March 31, 1997, BSFM (or the "Administrator") served as the administrator to the Portfolio pursuant to an Administration Agreement. The Administrator is entitled to receive from the Portfolio a monthly fee equal to an annual rate of 0.15% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Portfolio, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, PFPC Inc. is entitled to receive a monthly fee 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 approximately $100,000 for the Portfolio. During the fiscal year ended March 31, 1997, PFPC Inc. has voluntarily waived a portion of its fee. During the fiscal year ended March 31, 1997, the Adviser has voluntarily undertaken to limit the Portfolio's total operating expenses (exclusive of brokerage commissions, taxes, interest and extraordinary items) to a maximum annual level of 1.65% of the average daily net assets of its class A shares, 2.15% of the average daily net assets of its class C shares and 1.15% of the average daily net assets of its class Y shares. As necessary, this limitation is effected by waivers by the Adviser of its advisory fees and reimbursements of expenses exceeding the advisory fee. For the year ended March 31, 1997, the Adviser waived its advisory fee of $182,313. In addition, the Adviser reimbursed $243,945, in order to maintain the voluntary expense limitation. 13 For the fiscal year ended March 31, 1997, Bear Stearns, an affiliate of the Adviser and the Administrator, earned $8,925 in brokerage commissions from Portfolio transactions executed on behalf of the Portfolio. Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies Inc. and an affiliate of the Adviser and the Administrator, serves as custodian to the Portfolio. DISTRIBUTION PLAN The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan in effect for the fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares. Such fees are based on the average daily net assets in each class of the Portfolio and are accrued daily and paid monthly or at such other intervals as the Board of Trustees may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. For the fiscal year ended March 31, 1997, Bear Stearns earned $159,541 in distribution fees. Bear Stearns uses these fees to pay dealers whose clients hold Portfolio shares and other distribution-related activities. In addition, as Distributor of the Portfolio, Bear Stearns collects the sales charges imposed on sales of the Portfolio's class A shares, and reallows a portion of such charges to dealers through which the sales are made. As a result of an undertaking by the Distributor, it reallowed all of the sales charges to its dealers selling Portfolio shares for the period June 16, 1995 (commencement of investment operations) through September 26, 1995 and the period February 15, 1996 through June 30, 1996. Furthermore, the Distributor has increased the compensation paid to its dealers selling Portfolio shares on net asset value transfers (purchases made by investors with the proceeds from a redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns) from 0.50% to 1.00% beginning April 15, 1996 until further notice. In addition, Bear Stearns advanced 1.00% in sales commissions on the sale of class C shares to dealers at the time of such sales. For the fiscal year ended March 31, 1997, Bear Stearns has advised the Portfolio that it received approximately $163,000 in front-end sales charges resulting from sales of class A shares of the Portfolio. From these fees, Bear Stearns paid such sales charges to dealers which in turn paid commissions to sales persons. In addition, Bear Stearns has advised the Portfolio that during the period, it received approximately $14,300 in contingent deferred sales charges upon certain redemptions by class C shareholders. INVESTMENTS IN SECURITIES For U.S. federal income tax purposes, the cost of securities owned at March 31, 1997 was $22,473,135. Accordingly, the net unrealized appreciation of investments of $2,243,312 was composed of gross appreciation of $2,734,543 for those investments having an excess of value over cost and $491,231 of gross depreciation for those investments having an excess of cost over value. For the fiscal year ended March 31, 1997, aggregate purchases and sales of investment securities (excluding short-term investments) for the Portfolio were $28,876,688 and $31,585,896, respectively. SHARES OF BENEFICIAL INTEREST The Portfolio offers class A, C and Y shares. Class A shares are sold with a front-end sales charge of up to 4.75%. Class C shares are sold with a contingent deferred sales charge ("CDSC") of 1.00% during the first year. There is no sales charge or CDSC on class Y shares, which are offered primarily to institutional investors. At March 31, 1997, there was an unlimited amount of $0.001 par value shares of beneficial interest authorized for the Portfolio, of which Bear Stearns owned one class A share and one class C share of the Portfolio. 14 Transactions in the classes of shares of beneficial interest for the fiscal year ended March 31, 1997 were as follows:
SALES REINVESTMENTS REPURCHASES ---------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- ------ ---------- ------- ---------- Class A shares.................................... 331,726 $ 4,976,082 97,925 $1,381,727 345,460 $5,185,795 Class C shares.................................... 148,520 2,231,793 70,623 991,548 273,058 3,992,295 Class Y shares.................................... 29,508 444,370 11,179 158,408 26,728 398,697
Transactions in the classes of shares of beneficial interest for the period June 16, 1995 (commencement of investment operations) through March 31, 1996 were as follows:
SALES REINVESTMENTS REPURCHASES ---------------------- --------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- ------ ------ ------- ---------- Class A shares.................................... 1,179,727 $15,128,116 537 $7,389 313,951 $4,288,010 Class C shares.................................... 801,060 10,158,978 -- -- 89,783 1,224,227 Class Y shares*................................... 116,322 1,533,904 226 3,111 24,357 325,759
- --------- *Class Y shares commenced its initial public offering on June 20, 1995. CREDIT AGREEMENT The Fund, on behalf of the Portfolio, has entered into a credit agreement with The First National Bank of Boston. S&P STARS Fund, S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio and Bear Stearns Investment Trust, which consists of the Emerging Markets Debt Portfolio, are also parties to the credit agreement. The agreement provides that each party to the credit agreement is permitted to borrow in an amount up to 15% of the value of its total assets. Subject to Board approval and upon making necessary disclosure in its prospectus, each portfolio may, in accordance with the provisions of the credit agreement, borrow up to 25% of the value of its total assets, less all liabilities other than liabilities for borrowed money outstanding at the time. However, at no time is the aggregate outstanding principal amount of all loans to any of the portfolios to exceed $25,000,000. The line of credit will bear interest at the greater of: (i) the annual rate of interest announced from time to time from the bank at its head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or at the borrower's option, the rate quoted by The First National Bank of Boston. Each loan is payable on demand or upon termination of this credit agreement or, for money market loans, on the last day of the interest period and, in any event, not later than 14 days from the date the loan was advanced. The Portfolio uses the facility to borrow money only for temporary or emergency (not leveraging) purposes. The amount outstanding under the line of credit agreement for the Portfolio averaged $2,452 during the fiscal year ended March 31, 1997. The Portfolio did not have any amount outstanding at any month-end under such line of credit agreement during the fiscal year ended March 31, 1997. The average interest rate during the fiscal year ended March 31, 1997, on amounts outstanding under such line of credit agreement, was 8.25%. 15 THE BEAR STEARNS FUNDS The Insiders Select Fund REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholders, The Insiders Select Fund (A series of The Bear Stearns Funds): We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of The Insiders Select Fund (the "Portfolio") as of March 31, 1997, and the related statements of operations, changes in net assets and the financial highlights for the year ended March 31, 1997 and the period June 16, 1995 (commencement of operations) to March 31, 1996. These financial statements and financial highlights are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of The Insiders Select Fund at March 31, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York May 9, 1997 16 THE BEAR STEARNS FUNDS The Insiders Select Fund SHAREHOLDER TAX INFORMATION -- (UNAUDITED) The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of the Portfolio's fiscal year end (March 31, 1997) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the fiscal year ended March 31, 1997, the following dividends and distributions per share were paid by the Portfolio:
ORDINARY INCOME LONG-TERM CAPITAL GAINS - ------------------------------------- ------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ----------- ----------- ----------- --------- --------- --------- $ 1.720 $ 1.700 $ 1.730 $ 0.200 $ 0.019 $ 0.200 - ----------- ----------- ----------- --------- --------- --------- - ----------- ----------- ----------- --------- --------- ---------
The percentage of ordinary income received from The Insiders Select Fund qualifying for the corporate dividends received deduction is 16.86%. All Portfolio dividends were derived from dividend income. Because the Portfolio's fiscal year is not the calendar year, another notification will be sent with respect to calendar year 1997. The second notification, which will reflect the amount to be used by calendar year taxpayers on their U.S. federal income tax returns, will be made in conjunction with Form 1099-DIV and will be mailed in January 1998. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their dividend. They will generally not be entitled to a foreign tax credit or deduction for the withholding taxes paid by the Portfolio. In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Portfolio. 17 BEAR STEARNS The Bear Stearns Funds 245 PARK AVENUE NEW YORK, NY 10167 1.800.766.4111 Robert S. Reitzes Chairman of the Board and President Peter B. Fox Executive Vice President William J. Montgoris Executive Vice President Peter M. Bren Trustee Alan J. Dixon Trustee John R. McKernan, Jr. Trustee M.B. Oglesby, Jr. Trustee Stephen A. Bornstein Vice President Donalda L. Fordyce Vice President Frank J. Maresca Vice President and Treasurer Ellen T. Arthur Secretary Vincent L. Pereira Assistant Treasurer Eileen M. Coyle Assistant Secretary INVESTMENT ADVISER DISTRIBUTOR AND ADMINISTRATOR Bear, Stearns & Co. Inc. Bear Stearns Funds 245 Park Avenue Management Inc. New York, NY 10167 245 Park Avenue New York, NY 10167 CUSTODIAN TRANSFER AND DIVIDEND Custodial Trust Company DISBURSEMENT AGENT 101 Carnegie Center PFPC Inc. Princeton, NJ 08540 Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 COUNSEL INDEPENDENT AUDITORS Deloitte & Touche LLP Kramer, Levin, Naftalis & Frankel Two World Financial Center 919 Third Avenue New York, NY 10281 New York, NY 10022 This report is submitted for the general information of the shareholders of the Portfolio. It is not authorized for distribution to prospective investors in the Portfolio unless it is preceded or accompanied by a current prospectus which includes details regarding the Portfolio's objectives, policies, sales commissions and other information. Total investment return is based on historical results and is not intended to indicate future performance. The investment return and principal value of an investment in the Portfolio will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than original cost. "Standard & Poors[Registered Trademark]", "S&P[Registered Trademark]", and "STARS[Registered Trademark]" are trademarks of the McGraw-Hill Companies, Inc. and have been licensed for use by Bear, Stearns & Co. Inc. S&P STARS Portfolio is not sponsored, managed, advised, sold or promoted by Standard & Poor's. BSF-R-011-04 S&P STARS PORTFOLIO ANNUAL REPORT MARCH 31, 1997 THE BEAR STEARNS FUNDS S&P STARS Portfolio LETTER TO SHAREHOLDERS April 21, 1997 Dear Shareholders: We are pleased to present the annual report to shareholders for the S&P STARS Portfolio (the "Portfolio") for the fiscal year ended March 31, 1997. This was a volatile time for the equity market, particularly the technology sector, which is a core area of concentration for the Portfolio. Although we remain sanguine about the prospects for technology in the long run, the sell-off in this area at the end of March dragged down the Portfolio's performance for the twelve-month period. For the fiscal year ended March 31, 1997, the Portfolio's class A shares (without giving effect to the sales charge) had a total return of 16.87%*, class C shares (without giving effect to the contingent deferred sales charge) had a total return of 16.33% and class Y shares returned 17.48%. The Portfolio's benchmark, the S&P 500 Composite Index, returned 19.73% for the same period. Additional performance data for each class of shares can be found in the "Financial Highlights" section of this report. Since our semi-annual report last fall, the economy has proved to be stronger than we, along with many other market watchers, had expected. Gross Domestic Product growth for the fourth quarter of 1996 was a healthy 3.8%. Despite recent concerns about a pick-up in inflation, we expect growth to remain a moderate 2% to 3% this year with a modest inflation rate of roughly 3%. Factors that should help keep inflation under control include increased global competition and ample production capacity. MAINTAINING A DISCIPLINED STRATEGY Growth stocks, particularly technology issues, corrected in June and July last year, rebounded in the fall, then corrected again in late March. Recognizing that volatility is a characteristic of the kinds of companies we focus on, we will continue to maintain our discipline of concentrating on those areas we believe have the best long-term earnings growth potential -- notably technology and health care. In the technology sector, new holdings include Analog Devices, Inc. (2.06% of the Master Series' net assets), a leader in wireless communications technology; Quantum Corp. (3.55%) and Seagate Technology, Inc. (5.60%), two leading suppliers of disk drives; and Cisco Systems, Inc. (4.01%), the world's largest supplier of high-performance computer inter-networking systems. Significantly, unlike many other fund managers, we held onto some of our key technology positions, such as Intel Corp. (11.81%) and Seagate Technology, Inc. (5.60%), because at recent prices they were selling below their expected growth rates. We added Warner-Lambert Co. (4.82%), which we believe to be poised for significant growth with the recent introduction of two new drugs, Lipitor, a cholesterol-reducing drug, and the diabetes drug Rezulin, both of which quickly gained significant market share. We also saw opportunity in the consolidation occurring in the financial services sector and have added Conseco, Inc. (4.15%), which recently acquired several smaller insurance companies. Our strategy in the months ahead will be to continue to try to identify companies that have solid growth prospects for the following six-to twelve-month period. - -------- * For the fiscal year ended March 31, 1997, the Portfolio's class A shares had a total return of 11.34% including the initial maximum 4.75% sales charge. 1 In conclusion, we value the confidence you have placed in us and would be pleased to address any questions or concerns you may have. Please feel free to call us at 1-800-766-4111. Sincerely, [SIGNATURE] Robert S. Reitzes Chairman of the Board and President The Bear Stearns Funds Portfolio Manager S&P STARS Master Series 2 THE BEAR STEARNS FUNDS S&P STARS Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS CLASS A SHARES CLASS C SHARES S&P 500 COMPOSITE INDEX Apr. 5, 1995 $9,525 June 30, 1995 10,573 11,083 10,848 Sep. 30, 1995 11,446 11,975 11,709 Dec. 31, 1995 11,648 12,170 12,411 Mar. 31, 1996 12,162 12,691 13,074 June 30, 1996 12,307 12,837 13,659 Sep. 30, 1996 13,287 13,836 14,076 Dec. 31, 1996 14,881 15,471 15,247 Mar. 31, 1997 14,209 14,764 15,653 $9,525 Investment made on April 5, 1995 Past performance is not predictive of future performance DOLLARS CONSUMER PRICE INDEX Apr. 5, 1995 $10,000 June 30, 1995 10,079 Sep. 30, 1995 10,126 Dec. 31, 1995 10,178 Mar. 31, 1996 10,284 June 30, 1996 10,364 Sep. 30, 1996 10,430 Dec. 31, 1996 10,522 Mar. 31, 1997 10,568 $9,525 Investment made on April 5, 1995 Past performance is not predictive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- S&P STARS Portfolio(2) Class A shares(4)............................................... 11.34% 19.29% Class C shares.................................................. 16.33 21.60 S&P 500 Composite Index(1).......................................... 19.73 25.23 Consumer Price Index(1)............................................. 2.76 2.81
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses (class A shares reflect the initial maximum 4.75% sales charge). Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and/or reimbursements, total returns would have been lower had there been no assumption of fees and/or expenses in excess of expense limitations. (3)For the period of April 5, 1995 (commencement of investment operations) through March 31, 1997. (4)Reflects the initial maximum 4.75% sales charge. Without the applicable sales charge, the total returns would have been 16.87% and 22.25% respectively, for each period shown. 3 THE BEAR STEARNS FUNDS S&P STARS Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
S&P STARS PORTFOLIO Class Y shares S&P 500 Composite Consumer Price Index August 7, 1995 $10,000 $10,000 $10,000 September 30, 1995 10,241 10,486 10,039 December 31, 1995 10,435 11,115 10,098 March 31, 1996 10,908 11,709 10,197 June 30, 1996 11,054 12,233 10,269 September 30, 1996 11,943 12,607 10,347 December 31, 1996 13,400 13,655 10,433 March 31, 1997 12,816 14,019 10,478 Past performance is not predictive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- S&P STARS Portfolio Class Y shares(2)............................................... 17.48% 16.20% S&P 500 Composite Index(1).......................................... 19.73 22.69 Consumer Price Index(1)............................................. 2.76 2.87
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and/or expense reimbursements, total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period of August 7, 1995 (initial public offering date) through March 31, 1997. 4 THE BEAR STEARNS FUNDS S&P STARS Master Series MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Automotive Equipment 2.61% Banks 6.34% Chemicals & Fertilizers 4.30% Computers & Office Equipment 18.76% Computer Services 4.37% Diversified Operations 5.37% Drugs & Hospital Supplies 6.93% Electronic Measuring Instruments 5.10% Electronics 21.31% Insurance 4.15% Machinery 3.41% Oil - Offshore Drilling 3.89% Restaurants 4.73% Retailing 3.67% Other 5.06%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS ---- -------------------------------------------------- --------------------------- ---------- 1. Intel Corp. ...................................... Electronics 11.81 2. Adaptec, Inc. .................................... Electronics 7.44 3. Seagate Technology, Inc........................... Computers & Office 5.60 Equipment 4. General Electric Co. ............................. Diversified Operations 5.37 5. Vishay Intertechnology, Inc. ..................... Electronic Measuring 5.10 Instruments 6. Warner-Lambert Co. ............................... Drugs & Hospital Supplies 4.82 7. Wendy's International, Inc........................ Restaurants 4.73 8. EMC Corp. ........................................ Computers & Office 4.58 Equipment 9. Citicorp.......................................... Banks 4.51 10. Computer Associates International, Inc. .......... Computer Services 4.37
5 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 ASSETS Investments in S&P STARS Master Series ("Master Series"), at value.................... $ 120,014,527 Receivable for investments sold in Master Series......................................... 1,641,921 Receivable for Portfolio shares sold............ 343,443 Deferred organization expenses and other assets......................................... 156,571 ------------- Total assets.............................. 122,156,462 ------------- LIABILITIES Payable for investments purchased in Master Series......................................... 1,641,921 Payable for Portfolio shares repurchased........ 343,443 Distribution fee payable (class A and C shares)........................................ 189,039 Administration fee payable...................... 17,432 Accrued expenses................................ 88,603 ------------- Total liabilities......................... 2,280,438 ------------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 7,435 Paid-in capital................................. 107,925,894 Accumulated net realized gain from Master Series......................................... 9,987,870 Net unrealized appreciation from Master Series......................................... 1,954,825 ------------- Net assets................................ $ 119,876,024 ------------- ------------- CLASS A Net assets...................................... $ 67,490,866 ------------- Shares of beneficial interest outstanding....... 4,183,005 ------------- Net asset value per share....................... $16.13 Maximum offering price per share (net asset value plus sales charge of 4.75%* of the offering price)................................ $16.93 CLASS C Net assets...................................... $ 37,622,491 ------------- Shares of beneficial interest outstanding....... 2,342,170 ------------- Net asset value and offering price per share**........................................ $16.06 CLASS Y Net assets...................................... $ 14,762,667 ------------- Shares of beneficial interest outstanding....... 909,551 ------------- Net asset value, offering and redemption price per share...................................... $16.23
- -------- * On investments of $50,000 or more, the offering price is reduced. ** Redemption price per share is equal to the net asset value per share less any applicable contingent deferred sales charge. The accompanying notes are an integral part of the financial statements. 6 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 INVESTMENT INCOME Allocated net investment income from Master Series......................................... $ 589,335 ---------- EXPENSES Distribution fees - class A..................... 276,327 Distribution fees - class C..................... 324,164 Transfer agent fees and expenses................ 176,208 Administration fees............................. 149,100 Legal and auditing fees......................... 97,111 Federal and state registration fees............. 82,609 Accounting fees................................. 65,999 Reports and notices to shareholders............. 45,001 Amortization of organization expenses........... 40,719 Trustees' fees and expenses..................... 7,501 Custodian fees and expenses..................... 5,001 Other........................................... 7,001 ---------- Total expenses............................ 1,276,741 ---------- Net investment loss............................. (687,406) ---------- NET REALIZED AND UNREALIZED GAIN FROM MASTER SERIES Net realized gain............................... 16,488,691 Net change in unrealized appreciation........... (4,048,192) ---------- Net realized and unrealized gain from Master Series......................................... 12,440,499 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $11,753,093 ---------- ----------
The accompanying notes are an integral part of the financial statements. 7 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FOR THE APRIL 5, FISCAL 1995* YEAR ENDED THROUGH MARCH 31, MARCH 31, 1997 1996 ------------- ------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment loss............................. $ (687,406) $ (47,440) Net realized gain from Master Series............ 16,488,691 3,768,620 Net change in unrealized appreciation from Master Series.................................. (4,048,192) 6,003,017 ------------- ------------- Net increase in net assets resulting from operations..................................... 11,753,093 9,724,197 ------------- ------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class Y shares.................................. -- (14,755) ------------- ------------- -- (14,755) ------------- ------------- Net realized capital gains Class A shares.................................. (4,448,797) (994,461) Class C shares.................................. (2,375,768) (560,676) Class Y shares.................................. (956,196) (183,942) ------------- ------------- (7,780,761) (1,739,079) ------------- ------------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 66,340,756 86,911,640 Cost of shares repurchased...................... (39,406,235) (14,635,820) Shares issued in reinvestment of dividends...... 7,060,655 1,537,317 ------------- ------------- Net increase in net assets derived from shares of beneficial interest transactions............ 33,995,176 73,813,137 ------------- ------------- Total increase in net assets.................... 37,967,508 81,783,500 NET ASSETS Beginning of period............................. 81,908,516 125,016 ------------- ------------- End of period................................... $ 119,876,024 $ 81,908,516 ------------- ------------- ------------- -------------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 8 THE BEAR STEARNS FUNDS S&P STARS Portfolio FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- Contained below are per share operating performace data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD FOR THE FISCAL APRIL 5, 1995* YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 ------------------------------ ----------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y -------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period.......................... $ 14.92 $ 14.86 $ 14.97 $ 12.00 $ 12.00 $14.13 -------- -------- -------- -------- -------- -------- Net investment income/loss(1).... (0.09) (0.17) (0.02) -- (0.06) 0.07 Net realized and unrealized gain from Master Series(2)........... 2.63 2.62 2.66 3.31 3.28 1.20 -------- -------- -------- -------- -------- -------- Net increase in net assets resulting from operations....... 2.54 2.45 2.64 3.31 3.22 1.27 -------- -------- -------- -------- -------- -------- Dividends and distributions to shareholders from Net investment income.......... -- -- -- -- -- (0.03) Net realized capital gains..... (1.33) (1.25) (1.38) (0.39) (0.36) (0.40) -------- -------- -------- -------- -------- -------- (1.33) (1.25) (1.38) (0.39) (0.36) (0.43) -------- -------- -------- -------- -------- -------- Net asset value, end of period... $ 16.13 $ 16.06 $ 16.23 $ 14.92 $ 14.86 $14.97 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total investment return for the period(3)....................... 16.87% 16.33% 17.48% 27.68% 26.91% 9.09%(6) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)........................ $ 67,491 $ 37,622 $ 14,763 $ 45,049 $ 28,081 $8,779 Ratio of expenses to average net assets(1)....................... 1.50% 2.00% 1.00% 1.50%(4) 2.00%(4) 1.00%(4) Ratio of net investment income/(loss) to average net assets(1)........ (0.59)% (1.09)% (0.10)% (0.01)%(4) (0.45)%(4) 0.82%(4)(6) Decrease reflected in above expense ratios and net investment loss due to waivers and reimbursements(5)... 0.70% 0.70% 0.70% 0.89%(4) 0.92%(4) 0.99%(4)(6)
- -------- * Commencement of investment operations. Class Y shares commenced its initial public offering on August 7, 1995. ** Calculated based upon shares outstanding on the first and last day of the respective period, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Reflects waivers and/or reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) Annualized. (5) Includes Portfolio's share of Master Series' expenses. (6) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A or C shares, due to timing differences in the commencement of the initial public offering of class Y shares. The accompanying notes are an integral part of the financial statements. 9 THE BEAR STEARNS FUNDS S&P STARS Portfolio NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business trust on September 29, 1994 and is registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company. The Fund currently has five portfolios in operation: three diversified portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio, and two non-diversified portfolios, The Insiders Select Fund and S&P STARS Portfolio. As of the date hereof, S&P STARS Portfolio (the "Portfolio") offers three classes of shares which have been designated as class A, C and Y shares. The Portfolio invests all of its assets in S&P STARS Master Series (the "Master Series"), a separate series of S&P STARS Fund (the "Master Fund"), which has the same objective as the Portfolio. The Master Fund was organized as a Delaware business trust on October 5, 1994 and is registered under the Investment Company Act as an open-end management investment company. The Master Fund currently has one fund in operation, the Master Series, a non-diversified fund. The value of the Portfolio's investment in the Master Series reflects the Portfolio's proportionate beneficial interest in the net assets of the Master Series (99.9% at March 31, 1997). The performance of the Portfolio is directly affected by the performance of the Master Series. The financial statements of the Master Series, including the portfolio of investments, should be read in conjunction with the Portfolio's financial statements. ORGANIZATIONAL MATTERS--Prior to commencing investment operations on April 5, 1995, the Portfolio had no transactions other than those relating to organizational matters and the sale of 5,209 class A shares and 5,209 class C shares of beneficial interest of S&P STARS Portfolio to Bear, Stearns & Co. Inc. ("Bear Stearns" or the "Distributor"). Costs of approximately $203,596 incurred by the Portfolio in connection with the organization, its registration with the Commission and with various states and the initial public offering of its shares have been deferred and are being amortized, using the straight-line method over the period of benefit not exceeding sixty months, beginning with the commencement of investment operations of the Portfolio. In the event that the Distributor or any transferee of the Distributor redeems any of its original shares prior to the end of the sixty month period, the proceeds of the redemption payable in respect of such shares shall be reduced by the pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of the redemption) of the unamortized deferred organization expenses as of the date of such redemption. In the event that the Portfolio is liquidated prior to the end of the sixty month period, the Distributor or the transferee of the Distributor shall bear the unamortized deferred organization expenses. INVESTMENT VALUATION--The Portfolio invests all of its assets in the Master Series, rather than in a portfolio of securities. Valuation of securities by the Master Series is discussed in the Master Series' Notes to Financial Statements which are included elsewhere in this report. Expenses and fees, including administrative and distribution fees are accrued daily and taken into account for the purposes of determining the net asset value of the Portfolio's shares. Because of the differences in operating expenses incurred by each class, the per share net asset value of each class will differ. INVESTMENT INCOME--The Portfolio accrues its share of income, net of Master Series' expenses, daily on its investment in the Master Series. Net investment income and realized and unrealized gains and losses from investment transactions conducted by the Master Series, are allocated to the Portfolio based on the Portfolio's proportional beneficial interest in the net assets of the Master Series. The Portfolio's allocated net investment income (other than distribution fees) and realized and unrealized gains and losses from the Master Series is further allocated each day to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day (after adjusting for current capital share activity of the respective classes). 10 U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all of its taxable income and to comply with the other requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing during each calendar year substantially all of its ordinary income and capital gains, if any, the Portfolio intends not to be subject to a U.S. federal excise tax. DIVIDENDS AND DISTRIBUTIONS--The Portfolio intends to distribute at least annually to shareholders substantially all of its net investment income. Distribution of net realized gains, if any, will be declared and paid at least annually by the Portifolio. Dividends and distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within capital accounts based on their U.S. federal tax-basis treatment; temporary differences do not require reclassification. At March 31, 1997, the Portfolio reclassified within the composition of net assets a net operating loss of $734,846 to accumulated net realized gains. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the fiscal year ended March 31, 1997, Bear Stearns Funds Management Inc. ("BSFM" or the "Administrator") served as administrator to the Portfolio pursuant to an Administration Agreement. The Administrator is entitled to receive from the Portfolio a monthly fee equal to an annual rate of 0.15% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Portfolio, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, PFPC Inc. is entitled to receive from the Portfolio a monthly fee of $5,500. These fees are computed daily and paid monthly, and are subject to reduction in any year to the extent that the Portfolio's expenses (exclusive of brokerage commissions, distribution fees, taxes, interest and extraordinary items) exceed the most stringent limits prescribed by the laws or regulations of any state in which the Portfolio's shares are offered for sale, based on the average total net assets of the Portfolio. During the fiscal year ended March 31, 1997, BSFM as the Master Series' Adviser (the "Adviser") has voluntarily undertaken to limit the Portfolio's total operating expenses (other than brokerage commissions, taxes, interest and extraordinary items) to the extent that total Portfolio operating expenses exceeded 1.50% of the average daily net assets of the Portfolio's class A shares, 2.00% of the average daily net assets of the Portfolio's class C shares and 1.00% of the average daily net assets of the Portfolio's class Y shares. As necessary, this limitation is effected by waivers by the Adviser of its advisory fees (Master Series only) and reimbursements of expenses exceeding the advisory fee (Master Series and Portfolio). The Portfolio will not pay the Adviser at a later time for any amounts it may waive, nor will the Portfolio reimburse the Adviser for any amounts it may assume. Custodial Trust Company, a wholly-owned subsidary of The Bear Stearns Companies Inc. and an affiliate of the Administrator, serves as custodian to the Portfolio. DISTRIBUTION PLAN The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan in effect for the fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares. Such fees are based on the average daily net assets in each class of the Portfolio and are accrued daily and paid monthly or at such other intervals as the Board of Trustees may determine. The fees paid to Bear Stearns are payable without regard to actual expenses incurred. For the fiscal year ended March 31, 1997, Bear Stearns earned $600,491 in distribution fees. Bear Stearns uses these fees primarily to pay dealers whose clients hold Portfolio shares and other distribution-related activities. In addition, as Distributor of the Portfolio, Bear Stearns collects the sales charges imposed on sales of the Portfolio's class A shares, and reallows a portion of such charges to dealers through which the sales are made. As a result of an undertaking by the Distributor, it reallowed all of the sales charges to its dealers selling Portfolio shares for the period April 5, 1995 (commencement of investment operations) through September 26, 1995 and the period February 15, 1996 through June 30, 1996. Furthermore, the Distributor has 11 increased the compensation paid to its dealers selling Portfolio shares on net asset value transfers (purchases made by investors with the proceeds from a redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns) from 0.50% to 1.00% beginning April 15, 1996 until further notice. In addition, Bear Stearns advanced 1.00% in sales commissions on the sale of class C shares to dealers at the time of such sales. For the fiscal year ended March 31, 1997, Bear Stearns has advised the Portfolio that it received approximately $904,000 in front-end sales charges resulting from sales of class A shares of the Portfolio. From these fees, Bear Stearns paid such sales charges to dealers which in turn paid commissions to sales persons. Bear Stearns has advised the Portfolio that for the fiscal year ended March 31, 1997, it received approximately $30,000 in contingent deferred sales charges paid upon certain redemptions by class C shareholders of the Portfolio. INVESTMENT TRANSACTIONS Additions and reductions to the Portfolio's investment in the Master Series amounted to $66,340,367 and $41,277,815, respectively. SHARES OF BENEFICIAL INTEREST The Portfolio offers class A, C and Y shares. Class A shares are sold with a front-end sales charge of up to 4.75%. Class C shares are sold with a contingent deferred sales charge ("CDSC") of 1.00% during the first year. There is no sales charge or CDSC on class Y shares, which are offered primarily to institutional investors. At March 31, 1997, there was an unlimited amount of $0.001 par value shares of beneficial interest authorized of which Bear Stearns owned 5,209 class A shares and 5,209 class C shares. Transactions in the classes of shares of beneficial interest for the fiscal year ended March 31, 1997 were as follows:
SALES REINVESTMENTS --------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ----------- -------------- --------- ------------- Class A shares..................................................... 2,517,105 $ 42,363,300 242,732 $ 3,986,019 Class C shares..................................................... 935,884 15,772,161 134,250 2,197,714 Class Y shares..................................................... 492,911 8,205,295 53,147 876,922 REPURCHASES --------------------------- SHARES AMOUNT ----------- -------------- Class A shares..................................................... 1,596,708 $ 25,841,545 Class C shares..................................................... 617,043 9,919,428 Class Y shares..................................................... 223,037 3,645,262
Transactions in the classes of shares of beneficial interests for the period April 5, 1995 (commencement of investment operations) through March 31, 1996 were as follows:
SALES REINVESTMENTS --------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ----------- -------------- --------- ------------- Class A shares..................................................... 3,601,121 $ 48,488,374 58,847 $ 850,924 Class C shares..................................................... 2,211,148 29,952,540 34,906 503,689 Class Y* shares.................................................... 595,898 8,595,742 12,618 182,704 REPURCHASES --------------------------- SHARES AMOUNT ----------- -------------- Class A shares..................................................... 640,092 $ 9,215,429 Class C shares..................................................... 356,975 5,104,093 Class Y* shares.................................................... 21,986 316,298
- --------- * Class Y shares commenced its initial public offering on August 7, 1995. CREDIT AGREEMENT The Fund, on behalf of the Portfolio, has entered into a credit agreement with The First National Bank of Boston. S&P STARS Fund, Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio, The Insiders Select Fund and Bear Stearns Investment Trust, which consists of the Emerging Markets Debt Portfolio, are also parties to the credit agreement. The agreement provides that each party to the credit agreement is permitted to borrow in an amount up to 15% of the value of its total assets. Subject to Board approval and upon making necessary disclosure in its prospectus, each portfolio may, in accordance with the provisions of the credit agreement, borrow up to 25% of the value of its total assets, less all liabilities other than liabilities for borrowed money outstanding at the time. However, at no time shall the aggregate outstanding principal amount of all loans to any of the portfolios 12 exceed $25,000,000. The line of credit will bear interest at the greater of: (i) the annual rate of interest announced from time to time from the bank at its head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or, at the borrower's option, the rate quoted by The First National Bank of Boston. Each loan is payable on demand or upon termination of this credit agreement or, for money market loans, on the last day of the interest period and, in any event, not later than 14 days from the date the loan was advanced. The Portfolio uses this facility to borrow money only for temporary or emergency (not leveraging) purposes. The Portfolio had no amount outstanding under the line of credit agreement during the fiscal year ended March 31, 1997. SUBSEQUENT EVENT At the April 29, 1997, meeting of the Board of Trustees of the Fund, the Board authorized a transaction that would "despoke" the S&P STARS Portfolio and liquidate the S&P STARS Fund. This would be accomplished by a redemption request that all shares of the S&P STARS Portfolio be redeemed and the Master Series fulfull its redemption obligation by delivering portfolio securities, rather than cash, that the Master Series currently holds at the date of the redemption. This would thereby keep all shareholders essentially in the same position as they were prior to the transaction. The transaction is subject to approval by the Portfolio's shareholders of a new investment advisory agreement between the Fund, on behalf of the Portfolio, and BSFM. 13 THE BEAR STEARNS FUNDS S&P STARS Portfolio REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholders, S&P STARS Portfolio (A series of The Bear Stearns Funds): We have audited the accompanying statement of assets and liabilities of the S&P STARS Portfolio (the "Portfolio") as of March 31, 1997, and the related statements of operations, changes in net assets and the financial highlights for the fiscal year ended March 31, 1997 and the period April 5, 1995 (commencement of operations) through March 31, 1996. These financial statements and financial highlights are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of S&P STARS Portfolio at March 31, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented in conformity with generally accepted accounting principles. Deloitte & Touche Dublin, Ireland May 9, 1997 14 THE BEAR STEARNS FUNDS S&P STARS Portfolio SHAREHOLDER TAX INFORMATION -- (UNAUDITED) The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholder within 60 days of the Portfolio's fiscal year end (March 31, 1997) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the fiscal year ended March 31, 1997 the following dividends and distributions per share were paid by the Portfolio:
ORDINARY INCOME LONG-TERM CAPITAL GAINS - ------------------------------------- ------------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ----------- ----------- ----------- ----------- ----------- ----------- $ 1.24 $ 1.16 $ 1.29 $ 0.09 $ 0.09 $ 0.09 ----- ----- ----------- ----- ----- ----- ----- ----- ----------- ----- ----- -----
The percentage of ordinary income dividends received from S&P STARS Portfolio qualifying for the corporate dividends received deduction is 11.99%. This information is given to meet certain requirements of the Internal Revenue Code of 1986, as amended. Because the Portfolio's fiscal year is not the calendar year, another notification will be sent with respect to calendar year 1997. The second notification, which will reflect the amount to be used by calendar year taxpayers on their U.S. federal income tax returns, will be made in conjunction with Form 1099-DIV and will be mailed in January 1998. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their dividend. They will generally not be entitled to a foreign tax credit or deduction for the withholding taxes paid by the Portfolio, if any. In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans may need this information for their annual information reporting. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Portfolio. 15 THE BEAR STEARNS FUNDS S&P STARS Master Series PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- MARKET SHARES+ VALUE - -------------------------------------------------------------- COMMON STOCKS--97.31% AUTOMOTIVE EQUIPMENT - 2.61% 60,000 Goodyear Tire & Rubber Co. (The) ............................. $ 3,135,000 ------------ BANKS - 6.34% 60,000 Bank of New York Co., Inc. ........ 2,205,000 50,000 Citicorp........................... 5,412,500 ------------ 7,617,500 ------------ CHEMICALS & FERTILIZERS - 4.30% 135,000 Monsanto Co. ...................... 5,163,750 ------------ COMPUTERS & OFFICE EQUIPMENT - 18.76% 100,000 Cisco Systems, Inc.*++............. 4,812,500 155,000 EMC Corp.*......................... 5,502,500 100,000 HMT Technology Corp.*++............ 1,225,000 110,500 Quantum Corp.*+++.................. 4,268,061 150,000 Seagate Technology, Inc.*.......... 6,731,250 ------------ 22,539,311 ------------ COMPUTER SERVICES - 4.37% 135,000 Computer Associates International, Inc. .............................. 5,248,125 ------------ DIVERSIFIED OPERATIONS - 5.37% 65,000 General Electric Co. .............. 6,451,250 ------------ DRUGS & HOSPITAL SUPPLIES - 6.93% 30,000 Merck & Co., Inc. ................. 2,527,500 67,000 Warner-Lambert Co. ................ 5,795,500 ------------ 8,323,000 ------------ ELECTRICAL EQUIPMENT - 0.92% 115,000 DSP Communications, Inc.*++........ 1,106,875 ------------ ELECTRONIC MEASURING INSTRUMENTS - 5.10% 277,000 Vishay Intertechnology, Inc.*...... 6,128,625 ------------ ELECTRONICS - 21.31% 250,000 Adaptec, Inc.*..................... 8,937,500 110,000 Analog Devices, Inc.*+++........... 2,475,000 102,000 Intel Corp. ....................... 14,190,750 ------------ 25,603,250 ------------ - -------------------------------------------------------------- MARKET SHARES+ VALUE - -------------------------------------------------------------- INSURANCE - 4.15% 140,000 Conseco, Inc. ..................... $ 4,987,500 ------------ LASER SYSTEMS - 0.20% 5,000 Coherent, Inc.*.................... 239,063 ------------ MACHINERY - 3.41% 210,000 Crompton & Knowles Corp.+++........ 4,095,000 ------------ OIL & NATURAL GAS - 1.25% 45,000 Apache Corp. ...................... 1,507,500 ------------ OIL - OFFSHORE DRILLING - 3.89% 185,000 Global Marine Inc.*................ 3,977,500 40,000 Noble Drilling Corp.*.............. 690,000 ------------ 4,667,500 ------------ RESTAURANTS - 4.73% 275,700 Wendy's International, Inc. ....... 5,686,313 ------------ RETAILING - 3.67% 82,500 Home Depot, Inc. (The)............. 4,413,750 ------------ Total Common Stocks (cost - $115,044,732).............. 116,913,312 ------------ SHORT-TERM INVESTMENTS--1.88% INVESTMENT COMPANIES - 1.88% 2,257,573 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares**++........... 2,257,573 306 Federated Investors, Trust for Short-Term U.S. Government Trust Securities**++..................... 306 ------------ Total Short-Term Investments (cost $2,257,879).................. 2,257,879 ------------ Total Investments (cost $117,302,611) - 99.19%....... 119,171,191 Other assets in excess of liabilities - 0.81%................ 968,902 ------------ Net Assets - 100.00%............... $120,140,093 ------------ ------------
The accompanying notes are an integral part of the financial statements. 16 THE BEAR STEARNS FUNDS S&P STARS Master Series PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- NUMBER OF MARKET CONTRACTS VALUE - -------------------------------------------------------------- WRITTEN CALL OPTIONS ELECTRONICS 200 Intel Corp*++ 07/19/97 @ $160.................... $ (115,000) 200 Intel Corp*++ 07/19/97 @ $155.................... (127,500) ------------ (premiums received - $332,539) $ (242,500) ------------ ------------
- --------- + Unless otherwise indicated all common stocks are ranked five stars. ++ Currently ranked three stars. +++ Currently ranked four stars. ++ Not ranked by STARS. * Non-income producing security. ** Money market fund. S&P STARS RANKINGS: Five stars - Buy - Expected to be among the best performers over the next twelve months and to rise in price. Four stars - Accumulate - Expected to be an above-average performer. Three stars - Hold - Expected to be an average performer. Two stars - Avoid - Expected to be a below-average performer. One star - Sell - Expected to be a well-below-average performer and to fall in price. The accompanying notes are an integral part of the financial statements. 17 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 ASSETS Investments, at value (cost - $117,302,611)..... $119,171,191 Receivable for investments sold................. 4,224,333 Receivable for beneficial interests sold........ 343,443 Dividends and interest receivable............... 95,191 Deferred organization expenses and other assets......................................... 74,016 ----------- Total assets.............................. 123,908,174 ----------- LIABILITIES Payable for investments purchased............... 1,812,560 Payable for beneficial interests repurchased.... 1,641,921 Written call options, at value (premiums received - $332,539)........................... 242,500 Advisory fee payable............................ 21,234 Custodian fee payable........................... 3,626 Accrued expenses................................ 46,240 ----------- Total liabilities......................... 3,768,081 ----------- NET ASSETS Net proceeds from capital contributions and withdrawals.................................... 118,181,474 Net unrealized appreciation on investments and option transactions............................ 1,958,619 ----------- Net assets applicable to investors' beneficial interests....................... $120,140,093 ----------- -----------
The accompanying notes are an integral part of the financial statements. 18 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 INVESTMENT INCOME Dividends....................................... $ 808,843 Interest........................................ 103,629 ----------- 912,472 ----------- EXPENSES Advisory fees................................... 747,970 Administration and accounting fees.............. 123,741 Legal and auditing fees......................... 58,632 Custodian fees and expenses..................... 37,581 Amortization of organization expenses........... 20,002 Insurance expenses.............................. 16,280 Trustees' fees and expenses..................... 14,209 Other........................................... 3,267 ----------- Total expenses before waivers............. 1,021,682 Less: waivers............................. (699,997) ----------- Total expenses after waivers.............. 321,685 ----------- Net investment income........................... 590,787 ----------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS, SECURITIES SOLD SHORT AND OPTION TRANSACTIONS: Net realized gain/(loss) from: Investments............................... 16,532,203 Securities sold short..................... (23,862) Option transactions....................... (1,540) Net change in unrealized appreciation on: Investments............................... (4,137,794) Option transactions....................... 90,039 ----------- Net realized and unrealized gain on investments, securities sold short and option transactions................................... 12,459,046 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $13,049,833 ----------- -----------
The accompanying notes are an integral part of the financial statements. 19 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FOR THE FISCAL APRIL 5, 1995* YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 ------------------ ----------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment income........................... $ 590,787 $ 695,588 Net realized gain from investments, securities sold short and option transactions............. 16,506,801 3,769,370 Net change in unrealized appreciation on investments.................................... (4,047,755) 6,006,374 ------------------ ----------------- Net increase in net assets resulting from operations..................................... 13,049,833 10,471,332 ------------------ ----------------- CAPITAL TRANSACTIONS Contributions................................... 66,340,367 86,999,990 Withdrawals..................................... (41,277,815) (15,568,630) ------------------ ----------------- Net increase in net assets derived from capital transactions................................... 25,062,552 71,431,360 ------------------ ----------------- Total increase in net assets.................... 38,112,385 81,902,692 NET ASSETS Beginning of period............................. 82,027,708 125,016 ------------------ ----------------- End of period................................... $ 120,140,093 $ 82,027,708 ------------------ ----------------- ------------------ -----------------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 20 THE BEAR STEARNS FUNDS S&P STARS Master Series FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- Contained below are ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD FOR THE FISCAL APRIL 5, 1995* YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 ----------------- ----------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)....... $ 120,140 $ 82,028 Ratio of expenses to average net assets(1)...... 0.32% 0.19%(2) Ratio of net investment income to average net assets(1)...................................... 0.59% 1.36%(2) Decrease reflected in above expense ratios due to waivers and/or reimbursements............... 0.70% 0.91%(2) Portfolio turnover rate......................... 220.00% 295.97%(3) Average commission rate per share(4)............ $ 0.0595 $ 0.0603
- -------- * Commencement of investment operations. (1) Reflects waivers and/or reimbursements. (2) Annualized. (3) Not annualized. (4) Represents average commission rate per share charged to the Master Series on purchases and sales of investments subject to such commissions during each period. The accompanying notes are an integral part of the financial statements. 21 THE BEAR STEARNS FUNDS S&P STARS Fund S&P STARS Master Series NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES S&P STARS Fund (the "Master Fund") was organized as a Delaware business trust on October 5, 1994 and is registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company. The Master Fund is a "series fund" which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. The Master Fund currently has one portfolio in operation, S&P STARS Master Series (the "Master Series"), a non-diversified portfolio. ORGANIZATIONAL MATTERS--Prior to commencing investment operations on April 5, 1995, the Master Fund had no transactions other than those relating to organizational matters and the sale of 10,418 shares of beneficial interest of the Master Series to S&P STARS Portfolio (the "Portfolio") of The Bear Stearns Funds. Costs of approximately $100,000 incurred by the Master Fund in connection with the organization and its registration with the Commission have been deferred and are being amortized, using the straight-line method over the period of benefit not exceeding sixty months, beginning with the commencement of investment operations of the Master Series. The Master Series commenced investment operations on April 5, 1995. In the event that the Portfolio or any transferee of the Portfolio redeems any of its original shares prior to the end of the sixty month period, the proceeds of the redemption payable in respect of such shares shall be reduced by the pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of the redemption) of the unamortized deferred organization expenses as of the date of such redemption. In the event that the Master Series is liquidated prior to the end of the sixty month period, the Portfolio or the transferee of the Portfolio shall bear the unamortized deferred organization expenses. PORTFOLIO VALUATION--Securities, including covered call options written by the Master Series, 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. Securities which mature in 60 days or less are valued at amortized cost which approximates market value, unless this method does not represent fair value. Expenses and fees, including the investment advisory and administration fees, are accrued daily and taken into account for the purposes of determining the net asset value of the Master Series shares. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Master Series' investment transactions are recorded on the trade date (the date on which the order to buy or sell is executed). Realized gains and losses from securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. OPTIONS WRITING--When the Master Series writes an option, an amount equal to the premium received by the Master Series is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options which expire unexercised are recorded by the Master Series on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying securities in determining whether the Master Series has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities 22 purchased by the Master Series. The Master Series' use of written options involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts reflect the extent of the Master Series' involvement in these financial instruments. In writing an option, the Master Series bears the market risk of an unfavorable change in the price of the security underlying the written option. Exercise of an option written by the Master Series could result in the Master Series selling or buying a security at a price different from the current market value. The Master Series' activities in written options are conducted through regulated exchanges which do not result in counterparty credit risks. Option activity for the fiscal year ended March 31, 1997 was as follows:
CALL OPTIONS PUT OPTIONS ------------------- ------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS --------- -------- --------- -------- Outstanding at beginning of period................ -- -- -- -- Options written................................... 400 $332,539 -- -- Options Purchased................................. -- -- 70 $ 1,960 Options closed or expired......................... -- -- (70 ) (1,960 ) -- --- -------- -------- Outstanding at end of period...................... 400 332,539 -- -- -- -- --- -------- -------- --- -------- --------
SHORT SELLING--When the Master Series makes a short sale, an amount equal to the proceeds received by the Master Series is recorded as a liability and is subsequently adjusted to the current market value of the short sale. Short sales represent obligations of the Master Series to make future delivery of specific securities and, correspondingly, create an obligation to purchase the security at market prices prevailing at the later delivery date (or to deliver the security if already owned by the Master Series). Upon the termination of a short sale, the Master Series will recognize a gain, limited to the price at which the Master Series sold the security short, if the market price is less than the proceeds originally received. The Master Series will recognize a loss, unlimited in magnitude, if the market price at termination is greater than the proceeds originally received. As a result, short sales create the risk that the Master Series' ultimate obligation to satisfy the delivery requirements may exceed the amount of the proceeds initially received or the liability recorded in the financial statements U.S. FEDERAL TAX STATUS--The Master Series is treated as a partnership for U.S. federal tax purposes. No provision is made by the Master Series for U.S. federal taxes; each investor in the Master Series is ultimately responsible for the payment of any taxes. Since one of the Master Series' investors is a regulated investment company that invests all of its assets in the Master Series (S&P STARS Portfolio or the "Portfolio"), the Master Series normally must satisfy the applicable source of income and diversification requirements (under the Internal Revenue Code) in order for the Portfolio to satisfy them. The Master Series intends to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the fiscal year ended March 31, 1997, Bear Stearns Funds Management Inc. ("BSFM" or the "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., served as the investment adviser of the Master Series pursuant to an Investment Advisory Agreement. The Adviser is entitled to receive from the Master Series a monthly fee equal to an annual rate of 0.75% of the Master Series' average daily net assets. Under the terms of an Administrative Services Agreement with the Portfolio, PFPC International Ltd. provides certain administrative services to the Master Series. For providing these services, PFPC International Ltd. is entitled to receive from the Master Series a monthly fee equal to an annual rate of 0.12% of the Master Series' net assets up to $200 million, 0.09% of the next $200 million, 0.075% of the next $200 million, and 0.05% of net assets above $600 million, subject to a minimum fee of $8,500 for the Master Series, payable monthly. During the fiscal year ended March 31, 1997, the Adviser has voluntarily undertaken to limit the Portfolio's total operating expenses (other than brokerage commissions, interest, taxes and extraordinary items) to the extent that total Portfolio operating expenses exceeded 1.50% of the average daily net assets of the Portfolio's class A shares, 2.00% of the average daily net assets of the Portfolio's class C shares and 1.00% of the average daily net assets of the Portfolio's class Y shares. As necessary, this limitation is effected by waivers by the Adviser of its advisory fees and reimbursements of expenses exceeding the advisory fee. For the fiscal year ended 23 March 31, 1997, the Adviser waived $699,997 of its advisory fee in order to maintain the voluntary expense limitation. The Master Series will not pay the Adviser at a later time for any amounts it may waive, nor will the Master Series reimburse the Adviser for any amounts it may assume. For the fiscal year ended March 31, 1997, Bear, Stearns & Co. Inc., an affiliate of the Adviser, earned $368,765 in brokerage commissions from portfolio transactions executed on behalf of the Master Series. Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies Inc. and an affiliate of the Adviser, serves as custodian to the Master Series. INVESTMENTS IN SECURITIES For U.S. federal income tax purposes, the cost of securities owned at March 31, 1997 was $117,393,549. Accordingly, the net unrealized appreciation of investments of $1,777,642 was composed of gross appreciation of $8,067,308 for those investments having an excess of value over cost; and gross depreciation of $6,289,666 for those investments having an excess of cost over value. For the fiscal year ended March 31, 1997, aggregate purchases and sales of investment securities (excluding short-term investments) were $240,965,152 and $213,126,061, respectively. CREDIT AGREEMENT The S&P STARS Fund, on behalf of the Master Series, has entered into a credit agreement with The First National Bank of Boston. Bear Stearns Investment Trust, which consists of the Emerging Markets Debt Portfolio and The Bear Stearns Funds consisting of S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio and The Insiders Select Fund are also parties to the credit agreement. The agreement provides that each party to the credit agreement is permitted to borrow in an amount up to 15% of the value of its total assets. Subject to Board approval and upon making necessary disclosure in its prospectus, each portfolio may, in accordance with the provisions of the credit agreement, borrow up to 25% of the value of its total assets, less all liabilities other than liabilities for borrowed money outstanding at the time. However, at no time shall the aggregate outstanding principal amount of all loans to any of the portfolios exceed $25,000,000. The line of credit will bear interest at the greater of: (i) the annual rate of interest announced from time to time from the bank at its head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or, at the borrower's option, the rate quoted by The First National Bank of Boston. Each loan is payable on demand or upon termination of this credit agreement or, for money market loans, on the last day of the interest period and, in any event, not later than 14 days from the date the loan was advanced. The amount outstanding under the line of credit agreement for the Master Series averaged $26,074 during the fiscal year ended March 31, 1997. The maximum amount outstanding at any month-end under such line of credit agreement during the fiscal year ended March 31, 1997 was $220,000. The monthly weighted average interest rate during the fiscal year ended March 31, 1997, on amounts outstanding under such line of credit agreement, was 8.09%. The Master Series uses this facility to borrow money only for temporary or emergency (not leveraging) purposes. The Master Series had no amount outstanding under the line of credit agreement at March 31, 1997. 24 THE BEAR STEARNS FUNDS S&P STARS Master Series REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Investors, S&P STARS Master Series (A series of the S&P STARS Fund): We have audited the accompanying statement of assets and liabilities of the S&P STARS Master Series, (the "Master Series") as of March 31, 1997, and the related statements of operations, changes in net assets and the financial highlights for the fiscal year ended March 31, 1997 and the period April 5, 1995 (commencement of operations) through March 31, 1996. These financial statements and financial highlights are the responsibility of the Master Series's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of S&P STARS Master Series at March 31, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented in conformity with generally accepted accounting principles. Deloitte & Touche Dublin, Ireland May 9, 1997 25 BEAR STEARNS The Bear Stearns Funds 245 PARK AVENUE NEW YORK, NY 10167 1.800.766.4111 Robert S. Reitzes Chairman of the Board and President Peter B. Fox Executive Vice President William J. Montgoris Executive Vice President Peter M. Bren Trustee Alan J. Dixon Trustee John R. McKernan, Jr. Trustee M.B. Oglesby, Jr. Trustee Stephen A. Bornstein Vice President Donalda L. Fordyce Vice President Frank J. Maresca Vice President and Treasurer Ellen T. Arthur Secretary Vincent L. Pereira Assistant Treasurer Eileen M. Coyle Assistant Secretary INVESTMENT ADVISER DISTRIBUTOR AND ADMINISTRATOR Bear, Stearns & Co. Inc. Bear Stearns Funds 245 Park Avenue Management Inc. New York, NY 10167 245 Park Avenue New York, NY 10167 CUSTODIAN TRANSFER AND DIVIDEND Custodial Trust Company DISBURSEMENT AGENT 101 Carnegie Center PFPC Inc. Princeton, NJ 08540 Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 COUNSEL INDEPENDENT AUDITORS Kramer, Levin, Naftalis & Frankel Deloitte & Touche LLP 919 Third Avenue Two World Financial Center New York, NY 10022 New York, NY 10281 This report is submitted for the general information of the shareholders of each Portfolio. It is not authorized for distribution to prospective investors in each Portfolio unless it is preceded or accompanied by a current prospectus which includes details regarding each Portfolio's objectives, policies, sales commissions and other information. Total investment return is based on historical results and is not intended to indicate future performance. The investment return and principal value of an investment in each Portfolio will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than original cost. BSF-R-009-04 LARGE CAP VALUE PORTFOLIO SMALL CAP VALUE PORTFOLIO TOTAL RETURN BOND PORTFOLIO ANNUAL REPORT MARCH 31, 1997 THE BEAR STEARNS FUNDS Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio LETTER TO SHAREHOLDERS April 21, 1997 Dear Shareholders, We are pleased to present the annual report to shareholders for the Large Cap Value Portfolio ("Large Cap"), Small Cap Value Portfolio ("Small Cap") and Total Return Bond Portfolio ("Bond Portfolio") (collectively, the "Portfolios") for the fiscal year ended March 31, 1997. Detailed performance data for each class of shares of each of the Portfolios can be found in the "Financial Highlights" section of this report. LARGE CAP VALUE PORTFOLIO For the fiscal year ended March 31, 1997, Large Cap's class A shares (without giving effect to the sales charge) had a total return of 15.44%1, class C shares (without giving effect to the contingent deferred sales charge) had a total return of 14.87% and class Y shares returned 16.04%. Large Cap's benchmark, the S&P 500 Composite Index, returned 19.73% for the same period. Due to recent additions in the technology sector to the Portfolio, notably Intel Corp. (4.44% of Large Cap's net assets), Large Cap lagged its benchmark as technology stocks underperformed the broader market during this period. STAYING AHEAD OF THE INFLATION CURVE From April 1996 through February 1997, the stock market continued its stellar upward momentum. However, by March, the market was overextended and ready for a catalyst to correct -- which it did, falling nearly 10% for the month. The impetus for the correction came when the Federal Reserve Board raised interest rates toward the end of the month based on concerns about possible wage inflation. We believe that Chairman Greenspan is ahead of the inflation curve and that we will see the economy slowing to the 2.5% - 3.0% range, which should cause rates to fall in the second half of the year. This should be good news for the stock market and for Large Cap. During the first quarter of 1997, we increased our technology exposure with the purchase of Intel Corp., Varian Associates, Inc. (3.88%) and Quantum Corp. (3.81%). Due to the dollar's strength, we began to steer away from multinational companies and to focus our attention on firms with significant domestic sales, such as Wendy's International, Inc. (3.22%). Following our strategy of seeking out undervalued companies whose long-term earnings are expected to get a boost from a near-term catalyst, we acquired The Goodyear Tire & Rubber Co. (6.38%), which is currently benefiting from restructuring and cost-cutting initiatives, and Pitney Bowes, Inc. (4.80%), which is profiting from the trend to digital meters and from the outsourcing of its office services. We expect a volatile market over the near term as investors anticipate further interest rate hikes, but we would view market dips as buying opportunities. - -------- 1 For the fiscal year ended March 31, 1997, Large Cap's class A shares had a total return of 9.96% including the initial maximum 4.75% sales charge. 1 SMALL CAP VALUE PORTFOLIO* Given the volatility in the stock market in general over the past year and the sell-off in the small-cap market in the first quarter of 1997, Small Cap's performance was particularly noteworthy. For the fiscal year ended March 31, 1997, Small Cap's class A shares (without giving effect to the sales charge) had a total return of 11.71%2 , class C shares (without giving effect to the contingent deferred sales charge) had a total return of 11.12% and class Y shares returned 12.19% -- all outperforming Small Cap's benchmark, the Russell 2000 Index, which returned 5.13% for the same period. We believe Small Cap's relative strength can be attributed to our strategy of following a disciplined value-oriented approach and avoiding high-risk stocks. We continue to buy companies with low absolute and relative price-earnings multiples and strong fundamentals that are expected to lead to long-term earnings growth. Companies are sold when their current performance and future outlook do not meet our expectations. SEEKING GROWTH IN UNIQUE SCENARIOS In the recent rising interest rate environment, we have found unique situations where a company's stock price reflects a perceived vulnerability to higher rates, although the firm's underlying fundamentals, we believe, are quite strong. For example, Chase Brass Industries, Inc. (2.47% of Small Cap's net assets), which manufactures brass rod, is viewed as a new housing and construction company, and its stock is trading at a price-earnings multiple of under nine-times 1997 and eight-times 1998 earnings per share estimates. However, Chase is selling everything it produces and just implemented a price increase. Home remodeling, the concern over lead in drinking water and the firm's move into asymmetrical shapes should continue to constrain capacity even as production capabilities are increased incrementally. Chase generates excess free cash flow, management owns over 10% of the shares, and it recently completed an acquisition that should add $0.20 - $0.30 per share to earnings this year -- all reasons why we see value and an underpriced stock. As illustrated above, our primary focus continues to be on individual stocks. We believe there are compelling company-specific stories with strong earnings growth even in an environment of rising interest rates. Rigorous internal, in-depth research will continue to be key to our stock selection, and with increasing volatility in the market, we will seek opportunities to buy unique stocks at even more attractive valuations. TOTAL RETURN BOND PORTFOLIO For the fiscal year ended March 31, 1997, Bond Portfolio's class A shares (without giving effect to the sales charge) had a total return of 4.40%3, class C shares (without giving effect to the contingent deferred sales charge) had a total return of 3.99% and class Y shares returned 4.77%. Bond Portfolio's benchmark, Salomon Brothers Broad Investment Grade Bond Index, returned 4.92% for the same period. Over the period, Bond Portfolio's emphasis on corporate securities, with their relatively higher yields, added to its relative returns as corporate spreads tightened. However, this same strategy worked against us in March of this year as spreads widened due to quarter-end pressures and the Federal Reserve's tightening. - -------- * Small-cap funds typically carry additional risks, since smaller companies generally have a higher risk of failure than well-established, larger companies. Historically, stocks of smaller companies have experienced a greater degree of market volatility than stocks on average. 2 For the fiscal year ended March 31, 1997, Small Cap's class A shares had a total return of 6.41% including the initial maximum 4.75% sales charge. 3 For the fiscal year ended March 31, 1997, Bond Portfolio's class A shares had a total return of 0.49% including the initial maximum 3.75% sales charge. 2 FOCUSING ON CORPORATE AND MORTGAGE-BACKED SECURITIES During the past six to eight months, the fixed income markets traded in a fairly narrow range. In that regard, the strategy that we have had in place has paid off. We have overweighted corporate and mortgage-backed securities for two reasons: 1) to generate high income in a stable, low-volatility environment and 2) to benefit from expected spread tightening versus U.S. Treasury securities. In the near term, we expect to increase our exposure to Yankee credits (dollar-denominated bonds issued by foreign banks and companies in the U.S.), especially those issued by countries where spreads have widened on what we believe to be largely unwarranted political and economic concerns. From a structural standpoint, we will continue to focus on securities that should benefit from increased volatility. In the mortgage sector, this points toward discounted collateral, well-structured collateralized mortgage obligations and commercial mortgage tranches, and in the corporate sector, toward noncallable or putable issues. We expect the U.S. economy to remain strong with inflation under control. However, as the economies of Europe and Japan pick up, we expect to see a strengthening in U.S. exports in spite of the dollar's strength. This will keep upward pressure on wages and keep the Federal Reserve in a tightening mode. We believe that at least one and possibly two tightenings will occur this year. As a result, we expect a more volatile market, with long-term rates testing the 7.20% - 7.25% range before the market rallies later in the year. We will continue to emphasize corporate securities in the Bond Portfolio, given favorable economic conditions and the recent widening of spreads. We continue to carefully monitor commodities prices and any labor market developments for signs of pressure that could trigger further short-term upward moves in interest rates. In conclusion, we value the confidence you have placed in us and would be pleased to address any questions or concerns you may have. Please feel free to call us at 1-800-766-4111. Sincerely, [SIGNATURE] [SIGNATURE] [SIGNATURE] Robert S. Reitzes Mark Kurland Peter E. Mahoney Chairman of the Board and Portfolio Manager Portfolio Manager President Large Cap Value Portfolio Total Return Bond Portfolio The Bear Stearns Funds Portfolio Manager Large Cap Value Portfolio Small Cap Value Portfolio
3 THE BEAR STEARNS FUNDS Large Cap Value Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS Large Cap Value Portfolio Class A shares Class C shares S&P 500 Composite Index Apr. 4, 1995 $9,525 $10,000 $10,000 June 30, 1995 10,192 10,683 10,924 Sept. 30, 1995 11,295 11,825 11,791 Dec. 31, 1995 11,915 12,463 12,498 Mar. 31, 1996 12,034 12,571 13,166 June 30, 1996 12,042 12,563 13,755 Sept. 30, 1996 12,257 12,771 14,175 Dec. 31, 1996 13,627 14,178 15,354 Mar. 31, 1997 13,892 14,440 15,763 $9,525 Investment made on April 4, 1995 Past performance is not predictive of future performance Large Cap Value Portfolio Class A shares $13,892 Class C shares $14,440 S&P 500 Composite Index $15,763 Consumer Price Index $10,568 DOLLARS Large Cap Value Portfolio Consumer Price Index Apr. 4, 1995 $10,000 June 30, 1995 10,079 Sept. 30, 1995 10,126 Dec. 31, 1995 10,178 Mar. 31, 1996 10,284 June 30, 1996 10,364 Sept. 30, 1996 10,430 Dec. 31, 1996 10,522 Mar. 31, 1997 10,568 $9,525 Investment made on April 4, 1995 Past performance is not predictive of future performance Large Cap Value Portfolio Class A shares Class C shares S&P 500 Composite Index Consumer Price Index
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Large Cap Value Portfolio(2) Class A shares(4)............................................... 9.96% 17.94% Class C shares.................................................. 14.87 20.23 S&P 500 Composite Index(1).......................................... 19.73 25.63 Consumer Price Index(1)............................................. 2.76 2.81
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period April 4, 1995 (commencement of investment operations) through March 31, 1997. (4)Reflects the initial maximum 4.75% sales charge. Without the applicable sales charge, the total returns would have been 15.44% and 20.86%, respectively, for each period shown. 4 THE BEAR STEARNS FUNDS Large Cap Value Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS Large Cap Value Portfolio Class Y shares S&P 500 Composite Index Sept. 11, 1995 $10,000 $10,000 Sept. 30, 1995 $10,186 $10,221 Dec. 31, 1995 10,760 10,834 Mar. 31, 1996 10,875 11,413 June 30, 1996 10,896 11,923 Sept. 30, 1996 11,105 12,287 Dec. 31, 1996 12,360 13,309 Mar. 31, 1997 12,619 13,664 Past performance is not predictive of future performance Large Cap Value Portfolio Class Y shares $12,619 S&P 500 Composite Index $13,664 Consumer Price Index $10,451 DOLLARS Large Cap Value Portfolio Consumer Price Index Sept. 11, 1995 $10,000 Sept. 30, 1995 $10,013 Dec. 31, 1995 10,072 Mar. 31, 1996 10,170 June 30, 1996 10,242 Sept. 30, 1996 10,320 Dec. 31, 1996 10,405 Mar. 31, 1997 10,451 Past performance is not predictive of future performance Large Cap Value Portfolio Class Y shares S&P 500 Composite Index Consumer Price Index
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Large Cap Value Portfolio(2) Class Y shares.................................................. 16.04% 16.12% S&P 500 Composite Index(1).......................................... 19.73 22.21 Consumer Price Index(1)............................................. 2.76 2.88
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period September 11, 1995 (initial public offering date) through March 31, 1997. 5 THE BEAR STEARNS FUNDS Small Cap Value Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS Small Cap Value Portfolio Class A shares Class C shares Russell 2000 Index Apr. 3, 1995 $9,525 $10,000 $10,000 June 30, 1995 10,343 10,842 10,901 Sept. 30, 1995 12,057 12,625 11,969 Dec. 31, 1995 12,128 12,673 12,231 Mar. 31, 1996 12,797 13,358 12,852 June 30, 1996 14,240 14,847 13,511 Sept. 30, 1996 14,249 14,822 13,556 Dec. 31, 1996 14,002 14,553 14,248 Mar. 31, 1997 14,295 14,845 13,512 $9,525 Investment made on April 3, 1995 Past performance is not predictive of future performance Small Cap Value Portfolio Class A shares $14,296 Class C shares $14,845 Russell 2000 Index $13,512 Consumer Price Index $10,568 DOLLARS Small Cap Value Portfolio Consumer Price Index Apr. 3, 1995 $10,000 June 30, 1995 10,079 Sept. 30, 1995 10,126 Dec. 31, 1995 10,178 Mar. 31, 1996 10,284 June 30, 1996 10,364 Sept. 30, 1996 10,430 Dec. 31, 1996 10,522 Mar. 31, 1997 10,568 $9,525 Investment made on April 3, 1995 Past performance is not predictive of future performance Small Cap Value Portfolio Class A shares Class C shares Russell 2000 Index Consumer Price Index
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Small Cap Value Portfolio(2) Class A shares(4)............................................... 6.41% 19.63% Class C shares.................................................. 11.12 21.90 Russell 2000 Index(1)............................................... 5.13 16.27 Consumer Price Index(1)............................................. 2.76 2.81
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period April 3, 1995 (commencement of investment operations) through March 31, 1997. (4)Reflects the initial maximum 4.75% sales charge. Without the applicable sales charge, the total returns would have been 11.71% and 22.58%, respectively, for each period shown. 6 THE BEAR STEARNS FUNDS Small Cap Value Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES (1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS Small Cap Value Portfolio Class Y shares Russell 2000 Index Consumer Price Index June 22, 1995 $10,000 $10,000 $10,000 June 30, 1995 9,954 10,037 10,027 Sept. 30, 1995 11,620 11,021 10,073 Dec. 31, 1995 11,697 11,262 10,132 Mar. 31, 1996 12,352 11,834 10,231 June 30, 1996 13,762 12,440 10,303 Sept. 30, 1996 13,770 12,481 10,382 Dec. 31, 1996 13,555 13,119 10,467 Mar. 31, 1997 13,857 12,441 10,513 Past performance is not predictive of future performance Small Cap Value Portfolio Class Y shares $13,857 Russell 2000 Index $12,441 Consumer Price Index $10,513
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Small Cap Value Portfolio(2) Class Y shares.................................................. 12.19% 20.17% Russell 2000 Index(1)............................................... 5.13 13.07 Consumer Price Index(1)............................................. 2.76 2.85
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period June 22, 1995 (initial public offering date) through March 31, 1997. 7 THE BEAR STEARNS FUNDS Total Return Bond Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN BOND PORTFOLIO DOLLARS Salomon Brothers Broad Class A shares Class C shares Investment Grade Bond Index Apr. 5, 1995 $9,625 $10,000 $10,000 June 30, 1995 10,027 10,412 10,568 Sept. 30, 1995 10,206 10,587 10,767 Dec. 31, 1995 10,679 11,064 11,234 Mar. 31, 1996 10,430 10,797 11,038 June 30, 1996 10,467 10,824 11,092 Sept. 30, 1996 10,644 10,996 11,300 Dec. 31, 1996 10,972 11,322 11,641 Mar. 31, 1997 10,908 11,245 11,581 $9,625 Investment made on April 5, 1995 Past performance is not predictive of future performance Total Return Bond Portfolio Class A shares 10,908 Class C shares 11,245 Salomon Brothers Broad Investment Grade Bond Index 11,581 Consumer Price Index 10,568 TOTAL RETURN BOND PORTFOLIO DOLLARS Consumer Price Index Apr. 5, 1995 $10,000 June 30, 1995 10,079 Sept. 30, 1995 10,126 Dec. 31, 1995 10,185 Mar. 31, 1996 10,284 June 30, 1996 10,357 Sept. 30, 1996 10,436 Dec. 31, 1996 10,522 Mar. 31, 1997 10,568 $9,625 Investment made on April 5, 1995 Past performance is not predictive of future performance Total Return Bond Portfolio Class A shares Class C shares Salomon Brothers Broad Investment Grade Bond Index Consumer Price Index
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Total Return Bond Portfolio(2) Class A shares(4)............................................... 0.49% 4.45% Class C shares.................................................. 3.99 6.06 Salomon Brothers Broad Investment Grade Bond Index(1)............... 4.92 7.65 Consumer Price Index(1)............................................. 2.76 2.81
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period April 5, 1995 (commencement of investment operations) through March 31, 1997. (4)Reflects the initial maximum 3.75% sales charge. Without the applicable sales charge, the total returns would have been 4.40% and 6.47%, respectively, for each period shown. 8 THE BEAR STEARNS FUNDS Total Return Bond Portfolio COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN BOND PORTFOLIO DOLLARS Salomon Brothers Broad Consumer Class Y shares Investment Grade Bond Index Price Index Sept. 8, 1995 10,000 10,000 10,000 Sept. 30, 1995 10,036 10,056 10,013 Dec. 31, 1995 10,511 10,492 10,072 Mar. 31, 1996 10,274 10,309 10,170 June 30, 1996 10,319 10,360 10,242 Sept. 30, 1996 10,503 10,553 10,320 Dec. 31, 1996 10,837 10,872 10,405 Mar. 31, 1997 10,782 10,816 10,451 Past performance is not predictive of future performance Total Return Bond Portfolio Class Y shares 10,782 Salomon Brothers Broad Investment Grade Bond Index 10,816 Consumer Price Index 10,451
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL(3) ----------------- ------------- Total Return Bond Portfolio(2) Class Y shares.................................................. 4.77% 4.93% Salomon Brothers Broad Investment Grade Bond Index(1)............... 4.92 5.14 Consumer Price Index(1)............................................. 2.76 2.86
- --------- (1)The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2)Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes to the financial statements. Total returns shown include fee waivers and expense reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3)For the period September 8, 1995 (initial public offering date) through March 31, 1997. 9 THE BEAR STEARNS FUNDS Large Cap Value Portfolio MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Computers & Office Equipment 12.37% Building & Construction 7.52% Tobacco 3.36% Cash & Cash Equivalents 0.33% Electronics 4.44% Instruments -- Scientific 1.37% Automobiles 5.63% Transport -- Railroads 3.68% Life/Health Insurance 9.48% Banks 4.41% Protection -- Safety 5.33% Drugs & Hospital Supplies 11.50% Automotive Equipment 6.38% Diversified Operations 8.46% Soap & Cleaning Products 2.38% Restaurants 3.22% Credit & Finance 10.14%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ----- -------------------------------------------------- --------------------------- ---------- 1. Goodyear Tire & Rubber Co. (The) ................. Automotive Equipment 6.38 2. ADT Ltd. ......................................... Protection -- Safety 5.33 3. Pitney Bowes, Inc. ............................... Computers & Office Equipment 4.80 4. General Electric Co. ............................. Diversified Operations 4.58 5. Intel Corp. ...................................... Electronics 4.44 6. Bank of New York Co., Inc. ....................... Banks 4.41 7. Equitable Cos., Inc. ............................. Life/Health Insurance 4.26 8. FannieMae......................................... Credit & Finance 4.16 9. Medtronic, Inc. .................................. Drugs & Hospital Supplies 4.11 10. Armstrong World Industries, Inc. ................. Building & Construction 4.09
10 THE BEAR STEARNS FUNDS Small Cap Value Portfolio MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Building & Housing 9.63% Home Furnishings 2.93% Retail - Restaurants 5.71% Cosmetics & Soaps 2.83% Banks 5.82% Grocery Products 3.00% Financial Services 2.59% Steel 3.53% Cash & Cash Equivalents 2.21% Textiles & Shoes 4.48% Tobacco 3.66% Other 21.96% Publishing & Broadcasting 3.16% Non-Ferrous Metals 5.25% Life/Health Insurance 2.63% Rubber & Plastics 3.74% Electronics 3.36% Electrical Equipment 4.22% Drugs & Hospital Supplies 2.57% Coal 4.18% Computers & Office Equipment 2.54%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ----- -------------------------------------------------- --------------------------- ---------- 1. Triangle Pacific Corp. ........................... Building & Housing 5.11 2. AnnTaylor Stores Corp. ........................... Textiles & Shoes 4.48 3. Zeigler Coal Holding Co. ......................... Coal 4.18 4. Foodmaker, Inc. .................................. Retail -- Restaurants 4.11 5. Windmere-Durable Holdings Inc. ................... Electrical Equipment 3.86 6. DIMON Inc. ....................................... Tobacco 3.66 7. Universal Stainless & Alloy Products, Inc. ....... Steel 3.53 8. Cubic Corp. Designs............................... Electronics 3.36 9. Cadmus Communications Corp. ...................... Publishing & Broadcasting 3.16 10. Bay View Capital Corp. ........................... Banks 3.13
11 THE BEAR STEARNS FUNDS Total Return Bond Portfolio MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TREASURY / GOVERNMENT SECURITIES CORPORATES Total Return Bond Portfolio 13.09% 54.41% Salomon Brothers Broad Investment Grade Bond Index 50.77% 19.65% MORTGAGE-BACKED SECURITIES PREFERRED STOCK Total Return Bond Portfolio 24.62% 5.42% Salomon Brothers Broad Investment Grade Bond Index 29.58% 0.00% CASH & CASH EQUIVALENTS Total Return Bond Portfolio 2.46% Salomon Brothers Broad Investment Grade Bond Index 0.00%
- -------------------------------------------------------------------------------- FIXED INCOME PORTFOLIO CHARACTERISTICS - --------------------------------------------------------------------------------
TOTAL RETURN SALOMON BROTHERS BROAD BOND PORTFOLIO INVESTMENT GRADE BOND INDEX ------------------- ----------------------------------- 9.26 years 8.63 years Average Maturity.......................................................... 4.88 years 4.76 years Average Duration.......................................................... 7.41% 7.19% Average Coupon............................................................ 7.56% 7.19% Yield to Maturity......................................................... - ----------------------------------------------------------------------------------------------------------
12 THE BEAR STEARNS FUNDS Large Cap Value Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- MARKET SHARES VALUE - --------------------------------------------------------------- COMMON STOCKS--99.67% AUTOMOBILES - 5.63% 13,600 Ford Motor Co. ...................... $ 426,700 6,600 General Motors Corp. ................ 365,475 ----------- 792,175 ----------- AUTOMOTIVE EQUIPMENT - 6.38% 17,200 Goodyear Tire & Rubber Co. (The) .... 898,700 ----------- BANKS - 4.41% 16,900 Bank of New York Co., Inc. .......... 621,075 ----------- BUILDING & CONSTRUCTION - 7.52% 8,900 Armstrong World Industries, Inc. .... 576,275 12,000 Owens Corning........................ 483,000 ----------- 1,059,275 ----------- COMPUTERS & OFFICE EQUIPMENT - 12.37% 11,500 Pitney Bowes, Inc. .................. 675,625 13,900 Quantum Corp.*....................... 536,888 9,300 Xerox Corp. ......................... 528,937 ----------- 1,741,450 ----------- CREDIT & FINANCE - 10.14% 16,200 FannieMae............................ 585,225 7,100 Great Western Financial Corp. ....... 286,663 11,600 Travelers Group, Inc. ............... 555,350 ----------- 1,427,238 ----------- DIVERSIFIED OPERATIONS - 8.46% 6,500 General Electric Co. ................ 645,125 10,200 Varian Associates, Inc. ............. 545,700 ----------- 1,190,825 ----------- DRUGS & HOSPITAL SUPPLIES - 11.50% 12,100 Baxter International Inc. ........... 521,812 8,800 Bristol-Myers Squibb Co. ............ 519,200 9,300 Medtronic, Inc. ..................... 578,925 ----------- 1,619,937 ----------- - --------------------------------------------------------------- MARKET SHARES VALUE - --------------------------------------------------------------- ELECTRONICS - 4.44% 4,500 Intel Corp. ......................... $ 626,063 ----------- INSTRUMENTS--SCIENTIFIC - 1.37% 3,000 Perkin-Elmer Corp. .................. 193,125 ----------- LIFE/HEALTH INSURANCE - 9.48% 3,900 Aon Corporation...................... 238,875 22,000 Equitable Cos., Inc. ................ 599,500 23,100 USF&G Corp. ......................... 496,650 ----------- 1,335,025 ----------- PROTECTION--SAFETY - 5.33% 30,000 ADT Ltd.*............................ 750,000 ----------- RESTAURANTS - 3.22% 22,000 Wendy's International, Inc. ......... 453,750 ----------- SOAP & CLEANING PRODUCTS - 2.38% 20,800 Dial Corp. .......................... 335,400 ----------- TOBACCO - 3.36% 4,150 Philip Morris Cos. Inc. ............. 473,619 ----------- TRANSPORT--RAILROADS - 3.68% 4,590 Conrail, Inc. ....................... 517,522 ----------- Total Common Stocks (cost - $12,409,053)................. 14,035,179 ----------- SHORT-TERM INVESTMENT- 0.49% INVESTMENT COMPANY - 0.49% 69,397 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares** (cost - $69,397)..................... 69,397 ----------- Total Investments (cost - $12,478,450) - 100.16%....... 14,104,576 Liabilities in excess of other assets -(0.16)%............................. (22,744) ----------- Net Assets - 100.00%................. $14,081,832 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 13 THE BEAR STEARNS FUNDS Small Cap Value Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- MARKET SHARES VALUE - ------------------------------------------------------------ COMMON STOCKS--97.79% AUTOMOTIVE EQUIPMENT - 1.09% 70,000 Audiovox Corp.*..................... $ 446,250 ----------- BANKS - 5.82% 25,100 Bay View Capital Corp. ............. 1,280,100 19,950 California Financial Holding Co. ... 578,550 30,500 Hamilton Bancorp, Inc. ............. 526,125 ----------- 2,384,775 ----------- BUILDING & HOUSING - 9.63% 132,625 Fedders Corp., Class A.............. 712,859 73,500 Giant Cement Holding, Inc.*......... 1,139,250 76,000 Triangle Pacific Corp.*............. 2,090,000 ----------- 3,942,109 ----------- CHEMICALS & FERTILIZERS - 0.61% 13,700 Lilly Industries, Inc. ............. 248,313 ----------- COAL - 4.18% 72,000 Zeigler Coal Holding Co. ........... 1,710,000 ----------- COMMERCIAL PRINTING - 2.32% 35,000 Bowne & Co., Inc. .................. 949,375 ----------- COMMERCIAL SERVICES - 0.98% 16,500 Steiner Leisure Ltd.*............... 400,125 ----------- COMMUNICATIONS - 1.63% 25,500 Data Transmission Network Corp.*.... 669,375 ----------- COMMUNICATIONS SOFTWARE - 1.21% 25,600 Dialogic Corp.*..................... 496,000 ----------- COMPUTERS & OFFICE EQUIPMENT - 2.54% 80,000 S3 Inc.*............................ 1,040,000 ----------- COSMETICS & SOAPS - 2.83% 80,550 Guest Supply, Inc.*................. 1,157,906 ----------- DIVERSIFIED OPERATIONS - 2.26% 77,000 Griffon Corp.*...................... 924,000 ----------- - ------------------------------------------------------------ MARKET SHARES VALUE - ------------------------------------------------------------ DRUGS & HOSPITAL SUPPLIES - 2.57% 53,000 Global Pharmaceutical Corp.*........ $ 453,813 56,500 HumaScan Inc.*...................... 596,781 ----------- 1,050,594 ----------- ELECTRICAL EQUIPMENT - 4.22% 34,000 Aerovox, Inc.*...................... 144,500 112,000 Windmere-Durable Holdings Inc. ..... 1,582,000 ----------- 1,726,500 ----------- ELECTRONICS - 3.36% 57,300 Cubic Corp. Designs................. 1,375,200 ----------- ENTERTAINMENT & LEISURE - 0.27% 15,000 Colonial Downs Holdings, Inc., Class A*.................................. 110,625 ----------- FINANCIAL SERVICES - 2.59% 35,900 Banks United Corp., Class A......... 1,059,050 ----------- GROCERY PRODUCTS - 3.00% 53,200 Foodbrands America, Inc.*........... 1,230,250 ----------- HOME FURNISHINGS - 2.93% 80,000 Furniture Brands Intl., Inc.*....... 1,200,000 ----------- LIFE/HEALTH INSURANCE - 2.63% 23,900 Security-Connecticut Corp. ......... 1,078,488 ----------- MEDICAL--DRUGS - 2.41% 47,000 Cephalon, Inc.*..................... 987,000 ----------- MISCELLANEOUS INDUSTRIALS - 2.09% 77,000 Alyn Corp.*......................... 721,875 2,000 SPS Technologies, Inc.*............. 135,000 ----------- 856,875 ----------- NON-FERROUS METALS - 5.25% 49,900 Chase Brass Industries, Inc.*....... 1,010,475 29,100 Mueller Industries, Inc.*........... 1,138,537 ----------- 2,149,012 -----------
The accompanying notes are an integral part of the financial statements. 14 THE BEAR STEARNS FUNDS Small Cap Value Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
- ------------------------------------------------------------ MARKET SHARES VALUE - ------------------------------------------------------------ COMMON STOCKS (CONTINUED) OIL & GAS - 1.87% 25,000 Equitable Resources, Inc. .......... $ 765,625 ----------- PAPER & PAPER RELATED PRODUCTS - 2.02% 27,300 Schweitzer-Mauduit International, Inc. ............................... 825,825 ----------- PUBLISHING & BROADCASTING - 3.16% 91,500 Cadmus Communications Corp. ........ 1,292,437 ----------- RETAIL--RESTAURANTS - 5.71% 50,000 Apple South, Inc. .................. 656,250 166,000 Foodmaker, Inc.*.................... 1,680,750 ----------- 2,337,000 ----------- RUBBER & PLASTICS - 3.74% 80,000 Applied Extrusion Technologies, Inc.*............................... 870,000 83,900 Lamson & Sessions Co.*.............. 660,713 ----------- 1,530,713 ----------- STEEL - 3.53% 146,500 Universal Stainless & Alloy Products, Inc.*..................... 1,446,687 ----------- TELECOMMUNICATIONS - 2.06% 54,500 Davel Communications Group, Inc.*... 844,750 ----------- - ------------------------------------------------------------ MARKET SHARES VALUE - ------------------------------------------------------------ TEXTILES & SHOES - 4.48% 90,000 AnnTaylor Stores Corp.*............. $ 1,833,750 ----------- TOBACCO - 3.66% 65,100 DIMON Inc. ......................... 1,497,300 ----------- TRANSPORT--MARINE - 1.14% 27,000 Avondale Industries, Inc.*.......... 465,750 ----------- Total Common Stocks (cost - $33,947,540)................ 40,031,659 ----------- SHORT-TERM INVESTMENT-1.83% INVESTMENT COMPANY - 1.83% 750,765 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares** (cost - $750,765)................... 750,765 ----------- Total Investments (cost - $34,698,305) - 99.62%....... 40,782,424 Other assets in excess of liabilities - 0.38%................. 155,100 ----------- Net Assets - 100.00%................ $40,937,524 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 15 THE BEAR STEARNS FUNDS Total Return Bond Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT MARKET DESCRIPTION (000'S) VALUE - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT INVESTMENTS--92.12% CORPORATE OBLIGATIONS - 54.41% ASSET-BACKED - 9.34% AFC Mortgage Loan Asset-Backed Certificates, Series 1994-1, Class 1A, Superior Bank FSB Depositor, 6.40%, 03/25/24....................................................................................... $ 482 $ 465,431 Ford Credit 1995-B Grantor Trust, Asset-Backed Certificates, Class A, 5.90%, 10/15/00........... 470 467,313 Morgan Stanley Capital I Inc., Series 1997-C1, Class A-1B, Commercial Mortgage Pass-Through Certificates, 7.46%, 05/15/06.................................................................. 540 543,713 Standard Credit Card Trust 1990-6, Credit Card Participation Certificates, Class A, 9.375%, 07/10/97....................................................................................... 190 191,818 ----------- 1,668,275 ----------- FINANCE - 18.08% Aon Capital Trust A, Capital Securities, Aon Corporation Guaranteed, 8.205%, 01/01/27*.......... 500 489,826 Associates Corp. N.A., Senior Notes, 7.50%, 05/15/99............................................ 150 152,625 CIT Group Holdings, Inc. (The), Senior Notes, MTN, 6.75%, 05/14/01.............................. 250 246,875 Compass Trust I, Capital Securities, Series A, Compass Bancshares, Inc., 8.23%, 01/15/27........ 500 484,375 General Motors Acceptance Corp., MTN, 6.125%, 09/08/97.......................................... 675 675,479 Lehman Brothers Holdings Inc., Series E, MTN, 6.65%, 01/28/00................................... 500 495,000 Markel Capital Trust I, Markel Corporation Guaranteed, 8.71%, 01/01/46*......................... 200 196,410 Salomon Inc, Senior Notes, 7.20%, 02/01/04...................................................... 500 491,250 ----------- 3,231,840 ----------- GOVERNMENT--AGENCY - 4.14% Hydro-Quebec, Yankee Debentures, 8.05%, 07/07/24................................................ 700 740,250 ----------- INDUSTRIAL - 15.95% Coca-Cola Enterprises Inc., Debentures, 6.70%, 10/15/36......................................... 725 714,125 Continental Cablevision, Senior Notes, 8.30%, 05/15/06.......................................... 500 520,000 Cooper Tire & Rubber Company, Notes, 7.625%, 03/15/27........................................... 200 195,000 Six Flags Entertainment Inc., Senior Notes, Time Warner Entertainment Inc. Guaranteed, Zero Coupon, 12/15/99............................................................................... 250 206,250 TCI Communications, Inc., Series B, Senior Notes, MTN, 7.55%, 09/02/03.......................... 750 727,500 Total Access Communication Public Company Limited, Senior Unsecured Yankee Bonds, 8.375%, 11/04/06*...................................................................................... 500 487,500 ----------- 2,850,375 ----------- TELEPHONE - 4.15% US West Capital Funding, Inc., US West, Inc. Guaranteed, 6.85%, 01/15/02........................ 750 740,625 ----------- UTILITY--GAS - 2.75% Ras Laffan Liquified Natural Gas Company Limited, Secured Bonds, 7.628%, 09/15/06*.............. 500 491,250 ----------- Total Corporate Obligations (cost - $9,878,834)................................................. 9,722,615 -----------
The accompanying notes are an integral part of the financial statements. 16 THE BEAR STEARNS FUNDS Total Return Bond Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT MARKET DESCRIPTION (000'S) VALUE - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT INVESTMENTS (CONTINUED) U.S. GOVERNMENT AGENCY OBLIGATIONS - 24.62% Federal Home Loan Mortgage Corporation 6.00%, 10/01/00............................................................................... $ 238 $ 231,883 Federal National Mortgage Association 6.50%, 04/01/26............................................................................... 19 17,712 7.00%, 10/01/25............................................................................... 504 482,071 7.00%, 01/01/26............................................................................... 241 230,073 7.00%, 11/01/26............................................................................... 895 856,371 8.00%, 02/01/12............................................................................... 571 581,563 Government National Mortgage Association 7.00%, 08/15/10............................................................................... 227 223,906 7.00%, 08/15/25............................................................................... 269 257,061 7.00%, 02/15/26............................................................................... 140 133,865 7.00%, 03/15/26............................................................................... 1,452 1,386,137 ----------- Total U.S. Government Agency Obligations (cost - $4,477,779).................................... 4,400,642 ----------- U.S. GOVERNMENT OBLIGATIONS - 13.09% U.S. Treasury Notes 5.75%, 10/31/00............................................................................... 500 485,670 5.875%, 08/15/98.............................................................................. 350 348,131 6.125%, 07/31/00.............................................................................. 500 492,500 6.625%, 07/31/01.............................................................................. 500 497,990 7.75%, 11/30/99............................................................................... 500 514,255 ----------- Total U.S. Government Obligations (cost - $2,373,800)........................................... 2,338,546 ----------- Total Long-Term Debt Investments (cost - $16,730,413)........................................... 16,461,803 ----------- SHARES --------- LONG-TERM EQUITY INVESTMENTS--5.42% PREFERRED STOCKS - 5.42% 1585 Broadway Corporation, Step-Down Preferred Stock, 13.83%, 12/30/06*......................... 500 485,182 Marquette Real Estate Funding Corporation, Step-Down Preferred Stock, 13.701%, 12/30/06*........ 500 483,288 ----------- Total Long-Term Equity Investments (cost - $1,000,815).......................................... 968,470 -----------
The accompanying notes are an integral part of the financial statements. 17 THE BEAR STEARNS FUNDS Total Return Bond Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------ MARKET DESCRIPTION SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS--0.00% INVESTMENT COMPANIES - 0.00% Federated Investors, Trust for Short-Term U.S. Government Securities**.......................... 119 $ 119 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares **..................... 454 454 ----------- Total Short-Term Investments (cost - $573)...................................................... 573 ----------- Total Investments (cost - $17,731,801) - 97.54%................................................. 17,430,846 Other assets in excess of liabilities - 2.46%................................................... 439,868 ----------- Net Assets - 100.00%............................................................................ $17,870,714 ----------- -----------
- --------- MTN -- Medium-Term Notes. * SEC Rule 144A Security. Such securities are traded only among "qualified institutional buyers". ** Money market fund. The accompanying notes are an integral part of the financial statements. 18 THE BEAR STEARNS FUNDS STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997
LARGE CAP SMALL CAP VALUE VALUE TOTAL RETURN PORTFOLIO PORTFOLIO BOND PORTFOLIO -------------- -------------- -------------- ASSETS Investments, at value (cost - $12,478,450, $34,698,305 and $17,731,801, respectively)..... $ 14,104,576 $ 40,782,424 $ 17,430,846 Receivable for Portfolio shares sold............ 101,416 20,747 73,214 Receivable for investments sold................. -- 649,773 202,886 Receivable from investment adviser.............. 11,997 -- 33,844 Dividends and interest receivable............... 20,125 12,780 239,294 Deferred organization expenses and other assets......................................... 91,426 111,636 79,307 -------------- -------------- -------------- Total assets.............................. 14,329,540 41,577,360 18,059,391 -------------- -------------- -------------- LIABILITIES Loan payable.................................... -- -- 58,000 Payable for Portfolio shares repurchased........ 165,587 66,250 107 Payable for investments purchased............... -- 457,039 -- Dividends payable............................... -- -- 33,741 Administration fee payable...................... 1,927 5,477 2,384 Distribution fee payable (class A and C shares)........................................ 16,126 46,559 6,138 Custodian fee payable........................... 1,993 1,240 7,110 Accrued expenses................................ 62,075 63,271 81,197 -------------- -------------- -------------- Total liabilities......................... 247,708 639,836 188,677 -------------- -------------- -------------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 821 2,346 1,486 Paid-in capital................................. 9,793,505 35,248,497 18,233,426 Undistributed net investment income............. 8,376 -- -- Accumulated net realized gain/(loss) from investments.................................... 2,653,004 (397,438) (63,243) Net unrealized appreciation/(depreciation) on investments.................................... 1,626,126 6,084,119 (300,955) -------------- -------------- -------------- Net assets................................ $ 14,081,832 $ 40,937,524 $ 17,870,714 -------------- -------------- -------------- -------------- -------------- -------------- CLASS A Net assets...................................... $ 4,986,830 $ 13,142,573 $ 3,366,497 -------------- -------------- -------------- Shares of beneficial interest outstanding....... 290,426 751,791 279,908 -------------- -------------- -------------- Net asset value per share....................... $17.17 $17.48 $12.03 -------------- -------------- -------------- -------------- -------------- -------------- Maximum offering price per share (net asset value plus sales charge of 4.75%*, 4.75%* and 3.75%*, respectively, of the offering price)... $18.03 $18.35 $12.50 -------------- -------------- -------------- -------------- -------------- -------------- CLASS C $ 2,986,488 $ 11,070,666 $ 1,017,746 Net assets...................................... -------------- -------------- -------------- Shares of beneficial interest outstanding....... 174,588 637,042 84,626 -------------- -------------- -------------- Net asset value and offering price per share**........................................ $17.11 $17.38 $12.03 -------------- -------------- -------------- -------------- -------------- -------------- CLASS Y Net assets...................................... $ 6,108,514 $ 16,724,285 $ 13,486,471 -------------- -------------- -------------- 355,556 957,355 1,121,464 Shares of beneficial interest outstanding....... -------------- -------------- -------------- Net asset value, offering and redemption price per share...................................... $17.18 $17.47 $12.03 -------------- -------------- -------------- -------------- -------------- --------------
- --------- * On investments of $50,000 or more, the offering price is reduced. ** Redemption price per share is equal to the net asset value per share less any applicable contingent deferred sales charge. The accompanying notes are an integral part of the financial statements. 19 THE BEAR STEARNS FUNDS STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997
LARGE CAP SMALL CAP TOTAL RETURN VALUE PORTFOLIO VALUE PORTFOLIO BOND PORTFOLIO ---------------- ---------------- ---------------- INVESTMENT INCOME Dividends........................................................... $ 388,841 $ 240,179 $ 12,133 Interest............................................................ 10,957 21,681 1,482,997 ---------------- ---------------- ---------------- 399,798 261,860 1,495,130 ---------------- ---------------- ---------------- EXPENSES Advisory fees....................................................... 151,578 285,539 98,957 Transfer agent fees and expenses.................................... 104,027 131,112 101,476 Accounting fees..................................................... 99,570 119,822 99,469 Distribution fees - class A......................................... 27,440 57,907 15,344 Distribution fees - class C......................................... 37,332 111,111 12,483 Legal and auditing fees............................................. 39,505 52,884 43,203 Administration fees................................................. 30,232 57,108 32,986 Reports and notices to shareholders................................. 10,459 17,558 19,432 Federal and state registration fees................................. 27,811 36,387 27,797 Amortization of organization expenses............................... 19,860 21,604 15,304 Insurance expenses.................................................. 15,137 14,971 15,078 Custodian fees and expenses......................................... 8,900 10,222 15,002 Trustees' fees and expenses......................................... 7,001 8,001 10,901 Other............................................................... 2,345 5,851 -- ---------------- ---------------- ---------------- Total expenses before waivers and reimbursements.............. 581,197 930,077 507,432 Less: waivers and reimbursements.............................. (312,774) (372,205) (379,218) ---------------- ---------------- ---------------- Total expenses after waivers and reimbursements............... 268,423 557,872 128,214 ---------------- ---------------- ---------------- Net investment income/(loss)........................................ 131,375 (296,012) 1,366,916 ---------------- ---------------- ---------------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS Net realized gain/(loss) from investments........................... 2,770,141 210,104 (61,189) Net change in unrealized appreciation/(depreciation) on investments........................................................ 486,773 3,397,726 (148,563) ---------------- ---------------- ---------------- Net realized and unrealized gain/(loss) on investments.............. 3,256,914 3,607,830 (209,752) ---------------- ---------------- ---------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $3,388,289 $3,311,818 $1,157,164 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
The accompanying notes are an integral part of the financial statements. 20 THE BEAR STEARNS FUNDS STATEMENT OF CHANGES IN NET ASSETS
LARGE CAP SMALL CAP VALUE PORTFOLIO VALUE PORTFOLIO ------------------------------------ ---------------- FOR THE FOR THE PERIOD FOR THE FISCAL YEAR APRIL 3, 1995* FISCAL YEAR ENDED THROUGH ENDED MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 ---------------- ---------------- ---------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment income/(loss).............................. $ 131,375 $ 20,211 $ (296,012) Net realized gain/(loss) from investments................. 2,770,141 95,147 210,104 Net change in unrealized appreciation/ (depreciation) on investments.............................................. 486,773 1,139,353 3,397,726 ---------------- ---------------- ---------------- Net increase in net assets resulting from operations...... 3,388,289 1,254,711 3,311,818 ---------------- ---------------- ---------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class A shares.......................................... (36,680) (4,557) -- Class C shares.......................................... (5,113) -- -- Class Y shares.......................................... (86,346) (10,514) -- ---------------- ---------------- ---------------- (128,139) (15,071) -- ---------------- ---------------- ---------------- Net realized capital gains Class A shares.......................................... (66,024) (1,184) (191,411) Class C shares.......................................... (46,015) (1,037) (113,992) Class Y shares.......................................... (97,133) (891) (274,790) ---------------- ---------------- ---------------- (209,172) (3,112) (580,193) ---------------- ---------------- ---------------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares...................... 21,189,714 10,493,529 31,319,342 Cost of shares repurchased................................ (20,911,123) (1,214,980) (15,839,169) Shares issued in reinvestment of dividends................ 203,090 9,088 509,481 ---------------- ---------------- ---------------- Net increase/(decrease) in net assets derived from shares of beneficial interest transactions...................... 481,681 9,287,637 15,989,654 ---------------- ---------------- ---------------- Total increase/(decrease) in net assets................... 3,532,659 10,524,165 18,721,279 NET ASSETS Beginning of period....................................... 10,549,173 25,008 22,216,245 ---------------- ---------------- ---------------- End of period**........................................... $14,081,832 $10,549,173 $40,937,524 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- TOTAL RETURN BOND PORTFOLIO ------------------------------------ FOR THE PERIOD FOR THE FOR THE PERIOD APRIL 3, 1995* FISCAL YEAR APRIL 3, 1995* THROUGH ENDED THROUGH MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996 ---------------- ---------------- ---------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment income/(loss).............................. $ (69,561) $ 1,366,916 $ 670,434 Net realized gain/(loss) from investments................. 544,848 (61,189) 105,601 Net change in unrealized appreciation/ (depreciation) on investments.............................................. 2,686,393 (148,563) (152,392) ---------------- ---------------- ---------------- Net increase in net assets resulting from operations...... 3,161,680 1,157,164 623,643 ---------------- ---------------- ---------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class A shares.......................................... -- (262,042) (232,740) Class C shares.......................................... -- (92,135) (84,059) Class Y shares.......................................... -- (1,012,739) (353,635) ---------------- ---------------- ---------------- -- (1,366,916) (670,434) ---------------- ---------------- ---------------- Net realized capital gains Class A shares.......................................... (64,256) (10,555) (13,644) Class C shares.......................................... (72,361) (4,155) (5,746) Class Y shares.......................................... (134,885) (38,149) (35,406) ---------------- ---------------- ---------------- (271,502) (52,859) (54,796) ---------------- ---------------- ---------------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares...................... 23,204,316 11,283,204 19,389,794 Cost of shares repurchased................................ (4,151,186) (12,702,583) (1,253,726) Shares issued in reinvestment of dividends................ 247,929 1,111,988 381,251 ---------------- ---------------- ---------------- Net increase/(decrease) in net assets derived from shares of beneficial interest transactions...................... 19,301,059 (307,391) 18,517,319 ---------------- ---------------- ---------------- Total increase/(decrease) in net assets................... 22,191,237 (570,002) 18,415,732 NET ASSETS Beginning of period....................................... 25,008 18,440,716 24,984 ---------------- ---------------- ---------------- End of period**........................................... $22,216,245 $17,870,714 $18,440,716 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------- * Commencement of operations. ** Includes undistributed net investment income of $8,376 for the fiscal year ended March 31, 1997 and $5,140 for the period April 3, 1995* through March 31, 1996, for Large Cap Value Portfolio. The accompanying notes are an integral part of the financial statements. 21 THE BEAR STEARNS FUNDS FINANCIAL HIGHLIGHTS Large Cap Value Portfolio ------------------------------------------------------------------------- Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD FOR THE FISCAL YEAR ENDED APRIL 3, 1995* THROUGH MARCH 31, 1997 MARCH 31, 1996 --------------------------- --------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period............................... $ 15.13 $ 15.08 $ 15.12 $ 12.00 $ 12.00 $ 13.98 ------- ------- ------- ------- ------- ------- Net investment income/(loss)(1)....... 0.04 (0.02) 0.23 0.06 (0.01) 0.07 Net realized and unrealized gain on investments(2)....................... 2.28 2.25 2.17 3.10 3.10 1.16 ------- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations...................... 2.32 2.23 2.40 3.16 3.09 1.23 ------- ------- ------- ------- ------- ------- Dividends and distributions to shareholders from Net investment income................. (0.10) (0.02) (0.16) (0.02) -- (0.08) Net realized capital gains............ (0.18) (0.18) (0.18) (0.01) (0.01) (0.01) ------- ------- ------- ------- ------- ------- (0.28) (0.20) (0.34) (0.03) (0.01) (0.09) ------- ------- ------- ------- ------- ------- Net asset value, end of period........ $ 17.17 $ 17.11 $ 17.18 $ 15.13 $ 15.08 $ 15.12 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total investment return(3)............ 15.44% 14.87% 16.04% 26.35% 25.71% 8.75%(4) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)............................. $ 4,987 $ 2,986 $ 6,109 $ 3,616 $ 3,520 $ 3,413 Ratio of expenses to average net assets(1)............................ 1.50% 2.00% 1.00% 1.50%(5) 2.00%(5) 1.00%(5) Ratio of net investment income/(loss) to average net assets(1)............. 0.43% (0.08)% 1.00% 0.46%(5) (0.06)%(5) 0.76%(4)(5) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements....................... 1.58% 1.61% 1.50% 4.34%(5) 4.39%(5) 4.41%(4)(5) Portfolio turnover rate............... 136.67% 136.67% 136.67% 45.28%(6) 45.28%(6) 45.28%(6) Average commission rate per share(7)............................. $0.0593 $0.0593 $0.0593 $0.0596 $0.0596 $0.0596
- -------- * Commencement of operations. Commenced investment operations on April 4, 1995. Class Y shares commenced its initial public offering on September 11, 1995. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A and C shares, due to timing differences in the commencement of the initial public offering of class Y shares. (5) Annualized. (6) Not annualized. (7) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period. The accompanying notes are an integral part of the financial statements. 22 THE BEAR STEARNS FUNDS FINANCIAL HIGHLIGHTS Small Cap Value Portfolio ------------------------------------------------------------------------- Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD FOR THE FISCAL YEAR ENDED APRIL 3, 1995* THROUGH MARCH 31, 1997 MARCH 31, 1996 --------------------------- --------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period............................... $ 15.87 $ 15.79 $ 15.85 $ 12.00 $ 12.00 $ 13.09 ------- ------- ------- ------- ------- ------- Net investment loss(1)................ (0.10) (0.18) (0.05) (0.07) (0.10) -- Net realized and unrealized gain on investments(2)....................... 1.95 1.93 1.97 4.17 4.11 3.05 ------- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations...................... 1.85 1.75 1.92 4.10 4.01 3.05 ------- ------- ------- ------- ------- ------- Distributions to shareholders from Net realized capital gains............ (0.24) (0.16) (0.30) (0.23) (0.22) (0.29) ------- ------- ------- ------- ------- ------- Net asset value, end of period........ $ 17.48 $ 17.38 $ 17.47 $ 15.87 $ 15.79 $ 15.85 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total investment return(3)............ 11.71% 11.12% 12.19% 34.36% 33.59% 23.52%(4) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)............................. $13,143 $11,071 $16,724 $ 6,474 $ 6,753 $ 8,989 Ratio of expenses to average net assets(1)............................ 1.50% 2.00% 1.00% 1.50%(5) 2.00%(5) 1.00%(5) Ratio of net investment loss to average net assets(1)................ (0.81)% (1.31)% (0.31)% (0.66)%(5) (1.09)%(5) -- Decrease reflected in above expense ratios and net investment loss due to waivers and reimbursements........... 1.00% 0.99% 1.00% 2.32%(5) 2.39%(5) 2.45%(4)(5) Portfolio turnover rate............... 56.88% 56.88% 56.88% 40.79%(6) 40.79%(6) 40.79%(6) Average commission rate per share(7)............................. $0.0550 $0.0550 $0.0550 $0.0572 $0.0572 $0.0572
- -------- * Commencement of investment operations. Class Y shares commenced its initial public offering on June 22, 1995. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A and C shares, due to timing differences in the commencement of the initial public offering of class Y shares. (5) Annualized. (6) Not annualized. (7) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period. The accompanying notes are an integral part of the financial statements. 23 THE BEAR STEARNS FUNDS FINANCIAL HIGHLIGHTS Total Return Bond Portfolio ------------------------------------------------------------------------- Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD FOR THE FISCAL YEAR ENDED APRIL 3, 1995* THROUGH MARCH 31, 1997 MARCH 31, 1996 --------------------------- --------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period............................... $ 12.26 $ 12.26 $ 12.26 $ 12.00 $ 12.00 $ 12.35 ------- ------- ------- ------- ------- ------- Net investment income(1).............. 0.73 0.68 0.77 0.71 0.67 0.41 Net realized and unrealized gain/(loss) on investments(2)........ (0.20) (0.20) (0.20) 0.30 0.30 (0.05) ------- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations...................... 0.53 0.48 0.57 1.01 0.97 0.36 ------- ------- ------- ------- ------- ------- Dividends and distributions to shareholders from Net investment income................. (0.73) (0.68) (0.77) (0.71) (0.67) (0.41) Net realized capital gains............ (0.03) (0.03) (0.03) (0.04) (0.04) (0.04) ------- ------- ------- ------- ------- ------- (0.76) (0.71) (0.80) (0.75) (0.71) (0.45) ------- ------- ------- ------- ------- ------- Net asset value, end of period........ $ 12.03 $ 12.03 $ 12.03 $ 12.26 $ 12.26 $ 12.26 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total investment return(3)............ 4.40% 3.99% 4.77% 8.54% 8.13% 2.92%(4) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA(7) Net assets, end of period (000's omitted)............................. $ 3,367 $ 1,018 $13,486 $ 4,467 $ 1,775 $12,199 Ratio of expenses to average net assets(1)............................ 0.80% 1.20% 0.45% 0.85%(5) 1.25%(5) 0.45%(5) Ratio of net investment income to average net assets(1)................ 5.99% 5.57% 6.34% 5.76%(5) 5.38%(5) 5.93%(4)(5) Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements................... 1.73% 1.74% 1.73% 2.87%(5) 2.95%(5) 2.89%(4)(5) Portfolio turnover rate............... 262.95% 262.95% 262.95% 107.35%(6) 107.35%(6) 107.35%(6)
- -------- * Commencement of operations. Commenced investment operations on April 5, 1995. Class Y shares commenced its initial public offering on September 8, 1995. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A and C shares, due to timing differences in the commencement of the initial public offering of class Y shares. (5) Annualized. (6) Not annualized. (7) Average commission rate per share disclosure is required for fiscal years beginning on or after September 1, 1995. The Portfolio incurred no such charges. The accompanying notes are an integral part of the financial statements. 24 THE BEAR STEARNS FUNDS Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business trust on September 29, 1994 and is registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company. The Fund currently has five separate portfolios in operation: three diversified portfolios, Large Cap Value Portfolio ("Large Cap"), Small Cap Value Portfolio ("Small Cap") and Total Return Bond Portfolio ("Bond Portfolio") (collectively, the "Portfolios") and two non-diversified portfolios, The Insiders Select Fund and S&P STARS Portfolio. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As of the date hereof, each Portfolio offers three classes of shares, which have been designated as class A, C and Y shares. ORGANIZATIONAL MATTERS--Prior to commencing operations on April 3, 1995, the Portfolios did not have any transactions other than those relating to organizational matters and the sale of 1,042, 1,042 and 1,041 class A shares and 1,042, 1,042 and 1,041 class C shares of beneficial interest of Large Cap, Small Cap and Bond Portfolio, respectively, to Bear, Stearns & Co. Inc., ("Bear Stearns" or the "Distributor"). Costs of $99,875, $107,203 and $76,571 which were incurred by Large Cap, Small Cap and Bond Portfolio, respectively, in connection with the organization, registration with the Commission and initial public offering of its shares, have been deferred and are being amortized using the straight-line method over the period of benefit not exceeding sixty months, beginning with the commencement of investment operations of each Portfolio. The Portfolios commenced investment operations on April 4, 1995, April 3, 1995 and April 5, 1995 for Large Cap, Small Cap, and Bond Portfolio, respectively. In the event that the Distributor or any transferee of the Distributor redeems any of its original shares in any of the Portfolios prior to the end of the sixty month period, the proceeds of the redemption payable in respect of such shares shall be reduced by the pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of the redemption) of the unamortized deferred organization expenses as of the date of such redemption. In the event that any of the Portfolios are liquidated prior to the end of the sixty month period, the Distributor or the transferee of the Distributor shall bear the unamortized deferred organization expenses. PORTFOLIO VALUATION--Each Portfolio calculates the net asset value of and completes orders to purchase or repurchase its shares of beneficial interest on each business day, with the exception of those days on which the New York Stock Exchange is closed. The Equity Portfolios' (consisting of Large Cap and Small Cap) securities, including covered call options written by the Equity Portfolios, 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. For the Bond Portfolio, substantially all of the investments (including short-term investments) are valued at each business day by one or more independent pricing services (the "Service") approved by the Fund's Board of Trustees. Securities valued by the Service for which quoted bid prices in the judgment of the Service are readily available and are representative of the bid side of the market, are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation of the market for such securities). Securities which mature in 60 days or less are valued at amortized cost, which approximates market value, unless this 25 method does not represent fair value. Expenses and fees, including the investment advisory, administration and distribution fees, are accrued daily and taken into account for the purpose of determining the net asset value of a Portfolio's shares. Because of the differences in operating expenses incurred by each class, the per share net asset value of each class will differ. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are recorded on the trade date (the date on which the order to buy or sell is executed). Realized gains and losses from securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Discounts are treated as adjustments to interest income and identified costs of investments over the lives of respective investments. The Equity Portfolios' net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day (after adjusting for current capital share activity of the respective classes). The Bond Portfolio's net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of the settled shares value of each class at the beginning of the day. U.S. FEDERAL TAX STATUS--Each Portfolio intends to distribute substantially all of its taxable income and to comply with the other requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing during each calendar year substantially all of its ordinary income and capital gains, if any, each Portfolio intends not to be subject to a U.S. federal excise tax. At March 31, 1997, the Bond Portfolio had a capital loss carryforward of $60,955 available as a reduction, to the extent provided in regulations of any future net capital gains realized before the end of fiscal year 2005. To the extent that the loss is used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders. For U.S. federal income tax purposes, realized capital losses incurred after October 31, 1996, within the fiscal year, are deemed to arise on the first day of the following fiscal year. Small Cap incurred and elected to defer such losses of $397,438. DIVIDENDS AND DISTRIBUTIONS--Each Equity Portfolio intends to distribute at least annually to shareholders substantially all of its net investment income. The Bond Portfolio declares dividends from net investment income on each day the New York Stock Exchange is open for business. These dividends on the Bond Portfolio are paid usually on or about the twentieth day of each month. Distribution of net realized gains, if any, will be declared and paid at least annually by all Portfolios. Dividends and distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within capital accounts based on their U.S. federal tax-basis treatment; temporary differences do not require reclassification. At March 31, 1997, Small Cap reclassified within the composition of net assets a net operating loss of $300,695 to accumulated net realized gains. In addition, Small Cap reclassified $64,878 in net operating loss to paid-in capital. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the fiscal year ended March 31, 1997, Bear Stearns Funds Management Inc. ("BSFM" or the "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the investment adviser pursuant to an Investment Advisory Agreement with each Portfolio. The Adviser is entitled to receive from the Portfolios a monthly fee equal to an annual rate of 0.75% of each Equity Portfolio's average daily net assets and 0.45% of the Bond Portfolio's average daily net assets. During the fiscal year ended March 31, 1997, BSFM (or the "Administrator") served as administrator to each Portfolio pursuant to an Administration Agreement. The Administrator is entitled to receive from each Portfolio a monthly fee equal to an annual rate of 0.15% of each Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with each Portfolio, PFPC Inc. provides certain administrative services to each Portfolio. For providing these services, PFPC Inc. is entitled to receive from each Portfolio a monthly fee equal to an annual rate of 0.10% of 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 $132,000 for each Portfolio. During the fiscal year ended March 31, 1997, PFPC Inc. has voluntarily waived a portion of its fee. 26 During the fiscal year ended March 31, 1997, the Adviser has voluntarily undertaken to limit each Equity Portfolio's total operating expenses (exclusive of brokerage commissions, taxes, interest and extraordinary items) to a maximum annual level of 1.50% of the average daily net assets of its class A shares, 2.00% of the average daily net assets of its class C shares and 1.00% of the average daily net assets of its class Y shares. During the period April 3, 1995 through August 31, 1995, the Adviser had voluntarily undertaken to limit the total operating expenses (exclusive of brokerage commissions, taxes, interest and extraordinary items) of the Bond Portfolio, to a maximum annual level of 1.00%, 1.40%, and 0.65% of such Portfolio's average daily net assets for class A, C and Y shares, respectively. Effective September 1, 1995, the total operating expenses (exclusive of brokerage commissions, taxes, interest and extraordinary items) were further reduced by the Adviser with respect to the Bond Portfolio only, to a maximum annual level of 0.80%, 1.20% and 0.45% of the Bond Portfolio's average daily net assets for class A, C and Y shares, respectively. As necessary, this limitation is effected by waivers by the Adviser of its advisory fees and reimbursements of expenses exceeding the advisory fee. For the fiscal year ended March 31, 1997, the Adviser waived advisory fees of $151,578, $285,539 and $98,957 for Large Cap, Small Cap and Bond Portfolio, respectively. In addition, the Adviser reimbursed $161,196, $86,666 and $280,261 for Large Cap, Small Cap and Bond Portfolio, respectively, in order to maintain the voluntary expense limitation. For the fiscal year ended March 31, 1997, Bear Stearns, an affiliate of the Adviser and the Administrator, earned $1,267 and $9,066 in brokerage commissions from portfolio transactions executed on behalf of Large Cap and Small Cap, respectively. Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies Inc. and an affiliate of the Adviser and the Administrator, serves as custodian to the Portfolios. DISTRIBUTION PLAN The Fund, on behalf of each Portfolio, has entered into a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan in effect for the fiscal year ended March 31, 1997, the Equity Portfolios each paid Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares and the Bond Portfolio paid Bear Stearns a fee at an annual rate of 0.35% for class A shares and 0.75% for class C shares. Such fees are based on the average daily net assets in each class of the respective Portfolios and are accrued daily and paid monthly or at such other intervals as the Board of Trustees may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. For the fiscal year ended March 31, 1997, Bear Stearns earned $64,772, $169,018 and $27,827 for Large Cap, Small Cap and Bond Portfolio, respectively, in distribution fees. Bear Stearns uses these fees to pay its dealers whose clients hold Portfolio shares and for other distribution-related activities. In addition, as Distributor of the Portfolios, Bear Stearns collects the sales charges imposed on sales of each Portfolio's class A shares, and reallows a portion of such charges to dealers through which the sales are made. As a result of an undertaking by the Distributor, it reallowed all of the sales charges to its dealers selling Portfolio shares for the period April 3, 1995 (commencement of operations) through September 26, 1995 and the period February 15, 1996 through June 30, 1996. Furthermore, the Distributor has increased the compensation paid to its dealers selling Portfolio shares on net asset value transfers (purchases made by investors with the proceeds from a redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns) from 0.50% to 1.00% beginning April 15, 1996 until further notice. In addition, Bear Stearns advanced 1.00% in sales commissions on the sale of class C shares to dealers at the time of such sales. For the fiscal year ended March 31, 1997, Bear Stearns has advised each Portfolio that it received approximately $43,100, $227,500 and $17,600 in front-end sales charges resulting from sales of class A shares of Large Cap, Small Cap and Bond Portfolio, respectively. From these fees, Bear Stearns paid such sales charges to dealers which in turn paid commissions to sales persons. In addition, Bear Stearns has advised Large Cap, Small Cap and Bond Portfolio that during the period, it received approximately $3,200, $2,700 and $100 from the Portfolios, respectively, in contingent deferred sales charges upon certain redemptions by class C shareholders. 27 INVESTMENTS IN SECURITIES For U.S. federal income tax purposes, the costs of securities owned at March 31, 1997 were $12,495,862, $34,698,305 and $17,732,035 for Large Cap, Small Cap and Bond Portfolio, respectively. Accordingly, the net unrealized appreciation/(depreciation) of investments are as follows:
NET APPRECIATION/ PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION) - ---------------------------------------- --------------- --------------- ----------------- Large Cap............................... $ 1,820,935 $ (212,221) $ 1,608,714 Small Cap............................... 7,605,934 (1,521,815) 6,084,119 Bond Portfolio.......................... 2,798 (303,987) (301,189)
For the fiscal year ended March 31, 1997, aggregate purchases and sales of investment securities (excluding short-term investments) for each Portfolio were as follows:
PORTFOLIO PURCHASES SALES - ---------------------------------------- -------------- -------------- Large Cap............................... $ 26,322,213 $ 25,695,746 Small Cap............................... 35,863,818 21,007,015 Bond Portfolio.......................... 54,226,881 53,591,865
SHARES OF BENEFICIAL INTEREST Each Portfolio offers class A, C and Y shares. Class A shares are sold with a front-end sales charge of up to 4.75% (3.75% in the case of the Bond Portfolio). Class C shares are sold with a contingent deferred sales charge ("CDSC") of 1.00% within the first year. There is no sales charge or CDSC on class Y shares, which are offered primarily to institutional investors. At March 31, 1997, there was an unlimited amount of $0.001 par value shares of beneficial interest authorized for each Portfolio, of which Bear Stearns owned 1,042, 1,042 and 1,041 of class A shares and 1,042, 1,042 and 1,041 of class C shares of Large Cap, Small Cap and Bond Portfolio, respectively. Transactions in the classes of shares of beneficial interest were as follows:
LARGE CAP(1) SMALL CAP(2) BOND PORTFOLIO(3) ----------------------------------- ------------------------------------ ---------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y CLASS A CLASS C ---------- ---------- ----------- ----------- ---------- ----------- ---------- ---------- FOR THE FISCAL YEAR ENDED MARCH 31, 1997 SALES: Shares................... 231,427 61,362 1,085,350 589,041 464,417 771,522 124,771 24,694 Amount................... $3,703,414 $ 950,313 $16,535,987 $10,117,507 $8,013,394 $13,188,441 $1,526,794 $ 301,360 REINVESTMENTS: Shares................... 5,640 3,077 3,863 10,191 6,403 13,693 14,003 4,620 Amount................... $ 91,138 $ 49,600 $ 62,352 $ 171,713 $ 107,447 $ 230,321 $ 171,130 $ 56,453 REPURCHASES: Shares................... 185,652 123,270 959,370 255,449 261,409 394,936 223,376 89,493 Amount................... $3,216,798 $2,089,876 $15,604,449 $ 4,464,886 $4,565,675 $ 6,808,608 $2,719,344 $1,098,501 CLASS Y ---------- FOR THE FISCAL YEAR ENDED SALES: Shares................... 777,105 Amount................... $9,455,050 REINVESTMENTS: Shares................... 72,402 Amount................... $ 884,405 REPURCHASES: Shares................... 723,355 Amount................... $8,884,738
28
LARGE CAP(1) SMALL CAP(2) BOND PORTFOLIO(3) ----------------------------------- ------------------------------------ ---------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y CLASS A CLASS C ---------- ---------- ----------- ----------- ---------- ----------- ---------- ---------- FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996 SALES: Shares................... 315,696 233,174 230,011 670,342 431,865 564,644 412,635 146,761 Amount................... $4,132,049 $3,029,455 $ 3,332,025 $ 9,119,686 $5,897,544 $ 8,187,086 $5,005,133 $1,778,698 REINVESTMENTS: Shares................... 332 68 211 3,827 4,544 8,725 11,440 3,450 Amount................... $ 4,945 $ 1,009 $ 3,134 $ 55,602 $ 65,802 $ 126,525 $ 142,125 $ 42,916 REPURCHASES: Shares................... 78,059 865 4,509 267,203 9,820 6,293 60,606 6,447 Amount................... $1,135,562 $ 12,818 $ 66,600 $ 3,916,200 $ 142,216 $ 92,770 $ 761,370 $ 81,056 CLASS Y ---------- FOR THE PERIOD APRIL 3, 1 SALES: Shares................... 1,013,077 Amount................... $12,605,963 REINVESTMENTS: Shares................... 15,678 Amount................... $ 196,210 REPURCHASES: Shares................... 33,443 Amount................... $ 411,300
- --------- * Commencement of operations. (1) Commenced investment operations on April 4, 1995, class Y shares commenced its initial public offering on September 11, 1995. (2) Commenced investment operations on April 3, 1995, class Y shares commenced its initial public offering on June 22, 1995. (3) Commenced investment operations on April 5, 1995, class Y shares commenced its initial public offering on September 8, 1995. CREDIT AGREEMENT The Fund, on behalf of the Portfolios, has entered into a credit agreement with The First National Bank of Boston. S&P STARS Fund, The Insiders Select Fund, S&P STARS Portfolio and Bear Stearns Investment Trust, which consists of the Emerging Markets Debt Portfolio, are also parties to the credit agreement. The agreement provides that each party to the credit agreement is permitted to borrow in an amount up to 15% of the value of its total assets. Subject to Board approval and upon making necessary disclosure in its prospectus, each portfolio may, in accordance with the provisions of the credit agreement, borrow up to 25% of the value of its total assets, less all liabilities other than liabilities for borrowed money outstanding at the time. However, at no time is the aggregate outstanding principal amount of all loans to any of the portfolios to exceed $25,000,000. The line of credit will bear interest at the greater of: (i) the annual rate of interest announced from time to time from the bank at its head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or at the borrower's option, the rate quoted by The First National Bank of Boston. Each loan is payable on demand or upon termination of this credit agreement or, for money market loans, on the last day of the interest period and, in any event, not later than 14 days from the date the loan was advanced. The Portfolios use the facility to borrow money only for temporary or emergency (not leveraging) purposes. Amounts outstanding under the line of credit agreement for Large Cap, Small Cap, and Bond Portfolio averaged $14,895, $22,618 and $14,364, respectively, during the year ended March 31, 1997. The maximum amounts outstanding at any month-end under such line of credit agreement during fiscal year 1997 for Large Cap, Small Cap, and Bond Portfolio, were $52,000, $160,000 and $58,000, respectively. The average interest rates during 1997, on amounts outstanding under such line of credit agreement were 8.25%, 8.18% and 7.98% for Large Cap, Small Cap and Bond Portfolio, respectively. Large Cap and Small Cap had no amounts outstanding under the line of credit agreement at March 31, 1997. The Bond Portfolio had $58,000 outstanding under the line of credit agreement at March 31, 1997. 29 THE BEAR STEARNS FUNDS Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholders, Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio (Series of The Bear Stearns Funds): We have audited the accompanying statements of assets and liabilities, including the portfolios of investments of Large Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio (collectively, the "Portfolios") as of March 31, 1997, and the related statements of operations, changes in net assets and the financial highlights for the fiscal year ended March 31, 1997 and the period April 3, 1995 (commencement of operations) through March 31, 1996. These financial statements and financial highlights are the responsibility of the Portfolios' management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Large Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio at March 31, 1997, the results of their operations, the changes in their net assets and the financial highlights for the periods presented in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York May 9, 1997 30 THE BEAR STEARNS FUNDS Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio SHAREHOLDER TAX INFORMATION -- (UNAUDITED) Each Portfolio is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of each Portfolio's fiscal year end (March 31, 1997) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the fiscal year ended March 31, 1997, the following dividends and distributions per share were paid by each of the Portfolios: LARGE CAP VALUE PORTFOLIO
ORDINARY INCOME LONG-TERM CAPITAL GAINS - ------------------------------------- ------------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ----------- ----------- ----------- ----------- ----------- ----------- $ 0.18 $ 0.10 $ 0.24 $ 0.10 $ 0.10 $ 0.10 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
The percentage of total ordinary income dividends received from the Large Cap Value Portfolio qualifying for the corporate dividends received deduction is 100%. SMALL CAP VALUE PORTFOLIO
ORDINARY INCOME LONG-TERM CAPITAL GAINS - ------------------------------------- ------------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ----------- ----------- ----------- ----------- ----------- ----------- $ 0.21 $ 0.13 $ 0.27 $ 0.03 $ 0.03 $ 0.03 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
The percentage of total ordinary income dividends from the Small Cap Value Portfolio qualifying for the corporate dividends received deduction is 41.50%. TOTAL RETURN BOND PORTFOLIO
ORDINARY INCOME - ------------------------------- CLASS A CLASS C CLASS Y - --------- --------- --------- $ 0.7593 $ 0.7106 $ 0.8021 - --------- --------- --------- - --------- --------- ---------
There were no ordinary income dividends from the Total Return Bond Portfolio which would qualify for the dividends received deduction available to corporate shareholders. Because each Portfolio's fiscal year is not the calendar year, another notification will be sent with respect to calendar year 1997. The second notification, which will reflect the amount to be used by calendar year taxpayers on their U.S. federal income tax returns, will be made in conjunction with Form 1099-DIV and will be mailed in January 1998. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their dividend. They will generally not be entitled to a foreign tax credit or deduction for the withholding taxes paid by the Portfolios, if any. In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Portfolios. 31 -----END PRIVACY-ENHANCED MESSAGE-----