-----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, FzO+C6NqXcy1f0AqoLMDowldCk286WKLAeF/EilEdf91waBfEdr7fYaxnDO5n79L /KBknp4s7HugChK1QU4WVQ== 0000912057-96-010976.txt : 19960530 0000912057-96-010976.hdr.sgml : 19960530 ACCESSION NUMBER: 0000912057-96-010976 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960529 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: 96573507 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 The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Robert S. Reitzes....................... Chairman of the Board Neil T. Eigen........................... 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 Frank J. Maresca........................ Vice President and Treasurer Raymond D. DeAngelo..................... Vice President Ellen T. Arthur......................... Secretary Vincent L. Pereira...................... Assistant Treasurer Eileen M. Coyle......................... Assistant Secretary Investment Adviser & Sub-Investment Adviser 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 & Dividend Counsel Disbursement Agent Stroock & Stroock & Lavan PFPC Inc. 7 Hanover Square Bellevue Corporate Center New York, NY 10004 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 the 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 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-010-02 The Insiders Select Fund Annual Report March 31, 1996 [LOGO] THE BEAR STEARNS FUNDS The Insiders Select Fund LETTER TO SHAREHOLDERS April 25, 1996 Dear Shareholders, We are pleased to present the first annual report to the shareholders of The Insiders Select Fund (the "Portfolio") for the period ended March 31, 1996. From its inception on June 16, 1995 through March 31, 1996, the Portfolio gained 16.75% and 16.33% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively, compared to 21.79% for its benchmark, the S&P 500 (Composite) Index (the "S&P 500"). For the period June 20, 1995 (commencement of initial public offering) through March 31, 1996 the class Y shares gained 15.98% compared to 20.63% for the S&P 500. Further performance data for each class of shares during this reporting period is available in the "Financial Highlights" section of this report. The U.S. equity market has been remarkably robust since the Portfolio's inception, led by strong corporate earnings and declining interest rates. During this period, insider accumulation has been rather selective due to the continuing rise in the market. Most of the substantial insider acquisitions have been in the financial services sector where valuations continue to be attractive. In addition, insiders have been selectively acquiring stocks in other sectors, such as health care and technology. Corporate insiders tend to be value oriented investors with an aptness for the early discovery of undervalued sectors. With the strong performance of the equity market, it has become increasingly difficult for insiders to find clearly undervalued sectors. The Portfolio has remained close to fully invested through this period. There has also been very limited use of short selling in managing the Portfolio. The period from June 16, 1995 (commencement of investment operations) to March 31, 1996 has been characterized by the vigorous performance of large, growth stocks that dominate the S&P 500. The Portfolio's return was hurt this quarter due to its emphasis on banking and insurance stocks and its underweighting in retail stocks. The decline in the bond market in March contributed to the poor performance of the financial sector while boosting the retail sector as the perception of a stronger economy tends to do. Additionally, the Portfolio had a difficult time keeping pace with the S&P 500 during this period due to a significant number of mid-cap stocks being held in the Portfolio. Over the long run, we expect these mid-cap stocks to outperform the larger stocks because they typically have higher growth rates than their larger peers, and their valuation is not excessive. Looking ahead, we will continue to invest in companies where insider accumulation is accompanied by strong valuation characteristics as we feel that these stocks will have the most potential for capital appreciation and growth. We appreciate your support and would be pleased to respond to any questions or comments. If you have any questions concerning the Portfolio, please call 1-800-766-4111. Sincerely, [SIG] [SIG] Robert S. Reitzes Praveen Gottipalli Chairman of the Board Symphony Asset Management The Bear Stearns Funds Sub-Investment Adviser Portfolio Manager The Insiders Select Fund
1 THE BEAR STEARNS FUNDS The Insiders Select Fund(1) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
$9,525 INVESTMENT MADE ON JUNE 16, 1995 Past performance is not predictive of future performance The Insiders Select Portfolio (3)(4) S&P 500 (Composite) National Consumer Class A Shares Class C Shares Index Price Index June 16, 1996 $9,525.00 $10,000.00 $10,000.00 $10,000.00 June 30, 1995 9,588.50 10,066.66 10,099.00 10,013.13 July 31, 1995 10,080.63 10,583.33 10,434.00 10,032.83 August 31, 1995 10,136.19 10,633.33 10,461.00 10,045.96 September 30, 1995 10,469.56 10,975.00 10,902.00 10,059.09 October 31, 1995 10,390.19 10,900.00 10,863.00 10,091.92 November 30, 1995 10,795.00 11,316.66 11,340.00 10,091.92 Dcember 31, 1995 10,802.30 11,316.66 11,558.00 10,111.62 January 31, 1996 11,056.47 11,575.00 11,952.00 10,157.58 February 29, 1996 11,151.78 11,666.66 12,063.00 10,177.28 March 31, 1996 11120.01(5) 11533.33(6) 12,179.00 10,216.68 TOTAL RETURN WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS --------------------------- --------------------------- The Insiders Select Fund(1)(4) Class A shares.......................... 11.20%(5) 16.75% Class C shares.......................... 15.33(6) 16.33 Class Y shares(2)(7).................... 15.98 15.98 S&P 500 (Composite) Index(3)................ 21.79 -- National Consumer Price Index(3)............ 2.17 --
- --------- (1) For the period June 16, 1995 (commencement of investment operations) through March 31, 1996. (2) The return of class Y shares (for which June 20, 1995 was the initial public offering date) would have been higher than class A and class C shares if operations were commenced on the same day. The higher return is due to the fact that there is no sales load, CDSC or 12b-1 fee charged to class Y shares. (3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects 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. (4) 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. (5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and expense reimbursements, the total return would have been 9.93% with a sales load charged and 15.42% without a sales load charged. (6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense reimbursements, the total return would have been 13.92% with a CDSC charged at the end of the period and 14.92% without a CDSC charged at the end of the period. (7) Excluding fee waivers and expense reimbursements, the total return would have been 14.85%. CDSC -- Contingent Deferred Sales Charge. 2 THE BEAR STEARNS FUNDS The Insiders Select Fund MARCH 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Banks 7.75% Cash & Cash Equivalents 2.24% Chemicals & Fertilizers 3.66% Computers & Office Equipment 4.16% Computer Services 3.26% Credit & Finance 12.01% Drugs & Hospital Supplies 14.27% Electrical Equipment 3.77% Electronics 3.39% Food & Beverages 3.55% Holding Companies 2.54% Lodging 2.21% Miscellaneous Manufacturing 8.19% Oil & Gas 10.46% Telecommunications 5.51% Utilities 2.85% Other 10.18%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ------------------------------------------------------ --------------------------- ---------- 1. Johnson & Johnson................................. Drugs & Hospital Supplies 3.00 2. Federal National Mortgage Association............. Credit & Finance 2.95 3. Dover Corp........................................ Miscellaneous Manufacturing 2.94 4. American International Group, Inc................. Credit & Finance 2.89 5. Merck & Co., Inc.................................. Drugs & Hospital Supplies 2.88 6. Mobil Corp........................................ Oil & Gas 2.88 7. Jefferson-Pilot Corp.............................. Credit & Finance 2.71 8. Texaco, Inc. ..................................... Oil & Gas 2.32 9. Becton, Dickinson & Co............................ Drugs & Hospital Supplies 2.31 10. City National Corp. .............................. Banks 2.04
3 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1996
---------------------------------------------------------- MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS--97.75% AEROSPACE & DEFENSE - 0.50% 2,000 General Dynamics Corp....................................... $ 117,000 ----------- BANKS - 7.75% 1,800 BankAmerica Corp............................................ 139,500 4,100 Bank of Boston Corp......................................... 203,462 3,300 Central Fidelity Banks, Inc. ............................... 112,200 35,000 City National Corp.......................................... 476,875 2,000 First Chicago NBD Corp. .................................... 83,000 2,800 First Virginia Banks, Inc................................... 113,050 3,900 Green Tree Financial Corp. ................................. 134,062 9,800 Huntington Bancshares Inc. ................................. 233,975 4,200 Provident Bankshares Corp................................... 139,650 4,700 Summit Bancorp.............................................. 173,900 ----------- 1,809,674 ----------- BUILDING MATERIALS - 0.94% 2,900 Conseco Industries Ltd...................................... 209,887 400 USG Corp.*.................................................. 10,150 ----------- 220,037 ----------- CHEMICALS & FERTILIZERS - 3.66% 1,500 DuPont (E.I.) de Nemours & Co............................... 124,500 6,600 Eastman Chemical Co......................................... 456,225 4,400 Hercules Inc................................................ 272,800 ----------- 853,525 ----------- COMPUTERS & OFFICE EQUIPMENT - 4.16% 5,450 Computer Associates International, Inc...................... 390,356 19,500 Computervision Corp*........................................ 202,312 3,400 International Business Machines Corp........................ 377,825 ----------- 970,493 ----------- COMPUTER SERVICES - 3.26% 8,300 American Management Systems*................................ 211,650 4,400 Cisco Systems, Inc.*........................................ 204,050 6,700 National Data Corp.......................................... 228,638 3,400 SunGard Data Systems, Inc. *................................ 116,450 ----------- 760,788 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ CREDIT & FINANCE - 12.01% 7,200 American International Group, Inc........................... $ 674,100 21,600 Federal National Mortgage Association....................... 688,500 11,750 Jefferson-Pilot Corp........................................ 633,031 2,700 J.P. Morgan & Co............................................ 224,100 3,700 Merrill Lynch & Co. ........................................ 224,775 2,100 Morgan Stanley Group Inc. .................................. 108,675 1,900 Price (T. Rowe) Associates ................................. 100,700 2,000 Student Loan Marketing Association.......................... 153,000 ----------- 2,806,881 ----------- DRUGS & HOSPITAL SUPPLIES - 14.27% 6,600 Becton, Dickinson & Co...................................... 540,375 3,600 Bristol-Myers Squibb Co..................................... 308,250 2,600 Guidant Corp................................................ 140,725 7,600 Johnson & Johnson........................................... 701,100 6,600 Medtronic, Inc.............................................. 393,525 10,800 Merck & Co., Inc. .......................................... 672,300 7,975 Pharmacia & Upjohn, Inc..................................... 318,003 1,400 Schering-Plough............................................. 81,375 5,700 Sola International, Inc.*................................... 177,413 ----------- 3,333,066 ----------- ELECTRICAL EQUIPMENT - 3.77% 14,300 Belden, Inc................................................. 421,850 8,300 Honeywell, Inc.............................................. 458,575 ----------- 880,425 ----------- ELECTRONICS - 3.39% 7,800 Applied Materials, Inc.*.................................... 272,025 7,100 Atmel Corp.*................................................ 181,050 10,500 BMC Industries, Inc......................................... 225,750 3,100 National Service Industries, Inc............................ 112,375 ----------- 791,200 ----------- ENTERTAINMENT & LEISURE - 1.90% 8,900 MGM Grand, Inc.*............................................ 341,538 1,600 The Walt Disney Co. ........................................ 102,200 ----------- 443,738 ----------- ENVIRONMENTAL CONTROLS - 1.31% 9,700 Browning-Ferris Industries, Inc............................. 305,550 -----------
The accompanying notes are an integral part of the financial statements. 4 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1996
------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) FOOD & BEVERAGES - 3.55% 3,000 Pepsico, Inc................................................ $ 189,750 3,600 Philip Morris Cos. Inc. .................................... 315,900 6,200 Sara Lee Corp............................................... 202,275 900 Unilever N.V. .............................................. 122,175 ----------- 830,100 ----------- FOREST PRODUCTS & PAPER - 1.89% 3,600 Consolidated Papers, Inc.................................... 202,500 3,200 Kimberly-Clark Corp. ....................................... 238,400 ----------- 440,900 ----------- HOLDING COMPANIES - 2.54% 2,300 Eastern Enterprises......................................... 81,650 3,400 ITT Corp, new shares*....................................... 204,000 11,000 Teledyne, Inc............................................... 308,000 ----------- 593,650 ----------- LODGING - 2.21% 5,500 Hilton Hotels Corp.......................................... 517,000 ----------- MISCELLANEOUS MANUFACTURING - 8.19% 3,700 Case Corp................................................... 188,237 15,000 Dover Corp.................................................. 686,250 3,800 Eastman Kodak Co............................................ 269,800 4,200 Harsco Corp................................................. 278,250 7,900 Helix Technology Corp....................................... 222,188 4,300 ITT Industries, Inc......................................... 109,650 4,500 Lam Research Corp.*......................................... 157,500 ----------- 1,911,875 ----------- OIL & GAS - 10.46% 5,800 Consolidated Natural Gas Co. ............................... 252,300 5,800 Mobil Corp.................................................. 672,075 4,200 Oneok, Inc. ................................................ 100,275 2,300 Royal Dutch Petroleum Co. .................................. 324,875 1,500 Schlumberger, Ltd........................................... 118,688 6,300 Texaco Inc. ................................................ 541,800 8,600 The Williams Cos., Inc...................................... 433,225 ----------- 2,443,238 ----------- PACKAGING & CONTAINERS - 1.96% 13,400 Sealed Air Corp.*........................................... 457,275 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ RETAILING, - 1.67% 12,800 Safeway Inc.*............................................... $ 364,800 1,000 The TJX Companies, Inc...................................... 25,125 ----------- 389,925 ----------- TELECOMMUNICATIONS - 5.51% 1,000 360 Communications Company *................................ 23,875 4,500 ADC Telecommunications, Inc.*............................... 155,250 3,000 Century Telephone Enterprises, Inc. ........................ 95,250 5,400 Equifax Inc................................................. 108,675 10,200 GTE Corp.................................................... 447,525 6,500 SBC Communications Inc. .................................... 342,063 3,000 Sprint Corp................................................. 114,000 ----------- 1,286,638 ----------- UTILITIES - 2.85% 7,500 Entergy Corp. .............................................. 210,000 6,100 Texas Utilities Co.......................................... 252,388 7,500 Unicom Corp................................................. 202,500 ----------- 664,888 ----------- Total Common Stocks (cost - $21,342,374)........................................ 22,827,866 ----------- PREFERRED STOCK--0.01% HOLDING COMPANY - 0.01% 96 Teledyne Inc., Cumulative Preferred Series E, 6.00% (cost - $1,416)............................. 1,392 ----------- SHORT-TERM INVESTMENT - 0.02% INVESTMENT COMPANY - 0.02% 5,698 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares** (cost - $5,698)............................................. 5,698 ----------- Total Investments (cost - $21,349,488) - 97.78%............................... 22,834,956 Other assets in excess of liabilities - 2.22%............... 517,998 ----------- Net Assets - 100.00%........................................ $23,352,954 ----------- ----------- SHORT SALE OF COMMON STOCK RETAILING 4,200 Talbots, Inc. (proceeds received - $125,408).............................. $ (159,600) ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 5 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1996 ASSETS Investments, at value (cost -- $21,349,488)..... $22,834,956 Deposit with broker for security sold short (including margin requirement of $146,173)..... 271,581 Receivable for investments sold................. 167,362 Receivable from investment adviser.............. 159,169 Amount segregated at custodian for security sold short.......................................... 157,744 Receivable for Portfolio shares sold............ 61,913 Dividends and interest receivable............... 43,516 Deferred organization expenses and other assets......................................... 205,456 ----------- Total assets.............................. 23,901,697 ----------- LIABILITIES Security sold short, at value (proceeds received -- $125,408)................................... 159,600 Loan payable.................................... 75,000 Payable for Portfolio shares repurchased........ 198,929 Payable for investments purchased............... 14,962 Distribution fee payable (class A and C shares)........................................ 39,585 Administration fee payable...................... 2,982 Custodian fee payable........................... 2,130 Accrued expenses................................ 55,555 ----------- Total liabilities......................... 548,743 ----------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 1,670 Paid-in capital................................. 20,991,856 Undistributed net investment income............. 17,060 Accumulated net realized gain from investments.................................... 891,092 Net unrealized appreciation on investments...... 1,451,276 ----------- Net assets................................ $23,352,954 ----------- ----------- CLASS A Net assets...................................... $12,131,893 ----------- Shares of beneficial interest outstanding....... 866,314 ----------- Net asset value per share....................... $14.00 ----------- ----------- Maximum offering price per share (net asset value plus sales charge of 4.75%* of the offering price)................................ $14.70 ----------- ----------- CLASS C Net assets...................................... $ 9,928,357 ----------- Shares of beneficial interest outstanding....... 711,278 ----------- Net asset value and offering price per share**........................................ $13.96 ----------- ----------- CLASS Y Net assets...................................... $ 1,292,704 ----------- Shares of beneficial interest outstanding....... 92,191 ----------- Net asset value, offering and redemption price per share...................................... $14.02 ----------- -----------
- -------- * 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 The Insiders Select Fund STATEMENT OF OPERATIONS FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996 INVESTMENT INCOME Dividends....................................... $ 264,560 Interest........................................ 32,076 ---------- 296,636 ---------- EXPENSES Advisory fees................................... 116,606 Distribution fees - class A..................... 38,956 Distribution fees - class C..................... 61,049 Federal and state registration fees............. 59,230 Accounting fees................................. 44,282 Transfer agent fees and expenses................ 44,050 Reports and notices to shareholders............. 42,321 Legal and auditing fees......................... 31,354 Amortization of organization expenses........... 28,847 Administration fees............................. 21,806 Insurance expenses.............................. 19,855 Custodian fees and expenses..................... 17,626 Trustees' fees and expenses..................... 12,446 Other........................................... 5,222 ---------- Total expenses before waivers and reimbursements............................. 543,650 Less: waivers and reimbursements.......... (275,775) ---------- Total expenses after waivers and reimbursements............................. 267,875 ---------- Net investment income........................... 28,761 ---------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND SECURITIES SOLD SHORT TRANSACTIONS Net realized gain/(loss) from: Investments................................... 957,205 Security sold short........................... (66,113) Net change in unrealized appreciation/(depreciation) on: Investments................................... 1,485,468 Security sold short........................... (34,192) ---------- Net realized and unrealized gain on investments and securities sold short transactions......... 2,342,368 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $2,371,129 ---------- ----------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 7 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996 INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income........................... $ 28,761 Net realized gain from investments and security sold short..................................... 891,092 Net change in unrealized appreciation on investments and security sold short............ 1,451,276 ----------- Net increase in net assets resulting from operations..................................... 2,371,129 ----------- DIVIDENDS TO SHAREHOLDERS FROM Net investment income Class A shares................................ (8,222) Class Y shares................................ (3,479) ----------- (11,701) ----------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 26,820,998 Cost of shares repurchased...................... (5,837,996) Shares issued in reinvestment of dividends...... 10,500 ----------- Net increase in net assets derived from shares of beneficial interest transactions............ 20,993,502 ----------- Total increase in net assets.................... 23,352,930 NET ASSETS Beginning of period............................. 24 ----------- End of period (including undistributed net investment income of $17,060).................. $23,352,954 ----------- -----------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 8 THE BEAR STEARNS FUNDS The Insiders Select Fund FINANCIAL HIGHLIGHTS FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996 - -------------------------------------------------------------------------------- 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 the period. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
CLASS CLASS CLASS A C Y* ------- ------ ------ PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period............ $ 12.00 $12.00 $12.12 ------- ------ ------ Net investment income/(loss) (1)................ 0.03 (0.01) 0.07 Net realized and unrealized gain on investments and securities sold short (2).................. 1.98 1.97 1.87 ------- ------ ------ Net increase in net assets resulting from operations..................................... 2.01 1.96 1.94 ------- ------ ------ Dividends to shareholders from: Net investment income........................... (0.01) -- (0.04 ) ------- ------ ------ Net asset value, end of period.................. $ 14.00 $13.96 $14.02 ------- ------ ------ ------- ------ ------ Total investment return (3)(6).................. 16.75% 16.33% 15.98% ------- ------ ------ ------- ------ ------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)....... $12,132 $9,928 $1,293 Ratio of expenses to average net assets (1)(4)......................................... 1.65% 2.15% 1.15% Ratio of net investment income/(loss) to average net assets (1)(4)(6)........................... 0.38% (0.12)% 0.97% Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (4)(6)......................................... 1.87% 1.92% 2.04% Portfolio turnover rate (5)..................... 93.45% 93.45% 93.45% Average commission rate per share............... $ 0.03 $ 0.03 $0.03
- -------- * 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 period, 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 amount shown for a share outstanding throughout the respective period is not in accord with the change in the aggregate gains and losses in investments during the respective period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total 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 returns are not annualized. (4) Annualized. (5) Not annualized. (6) 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. The accompanying notes are an integral part of the financial statements. 9 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). 10 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 has segregated $303,917 in separate accounts as collateral for open short sales. Security sold short at March 31, 1996:
MARKET UNREALIZED SHORT SALE PROCEEDS VALUE LOSS - -------------------------------------------------- -------- -------- ---------- Talbots, Inc...................................... $125,408 $159,600 $34,192
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. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the period ended March 31, 1996, Bear Stearns Funds Management Inc. ("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves 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. During the period ended March 31, 1996, BSFM (or the "Administrator") serves 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 $132,000 for the Portfolio. During the period ended March 31, 1996, PFPC Inc. has voluntarily waived a portion of its fee. 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. The Portfolio will not pay BSFM at a later time for any amounts it may waive, nor will the Portfolio reimburse BSFM for any amounts it may assume. During the period ended March 31, 1996, 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 11 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 period ended March 31, 1996, the Adviser waived its advisory fee of $116,606. In addition, the Adviser reimbursed $159,169, in order to maintain the voluntary expense limitation. For the period ended March 31, 1996, Bear Stearns, an affiliate of the Adviser and the Administrator, earned approximately $26,300 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 period ended March 31, 1996, 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 period June 16, 1995 (commencement of investment operations) through March 31, 1996, Bear Stearns earned $100,005 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 or will reallow 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% for the period April 15, 1996 through June 30, 1996. 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 period ended March 31, 1996, Bear Stearns has advised the Portfolio that it received approximately $502,600 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 $9,000 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, 1996 was $21,366,467. Accordingly, the net unrealized appreciation of investments of $1,468,489 was composed of gross appreciation of $1,986,350 for those investments having an excess of value over cost and $517,861 of gross depreciation for those investments having an excess of cost over value. For the period June 16, 1995 (commencement of investment operations) through March 31, 1996, aggregate purchases and sales of investment securities (excluding short-term securities) for the Portfolio were $37,386,370 and $16,895,661, 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, 1996, 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. 12 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.................................... 1,179,728 $15,128,116 537 $7,389 313,951 $4,288,010 Class C shares.................................... 801,061 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 Portfolio had $75,000 outstanding under the line of credit agreement at March 31, 1996. 13 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, 1996, and the related statements of operations, changes in net assets and the financial highlights for 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 audit. We conducted our audit 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, 1996 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 audit provides 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, 1996, the results of its operations, the changes in its net assets and the financial highlights for the period presented in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York May 9, 1996 14 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, 1996) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the year ended March 31, 1996, the following ordinary income dividends per share were paid by the Portfolio:
NET INVESTMENT INCOME - ------------------------------- CLASS A CLASS C CLASS Y - --------- --------- --------- $ 0.0093 -- $ 0.0363 - --------- --------- --------- - --------- --------- ---------
The percentage of total net investment income dividends received from The Insiders Select Fund qualifying for the corporate dividends received deduction is 100%. 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 1996. 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, 1997. 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. 15 The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Robert S. Reitzes....................... Chairman of the Board Neil T. Eigen........................... 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 Frank J. Maresca........................ Vice President and Treasurer Raymond D. DeAngelo..................... Vice President Ellen T. Arthur......................... Secretary Vincent L. Pereira...................... Assistant Treasurer Eileen M. Coyle......................... Assistant Secretary Investment Adviser & Distributor 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 & 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 Stroock & Stroock & Lavan Deloitte & Touche LLP 7 Hanover Square Two World Financial Center New York, NY 10004 New York, NY 10281
This report is submitted for the general information of the shareholders of each Portfolio. It is not authorized for the 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 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-009-02 Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio Annual Report March 31, 1996 [LOGO] THE BEAR STEARNS FUNDS Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio LETTER TO SHAREHOLDERS April 25, 1996 Dear Shareholders, We are pleased to present the first 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 period ended March 31, 1996. LARGE CAP VALUE PORTFOLIO Large Cap's total return for the period April 4, 1995 (commencement of investment operations) through March 31, 1996, was 26.35% and 25.71% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively. The S&P 500 (Composite) Index (the "S&P 500") returned 30.86% for the same period. For the one year period ended April 4, 1996, Large Cap gained 27.52% and 26.88% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively. The S&P 500 returned 33.00% for the same time frame. Since inception on August 11, 1995 through March 31, 1996, class Y shares gained 8.75% compared to 17.03% for the S&P 500. Further performance data for each class of shares for this reporting period is available in the "Financial Highlights" section of this report. The first quarter of 1996 proved to be a continuation of the outstanding equity market of 1995. For the most part, the investment environment has been favorable since the Portfolio's inception on April 4, 1995. The U.S. economy has weakened from its rapid growth pace of a year ago; inflation remains subdued; we have lower deficits; and we have an enhanced competitive position in world markets. In March, we saw two changes that affected the equity valuation model. Interest rates moved higher at a time when the majority of economists were predicting very slow economic growth for the first quarter. Given the slow growth scenario, analysts reduced earnings estimates for companies they follow. Since the beginning of April it was apparent that given the strong employment data, the reported number for first quarter GDP growth would be stronger than anticipated. This, and the strong number when it was released, served to further weaken the bond market and stocks followed suit. We expect the weakness to abate over the next few months as evidence mounts that the economy is growing only moderately and inflation continues to be well controlled. We continue to believe that the U.S. economy is in a sluggish mode and GDP should grow only in the vicinity of about 2% during 1996. Bond yields have now moved up to levels that we think will serve to further weaken the economy as the year progresses. As a result, we believe that the bond sell-off will be reversed. We feel that we are well-positioned in the Portfolio and continue to remain overweighted in the financial sector given our belief that earnings growth for the sector, in general, will outpace corporate America. We continue to favor the healthcare sector and the predictable earnings growth these stocks provide. We remain comfortable about the equity market notwithstanding the possibility of additional weakness over the near term. We believe stocks are not overvalued and that equity prices can still move higher. 1 SMALL CAP VALUE PORTFOLIO Small Cap's total return for the period April 3, 1995 (commencement of investment operations) through March 31, 1996, was 34.36% and 33.59% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively, outperforming the Russell 2000 Index (the "Russell 2000"), which gained 26.82%. Additionally, Small Cap's performance for the one year period ended April 3, 1996 was exceptional with returns of 36.47% and 35.71% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively, compared with the gain of 28.09% for the Russell 2000. Since inception on June 22, 1995 through March 31, 1996, class Y shares returned 23.52% versus 17.70% for the Russell 2000. Further performance data for each class of shares for this reporting period is available in the "Financial Highlights" section of this report. We believe that the single greatest reason for the success of any money manager over long periods of time is having an investment discipline and sticking with it. Briefly stated, our general philosophy is to invest in good companies that not only meet our value criteria, but have the prospect to become even better companies going forward. This trait is usually evidenced by an acceleration of earnings. We are excited about the investment prospects for the next twelve months for small cap investors in general and this Portfolio, in particular. Performance during the past twelve months has been driven by successes across a broad spectrum of industries and has included the take-over of four of our holdings: SFFed Corp., Emphesys Financial Group Inc., Summit Bancorp Inc., and most recently The Stop & Shop Cos., Inc. All four of these companies were purchased based on an inexpensive valuation and accelerated earnings growth. Our biggest winner of the year, was Cephalon Inc., a biotech company with a large cash position and several new drugs with potential in the final stages of testing. Our initial purchase price was $8 per share. It closed on March 29th at $25 7/8. We have also used recent weakness in price of two of our holdings, Donnkenny Inc. and M/I Schottenstein Homes, Inc., to add to our positions. We find Donnkenny Inc. attractive with its 50% earnings growth last year and an anticipated strong growth this year. Additionally, M/I Schottenstein Homes, Inc. is generating record orders and backlogs, and currently is selling at less than its book value. Finally, we have recently added Foodmaker Inc., the parent company of Jack-in-the-Box restaurants. Foodmaker Inc. is enjoying a major resurgence in its business due to improved and innovative products, an effective advertising campaign and a refocus on its business. Looking forward, we will maintain our emphasis on small banks and insurance companies which should benefit from both lower interest rates and continued consolidation. As to small cap investing in general, we see a great deal of value, especially when compared with larger cap alternatives. Using earnings, growth or book value, these stocks are not expensive on a relative basis. While this bullish condition has existed for several quarters now, recent surveys indicate that small cap managers have been building up their cash levels in the wake of record cash inflows into mutual funds. This is critical, because once it becomes apparent that an improvement in the economy is forthcoming, this money should provide a powerful impetus for small cap performance. Whether the prior two months of outperformance versus the S&P 500 is an indication of this dynamism is not of great significance to us; our efforts are on things that we believe that we can control, which is to invest in companies that can outperform the Russell 2000 over long periods of time. TOTAL RETURN BOND PORTFOLIO The Bond Portfolio's total return for the period April 5, 1995 (commencement of investment operations) through March 31, 1996, was 8.54% and 8.13% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively. The Salomon Brothers Broad Investment Grade ("BIG") Bond Index returned 10.23% for the same time frame. For the one year period ended April 5, 1996, the Bond Portfolio gained 8.65% and 8.74% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively, compared to the Salomon Brothers BIG Bond Index, which returned 10.31%. Since inception on September 8, 1995 through March 31, 1996, class Y shares gained 2.92% versus 3.10% for the Salomon Brothers BIG Bond Index. Further performance data for each class of shares for this reporting period is available in the "Financial Highlights" section of this report. 2 In the first quarter of 1996, the Federal Reserve lowered the federal funds rates. In February, Alan Greenspan commented that the economy was stable and that the objective of price stability had been achieved. Bond market investors interpreted this as a sign that the Fed was probably going to lower interest rates further in the near term; as a result, bond yields rose significantly. On March 8th when the February Employment Report was released, it showed that 705,000 new jobs were created during the month and that the unemployment rate had declined to 5.5%. This report of economic strength erased any doubt about Federal Reserve easings in the near term and caused treasury bond and note rates to rise by 25-35 basis points in one trading session. We remain optimistic on the prospects for lower rates during the course of 1996, notwithstanding the strong recovery in the first quarter, as the picture of slow growth and moderate inflation unfolds. The Portfolio is overweighted in both corporate and mortgage-backed sectors. Corporate bonds are benefiting from a light new-issue calendar and no competition from CMO issuance. The mortgage-backed sector has performed well and continues to offer attractive yields in the Portfolio. Under the current market conditions, we reduced the duration of the Portfolio to correspond to the Salomon Brothers BIG Bond Index, its benchmark. We are awaiting signs of stabilization in bond prices before lengthening the portfolio duration. In conclusion, we appreciate your support and would be pleased to respond to any questions or comments. If you have any questions concerning these Portfolios, please call 1-800-766-4111. Sincerely, [SIG] [SIG] [SIG] Robert S. Reitzes Neil T. Eigen Peter E. Mahoney Chairman of the Board President Portfolio Manager The Bear Stearns Funds The Bear Stearns Funds Total Return Bond Portfolio Portfolio Manager Large Cap Value Portfolio Small Cap Value Portfolio
3 THE BEAR STEARNS FUNDS Large Cap Value Portfolio(1) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS A NATIONAL CONSUMER PRICE INDEX CLASS C S&P 500 April 4, 1995 $9,525 $10,000 $10,000 $10,000 April 30, 1995 9,581 10,040 10,050 10,193 May 31, 1995 9,993 10,066 10,483 10,605 June 30, 1995 10,192 10,079 10,683 10,851 July 31, 1995 10,501 10,099 11,008 11,211 August 31, 1995 10,771 10,112 11,292 11,240 Sep 30, 1995 11,295 10,126 11,825 11,714 October 31, 1995 10,851 10,159 11,358 11,672 November 30,1995 11,835 10,159 12,400 12,184 December 31, 1995 11,915 10,178 12,463 12,419 January 31, 1996 11,995 10,225 12,538 12,842 February 29, 1996 11,955 10,245 12,488 12,961 March 31, 1996 12,034 10,284 12,471 13,086 TOTAL RETURN WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS --------------------------- --------------------------- Large Cap Value Portfolio(1)(4) Class A shares .......................... 20.34%(5) 26.35% Class C shares........................... 24.71(6) 25.71 Class Y shares(2)(7)..................... 8.75 8.75 S&P 500 (Composite) Index(3)................. 30.86 -- National Consumer Price Index(3)............. 2.84 --
- --------- (1) For the period April 4, 1995 (commencement of investment operations) through March 31, 1996. (2) The return of class Y shares (for which August 11, 1995 was the initial public offering date) would have been higher than class A and C shares if operations were commenced on the same day. The higher return is due to the fact that there is no sales load, CDSC or 12b-1 fee charged to class Y shares. (3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects 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. (4) 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. (5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and expense reimbursements, the total return would have been 16.52% with a sales load charged and 22.33% without a sales load charged. (6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense reimbursements, the total return would have been 21.08% with a CDSC charged at the end of the period and 22.08% without a CDSC charged at the end of the period. (7) Excluding fee waivers and expense reimbursements, the total return would have been 6.90%. CDSC -- Contingent Deferred Sales Charge. 4 THE BEAR STEARNS FUNDS Small Cap Value Portfolio(1) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS A NATIONAL CONSUMER PRICE INDEX CLASS C RUSSEL 2000 April 3, 1995 $9,525 $10,000 $10,000 $10,000 April 30, 1995 9,660 10,040 10,142 10,362 May 31, 1995 9,938 10,066 10,425 10,875 June 30, 1995 10,343 10,079 10,842 11,492 July 31, 1995 11,216 10,099 11,758 11,708 August 31, 1995 11,914 10,112 12,475 11,901 Sep 30, 1995 12,057 10,126 12,625 11,359 October 31, 1995 11,216 10,159 11,733 11,832 November 30,1995 11,533 10,159 12,067 12,115 December 31, 1995 12,128 10,178 12,674 12,092 January 31, 1996 11,951 10,225 12,488 12,092 February 29, 1996 12,435 10,245 12,995 12,458 March 31, 1996 12,797 10,284 13,259 12,682
TOTAL RETURN WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS --------------------------- --------------------------- Small Cap Value Portfolio(1)(4) Class A shares .......................... 27.97%(5) 34.36% Class C shares........................... 32.59(6) 33.59 Class Y shares(2)(7)..................... 23.52 23.52 Russell 2000 Index(3)........................ 26.82 -- National Consumer Price Index(3)............. 2.84 --
- --------- (1) For the period April 3, 1995 (commencement of investment operations) through March 31, 1996. (2) The return of class Y shares (for which June 22, 1995 was the initial public offering date) would have been higher than class A and C shares if operations were commenced on the same day. The higher return is due to the fact that there is no sales load, CDSC or 12b-1 fee charged to class Y shares. (3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects 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. (4) 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. (5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and expense reimbursements, the total return would have been 26.22% with a sales load charged and 32.51% without a sales load charged. (6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense reimbursements, the total return would have been 31.71% with a CDSC charged at the end of the period and 32.71% without a CDSC charged at the end of the period. (7) Excluding fee waivers and expense reimbursements, the total return would have been 23.33%. CDSC -- Contingent Deferred Sales Charge. 5 THE BEAR STEARNS FUNDS Total Return Bond Portfolio(1) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS A CLASS C NATIONAL CONSUMER PRICE INDEX SALOMON BROTHERS April 5, 1995 $9,625 $10,000 $10,000 $10,000 April 30, 1995 9,659 10,036 10,040 10,080 May 31, 1995 9,960 10,345 10,066 10,480 June 30, 1995 10,027 10,412 10,079 10,553 July 31, 1995 10,005 10,385 10,099 10,532 August 31, 1995 10,114 10,495 10,112 10,653 Sep 30, 1995 10,206 10,587 10,126 10,753 October 31, 1995 10,335 10,737 10,159 10,897 November 30,1995 10,502 10,886 10,159 11,066 December 31, 1995 10,679 11,064 10,178 11,219 January 31, 1996 10,705 11,089 10,225 11,296 February 29, 1996 10,510 10,884 10,245 11,104 March 31, 1996 10,447 10,713 10,284 11,023
TOTAL RETURN WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS --------------------------- --------------------------- Total Return Bond Portfolio(1)(4) Class A shares .......................... 4.47%(5) 8.54% Class C shares........................... 7.13(6) 8.13 Class Y shares(2)(7)..................... 2.92 2.92 Salomon Brothers Broad Investment Grade Bond Index(3).................................... 10.23 -- National Consumer Price Index(3)............. 2.84 --
- --------- (1) For the period April 5, 1995 (commencement of investment operations) through March 31, 1996. (2) The return of class Y shares (for which September 8, 1995 was the initial public offering date) would have been higher than class A and C shares if operations were commenced on the same day. The higher return is due to the fact that there is no sales load, CDSC or 12b-1 fee charged to class Y shares. (3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects 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. (4) 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. (5) Reflects the initial maximum 3.75% sales load. Excluding fee waivers and expense reimbursements, the total return would have been 1.55% with a sales load charged and 5.51% without a sales load charged. (6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense reimbursements, the total return would have been 3.93% with a CDSC charged at the end of the period and 4.93% without a CDSC charged at the end of the period. (7) Excluding fee waivers and expense reimbursements, the total return would have been 1.34%. CDSC -- Contingent Deferred Sales Charge. 6 THE BEAR STEARNS FUNDS Large Cap Value Portfolio MARCH 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
AEROSPACE 2.66% Automobiles 5.79% Banks 5.87% Building & Housing 2.66% Chemicals & Fertilizers 2.74% Computers & Office Equipment 9.52% Credit & Finance 11.72% Cash & Cash Equivalents 2.32% Drugs & Hospital Supplies 11.85% Electrical Equipment 16.09% Food & Beverages 2.91% Forest Products & Paper 3.97% Furnishings & Appliances 3.24% Insurance 7.42% Miscellaneous Industrials 3.19% Retailing 3.52% Services 4.53%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ----- -------------------------------------------------- --------------------------- ---------- 1. Stewart & Stevenson Services, Inc. ............... Electrical Equipment 5.07 2. ADT Ltd. ......................................... Electrical Equipment 5.01 3. Digital Equipment Corp. .......................... Computers & Office Equipment 4.70 4. Great Western Financial Corp. .................... Credit & Finance 4.57 5. Humana Inc. ...................................... Services 4.53 6. Medtronic, Inc. .................................. Drugs & Hospital Supplies 4.52 7. Union Planters Corp. ............................. Credit & Finance 4.01 8. Kimberly-Clark Corp. ............................. Forest Products & Paper 3.97 9. Bristol-Myers Squibb Co. ......................... Drugs & Hospital Supplies 3.90 10. Equitable Cos., Inc. ............................. Insurance 3.75
7 THE BEAR STEARNS FUNDS Small Cap Value Portfolio MARCH 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
BANKS 4.30% Building & Housing 4.91% Cash & Cash Equivalents 2.92% Coal 3.91% Computers & Office Equipment 4.18% Cosmetics & Soaps 2.12% Credit & Finance 7.83% Electronics 5.27% Entertainment & Leisure 2.52% Grocery Products 4.02% Insurance 3.61% Investment Company 3.53% Lodging & Catering 4.29% Miscellaneous Industrials 8.09% Non-Ferrous Metals 3.98% Other 3.90% Publishing & Broadcasting 2.14% Retailing 6.13% Services 3.73% Telecommunications 3.52% Textiles & Shoes 15.10%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ----- -------------------------------------------------- --------------------------- ---------- 1. Donnkenny Inc. ................................... Textiles & Shoes 5.44 2. Ann Taylor, Inc. ................................. Textiles & Shoes 4.86 3. Ornda Healthcorp ................................. Miscellaneous Industrials 4.53 4. Dialogic Corp. ................................... Computers & Office Equipment 4.18 5. The Stop & Shop Cos., Inc. ....................... Retailing 4.01 6. Mueller Industries, Inc. ......................... Non-Ferrous Metals 3.98 7. Zeigler Coal Holding Co. ......................... Coal 3.91 8. Cephalon Inc. .................................... Services 3.73 9. Ace, Ltd. ........................................ Insurance 3.61 10. Furon Co. ........................................ Miscellaneous Industrials 3.56
8 THE BEAR STEARNS FUNDS Total Return Bond Portfolio MARCH 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN BOND PORTFOLIO SALOMON BROTHERS BROAD INVESTMENT GRADE INDEX TSY/GSE 28.7 52.0 Corporations 31.7 18.0 Asset-Backed 7.2 1.0 Mortgage-Backed Securities 29.8 29.0 Cash and Cash Equivalents 2.6 0
- -------------------------------------------------------------------------------- FIXED INCOME PORTFOLIO CHARACTERISTICS - --------------------------------------------------------------------------------
TOTAL RETURN SALOMON BROTHERS BROAD BOND INVESTMENT GRADE BOND PORTFOLIO INDEX ------------- ------------------------- 8.62 years 8.50 years Average Maturity.................................... 4.97 years 4.73 years Duration............................................ 7.38% 7.46% Coupon.............................................. 6.81% 6.72% Yield to Maturity................................... - ----------------------------------------------------------------------------------------------
9 THE BEAR STEARNS FUNDS Large Cap Value Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1996
---------------------------------------------------------- MARKET SHARES VALUE - ------------------------------------------------------------ COMMON STOCKS--97.68% AEROSPACE - 2.66% 2,500 United Technologies Corp. ........ $ 280,625 ----------- AUTOMOBILES - 5.79% 10,500 Ford Motor Co. ................... 360,937 4,700 General Motors Corp. ............. 250,275 ----------- 611,212 ----------- BANKS - 5.87% 5,000 BankAmerica Corp. ................ 387,500 4,500 Bank of New York Co., Inc. ....... 231,750 ----------- 619,250 ----------- BUILDING & HOUSING - 2.66% 7,000 Owens-Corning Fiberglas Corp.*.... 280,875 ----------- CHEMICALS & FERTILIZERS - 2.74% 3,700 Grace (W.R.) & Co................. 289,525 ----------- COMPUTERS & OFFICE EQUIPMENT - 9.52% 9,000 Digital Equipment Corp.*.......... 496,125 29,000 Tandem Computers Inc.*............ 257,375 2,000 Xerox Corp. ...................... 251,000 ----------- 1,004,500 ----------- CREDIT & FINANCE - 11.72% 20,000 Great Western Financial Corp. .... 482,500 5,000 Travelers Group, Inc. ............ 330,000 14,000 Union Planters Corp. ............. 423,500 ----------- 1,236,000 ----------- DRUGS & HOSPITAL SUPPLIES - 11.85% 8,000 Baxter International, Inc. ....... 362,000 4,800 Bristol-Myers Squibb Co. ......... 411,000 8,000 Medtronic, Inc. .................. 477,000 ----------- 1,250,000 ----------- ELECTRICAL EQUIPMENT - 16.09% 30,000 ADT Ltd.*......................... 528,750 5,000 General Electric Co. ............. 389,375 3,800 Raychem Corp. .................... 245,100 19,000 Stewart & Stevenson Services, Inc. ............................. 534,375 ----------- 1,697,600 ----------- ---------------------------------------------------------- MARKET SHARES VALUE - ------------------------------------------------------------ FOOD & BEVERAGES - 2.91% 3,500 Philip Morris Cos. Inc. .......... $ 307,125 ----------- FOREST PRODUCTS & PAPER - 3.97% 5,620 Kimberly-Clark Corp. ............. 418,690 ----------- FURNISHINGS & APPLIANCES - 3.24% 5,500 Armstrong World Industries, Inc. ............................. 341,688 ----------- INSURANCE - 7.42% 16,300 Equitable Cos., Inc. ............. 395,275 25,000 USF&G Corp. ...................... 387,500 ----------- 782,775 ----------- MISCELLANEOUS INDUSTRIALS - 3.19% 12,000 Dial Corp. ....................... 336,000 ----------- RETAILING - 3.52% 7,700 May Department Stores Co. ........ 371,525 ----------- SERVICES - 4.53% 19,000 Humana Inc.* ..................... 477,375 ----------- Total Common Stocks (cost - $9,165,412)............... 10,304,765 ----------- SHORT-TERM INVESTMENT--0.36% INVESTMENT COMPANY - 0.36% 37,581 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares** (cost - $37,581).................. 37,581 ----------- Total Investments (cost - $9,202,993) - 98.04%...... 10,342,346 Other assets in excess of liabilities - 1.96%............... 206,827 ----------- Net Assets - 100.00%.............. $10,549,173 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 10 THE BEAR STEARNS FUNDS Small Cap Value Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1996
---------------------------------------------------------- MARKET SHARES VALUE - ------------------------------------------------------------ COMMON STOCKS--97.08% BANKS - 4.30% 17,000 Bay View Capital Corp. ........... $ 552,500 19,750 California Financial Holding Co. .............................. 402,406 ----------- 954,906 ----------- BUILDING & HOUSING - 4.91% 51,520 Fedders Corp. Class A............. 294,688 25,000 Giant Cement Holding, Inc.*....... 315,625 47,000 M/I Schottenstein Homes, Inc.*.... 481,750 ----------- 1,092,063 ----------- COAL - 3.91% 60,000 Zeigler Coal Holding Co. ......... 870,000 ----------- COMPUTERS & OFFICE EQUIPMENT - 4.18% 22,000 Dialogic Corp. *.................. 929,500 ----------- COSMETICS & SOAPS - 2.12% 38,500 Guest Supply, Inc.*............... 471,625 ----------- CREDIT & FINANCE - 7.83% 31,000 LaSalle Re Holdings, Ltd. ........ 666,500 20,000 RenaissanceRe Holdings Ltd. ...... 550,000 20,000 Security-Connecticut Corp. ....... 522,500 ----------- 1,739,000 ----------- DRUGS & HOSPITAL SUPPLIES - 0.50% 15,000 Health Images, Inc. .............. 110,625 ----------- ELECTRICAL EQUIPMENT - 1.32% 30,000 Windmere Corp. ................... 292,500 ----------- ELECTRONICS - 5.27% 22,600 Cubic Corp. Designs............... 607,375 60,000 Griffon Corp.*.................... 562,500 ----------- 1,169,875 ----------- ENTERTAINMENT & LEISURE - 2.52% 25,000 Avondale Industries, Inc.*........ 434,375 40,000 Graff Pay-Per-View Inc.*.......... 125,000 ----------- 559,375 ----------- FURNISHINGS & APPLIANCES - 1.14% 100,000 QSound Labs, Inc.*................ 253,125 ----------- GROCERY PRODUCTS - 4.02% 22,650 ERLY Industries, Inc.*............ 198,895 43,400 FoodBrands America, Inc.*......... 694,400 ----------- 893,295 ----------- INSURANCE - 3.61% 18,000 Ace, Ltd. ........................ 803,250 ----------- INVESTMENT COMPANY - 3.53% 61,000 The Argentina Fund, Inc. ......... 785,375 ----------- ---------------------------------------------------------- MARKET SHARES VALUE - ------------------------------------------------------------ LODGING & CATERING - 4.29% 90,000 Foodmaker Inc.*................... $ 630,000 29,700 John Q. Hammons Hotels, Inc.*..... 322,988 ----------- 952,988 ----------- MACHINERY - 0.94% 22,500 Lamson & Sessions Co.*............ 208,125 ----------- MISCELLANEOUS INDUSTRIALS - 8.09% 36,000 Furon Co. ........................ 792,000 35,000 Ornda Healthcorp*................. 1,006,250 ----------- 1,798,250 ----------- NON-FERROUS METALS - 3.98% 25,000 Mueller Industries, Inc.*......... 884,375 ----------- PUBLISHING & BROADCASTING - 2.14% 27,700 Cadmus Communications Corp. ...... 474,362 ----------- RETAILING - 6.13% 39,700 American Eagle Outfitters, Inc.*............................. 392,038 13,000 Tandycrafts, Inc.*................ 78,000 27,000 The Stop & Shop Cos., Inc.*....... 891,000 ----------- 1,361,038 ----------- SERVICES - 3.73% 32,000 Cephalon Inc.*.................... 828,000 ----------- TELECOMMUNICATIONS - 3.52% 59,000 Davel Communications Group, Inc.*............................. 781,750 ----------- TEXTILES & SHOES - 15.10% 60,000 Ann Taylor, Inc.*................. 1,080,000 38,000 Cone Mills Corp.*................. 441,750 75,000 Donnkenny Inc.*................... 1,209,375 30,000 Fieldcrest Cannon, Inc.*.......... 622,500 ----------- 3,353,625 ----------- Total Common Stocks (cost - $18,880,634).............. 21,567,027 ----------- SHORT-TERM INVESTMENT--0.86% INVESTMENT COMPANY - 0.86% 191,368 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares** (cost - $191,368)................. 191,368 ----------- Total Investments (cost - $19,072,002) - 97.94%..... 21,758,395 Other assets in excess of liabilities - 2.06%............... 457,850 ----------- Net Assets - 100.00%.............. $22,216,245 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 11 THE BEAR STEARNS FUNDS Total Return Bond Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1996
------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT MARKET DESCRIPTION (000'S) VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS--97.44% CORPORATE OBLIGATIONS - 38.94% Associates Corp. N.A., Senior Notes, 7.50%, 05/15/99............................................. $ 150 $ 155,063 Caterpillar Financial Services Corp., MTN, 6.56%, 11/03/97....................................... 150 151,068 Chevron Trust Fund, Debentures, Chevron Corp. Guaranteed, 8.11%, 12/01/04........................ 475 514,209 CIT Group Holdings, Inc., Notes, 6.75%, 04/30/98................................................. 150 152,063 Columbia HCA Healthcare, Inc., Debentures, 7.19%, 11/15/15....................................... 325 313,219 Cox Communications, Inc., Debentures, 7.25%, 11/15/15............................................ 250 238,917 Ford Credit 1995-B Grantor Trust, Asset-Backed Certificates, Class A, 5.90%, 10/15/00............ 621 623,505 General Motors Acceptance Corp., MTN, 6.125%, 09/08/97........................................... 425 427,945 Kansas Electric & Power Co-op, Collateral Trust, Grantor Trust Notes, 9.73%, 12/15/17............ 200 219,750 News America Holdings, Inc., Senior Debentures, News Corp. Ltd. Guaranteed, 7.60%, 10/11/15...... 400 382,000 Penney J.C. & Co., MTN, 6.375%, 09/15/00......................................................... 600 597,750 Phillips Petroleum Co., Notes, 8.49%, 01/01/23................................................... 600 610,098 Province of Quebec, Yankee Debentures, 7.50%, 07/15/23........................................... 500 485,625 Salomon Inc., Senior Notes, MTN, 5.34%, 12/17/96................................................. 500 496,720 Salomon Inc., Senior Notes, 6.75%, 02/15/03...................................................... 500 477,500 Sears Credit Account Trust 1991-B, Credit Account Pass Through Certificates, 8.60%, 05/15/98..... 500 501,450 Secured Finance Inc., Debentures, FSA Insured, 9.05%,12/15/04.................................... 550 634,562 Standard Credit Card Trust 1990-6, Credit Card Participation Certificates, Class A, 9.375%, 07/10/97........................................................................................ 190 198,398 ----------- Total Corporate Obligations (cost - $7,267,796).................................................. 7,179,842 ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS - 29.77% Federal Home Loan Mortgage Corporation 9.00%, 03/01/25................................................................................ 1,423 1,492,586 9.00%, 03/01/25................................................................................ 408 428,147 9.00%, 04/01/25................................................................................ 356 372,840 Federal National Mortgage Association 9.00%, 04/01/25................................................................................ 221 232,256 Government National Mortgage Association 6.50%, 11/15/23................................................................................ 491 465,785 6.50%, 03/15/24................................................................................ 467 442,839 7.00%, 03/15/26................................................................................ 1,530 1,492,228 9.00%, 05/15/25................................................................................ 355 374,270 6.50%, 04/15/25 TBA............................................................................ 200 189,375 ----------- Total U.S. Government Agency Obligations (cost - $5,447,182)..................................... 5,490,326 -----------
The accompanying notes are an integral part of the financial statements. 12 THE BEAR STEARNS FUNDS Total Return Bond Portfolio PORTFOLIO OF INVESTMENTS MARCH 31, 1996
------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT MARKET DESCRIPTION (000'S) VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS (CONTINUED) U.S. GOVERNMENT OBLIGATIONS - 28.73% U.S. Treasury Bond 7.625%, 02/15/25............................................................................... $ 800 $ 880,704 U.S. Treasury Notes 5.875%, 08/15/98............................................................................... 400 400,272 6.25%, 05/31/00................................................................................ 1,000 1,005,700 6.375%, 08/15/02............................................................................... 1,000 1,006,390 6.50%, 08/15/05................................................................................ 525 528,607 7.75%,11/30/99................................................................................. 620 654,094 7.875%,11/15/04................................................................................ 750 822,352 ----------- Total U.S. Government Obligations (cost - $5,405,701)............................................ 5,298,119 ----------- Total Long-Term Investments (cost - $18,120,679)................................................. 17,968,287 ----------- SHARES ----------- SHORT-TERM INVESTMENT--2.98% INVESTMENT COMPANY - 2.98% The Milestone Funds Treasury Obligations Portfolio, Institutional Shares* (cost - $549,055)...... 549,055 549,055 ----------- Total Investments (cost - $18,669,734) - 100.42%................................................. 18,517,342 Liabilities in excess of other assets - (0.42)%.................................................. (76,626) ----------- Net Assets - 100.00%............................................................................. $18,440,716 ----------- -----------
- --------- FSA Financial Security Assurance. MTN Medium-Term Notes. TBA To be Announced. TBA securities are purchased on a firm commitment basis with an approximate principal and maturity. The actual principal amount and maturity date is determined upon settlement. * Money market fund, of which $204,000 was segregated as collateral for TBA securities. The accompanying notes are an integral part of the financial statements. 13 THE BEAR STEARNS FUNDS STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1996
LARGE CAP SMALL CAP TOTAL RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO -------------- -------------- ------------ ASSETS Investments, at value (cost--$9,202,993, $19,072,002, $18,669,734, respectively)..................... $ 10,342,346 $ 21,758,395 $18,517,342 Cash............................................ -- -- 538 Receivable from investment adviser.............. 224,658 191,607 282,573 Receivable for investments sold................. 72,598 -- -- Receivable for Portfolio shares sold............ 47,530 474,066 8,654 Dividends and interest receivable............... 14,224 13,683 255,185 Deferred organization expenses and other assets......................................... 94,734 101,579 81,005 -------------- -------------- ------------ Total assets.............................. 10,796,090 22,539,330 19,145,297 -------------- -------------- ------------ LIABILITIES Loan payable.................................... 50,000 -- -- Payable for investments purchased............... 105,620 214,958 189,688 Payable for Portfolio shares repurchased........ -- -- 374,989 Dividends payable............................... -- -- 27,918 Distribution fee payable (class A and C shares)........................................ 12,113 20,793 7,140 Administration fee payable...................... 9,106 17,782 17,290 Custodian fee payable........................... 2,860 3,878 1,936 Organization expenses payable................... 8,520 -- 7,095 Accrued expenses................................ 58,698 65,674 78,525 -------------- -------------- ------------ Total liabilities......................... 246,917 323,085 704,581 -------------- -------------- ------------ NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 698 1,403 1,505 Paid-in capital................................. 9,311,947 19,324,664 18,540,798 Undistributed net investment income/(loss)...... 5,140 (69,561) -- Accumulated net realized gain from investments.................................... 92,035 273,346 50,805 Net unrealized appreciation/(depreciation) on investments.................................... 1,139,353 2,686,393 (152,392) -------------- -------------- ------------ Net assets................................ $ 10,549,173 $ 22,216,245 $18,440,716 -------------- -------------- ------------ -------------- -------------- ------------ CLASS A Net assets...................................... $ 3,616,446 $ 6,473,911 $ 4,467,447 -------------- -------------- ------------ Shares of beneficial interest outstanding....... 239,011 408,008 364,510 -------------- -------------- ------------ Net asset value per share....................... $15.13 $15.87 $12.26 -------------- -------------- ------------ -------------- -------------- ------------ Maximum offering price per share (net asset value plus sales charge of 4.75%*, 4.75%* and 3.75%*, respectively, of the offering price)... $15.88 $16.66 $12.74 -------------- -------------- ------------ -------------- -------------- ------------ CLASS C Net assets...................................... $ 3,519,628 $ 6,753,520 $ 1,774,795 -------------- -------------- ------------ Shares of beneficial interest outstanding....... 233,419 427,631 144,805 -------------- -------------- ------------ Net asset value and offering price per share**........................................ $15.08 $15.79 $12.26 -------------- -------------- ------------ -------------- -------------- ------------ CLASS Y Net assets...................................... $ 3,413,099 $ 8,988,814 $12,198,474 -------------- -------------- ------------ Shares of beneficial interest outstanding....... 225,713 567,076 995,312 -------------- -------------- ------------ Net asset value, offering and redemption price per share...................................... $15.12 $15.85 $12.26 -------------- -------------- ------------ -------------- -------------- ------------
- --------- * 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. 14 THE BEAR STEARNS FUNDS STATEMENT OF OPERATIONS FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996
TOTAL LARGE CAP SMALL CAP RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO ---------- ---------- ---------- INVESTMENT INCOME Dividends....................................... $ 115,115 $ 104,932 -- Interest........................................ 2,830 5,353 $ 750,674 ---------- ---------- ---------- 117,945 110,285 750,674 ---------- ---------- ---------- EXPENSES Federal and state registration fees............. 65,693 57,283 85,314 Accounting fees................................. 62,405 62,532 63,913 Advisory fees................................... 45,531 88,955 51,869 Transfer agent fees and expenses................ 45,781 55,800 42,929 Legal and auditing fees......................... 24,404 24,444 31,818 Reports and notices to shareholders............. 19,848 25,750 35,000 Distribution fees - class A..................... 13,300 22,762 14,093 Distribution fees - class C..................... 23,333 37,577 11,638 Amortization of organization expenses........... 19,720 21,434 15,220 Insurance expenses.............................. 15,603 15,421 15,686 Administration fees............................. 9,106 17,782 17,290 Custodian fees and expenses..................... 11,029 15,989 14,357 Trustees' fees and expenses..................... 9,240 10,724 5,300 Other........................................... 2,930 3,955 10,255 ---------- ---------- ---------- Total expenses before waivers and reimbursements........................... 367,923 460,408 414,682 Less: waivers and reimbursements.......... (270,189 ) (280,562 ) (334,442 ) ---------- ---------- ---------- Total expenses after waivers and reimbursements........................... 97,734 179,846 80,240 ---------- ---------- ---------- Net investment income/(loss).................... 20,211 (69,561 ) 670,434 ---------- ---------- ---------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS Net realized gain from investments.............. 95,147 544,848 105,601 Net change in unrealized appreciation/(depreciation) on investments..... 1,139,353 2,686,393 (152,392 ) ---------- ---------- ---------- Net realized and unrealized gain/(loss) on investments.................................... 1,234,500 3,231,241 (46,791 ) ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $1,254,711 $3,161,680 $ 623,643 ---------- ---------- ---------- ---------- ---------- ----------
- -------- * Commencement of operations. The accompanying notes are an integral part of the financial statements. 15 THE BEAR STEARNS FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996
TOTAL LARGE CAP SMALL CAP RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO ----------- ----------- ----------- INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income/(loss).................... $ 20,211 $ (69,561 ) $ 670,434 Net realized gain from investments.............. 95,147 544,848 105,601 Net change in unrealized appreciation/(depreciation) on investments..... 1,139,353 2,686,393 (152,392 ) ----------- ----------- ----------- Net increase in net assets resulting from operations..................................... 1,254,711 3,161,680 623,643 ----------- ----------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class A shares............................... (4,557 ) -- (232,740 ) Class C shares................................ -- -- (84,059 ) Class Y shares............................... (10,514 ) -- (353,635 ) ----------- ----------- ----------- (15,071 ) -- (670,434 ) ----------- ----------- ----------- Net realized capital gains Class A shares............................... (1,184 ) (64,256 ) (13,644 ) Class C shares................................ (1,037 ) (72,361 ) (5,746 ) Class Y shares............................... (891 ) (134,885 ) (35,406 ) ----------- ----------- ----------- (3,112 ) (271,502 ) (54,796 ) ----------- ----------- ----------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 10,493,529 23,204,316 19,389,794 Cost of shares repurchased...................... (1,214,980 ) (4,151,186 ) (1,253,726 ) Shares issued in reinvestment of dividends...... 9,088 247,929 381,251 ----------- ----------- ----------- Net increase in net assets derived from shares of beneficial interest transactions............ 9,287,637 19,301,059 18,517,319 ----------- ----------- ----------- Total increase in net assets.................... 10,524,165 22,191,237 18,415,732 NET ASSETS Beginning of period............................. 25,008 25,008 24,984 ----------- ----------- ----------- End of period................................... $10,549,173 $22,216,245 $18,440,716 ----------- ----------- ----------- ----------- ----------- -----------
- -------- * Commencement of operations. The accompanying notes are an integral part of the financial statements. 16 THE BEAR STEARNS FUNDS FINANCIAL HIGHLIGHTS FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996 - -------------------------------------------------------------------------------- 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 the period. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
LARGE CAP VALUE PORTFOLIO (1) SMALL CAP VALUE TOTAL RETURN BOND ---------------------- PORTFOLIO (2) PORTFOLIO (3) CLASS CLASS CLASS ------------------------------ --------------------------- A C Y CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y ------ ------ ------ -------- -------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period.......................... $12.00 $12.00 $13.98 $12.00 $12.00 $13.09 $12.00 $12.00 $ 12.35 ------ ------ ------ -------- -------- -------- ------- ------- ------- Net investment income/(loss)(4)................ 0.06 (0.01 ) 0.07 (0.07) (0.10) -- 0.71 0.67 0.41 Net realized and unrealized gain/(loss) on investments(5)... 3.10 3.10 1.16 4.17 4.11 3.05 0.30 0.30 (0.05) ------ ------ ------ -------- -------- -------- ------- ------- ------- Net increase in net assets resulting from operations....... 3.16 3.09 1.23 4.10 4.01 3.05 1.01 0.97 0.36 ------ ------ ------ -------- -------- -------- ------- ------- ------- Dividends and distributions to shareholders from: Net investment income............ (0.02 ) -- (0.08 ) -- -- -- (0.71) (0.67) (0.41) Net realized capital gains....... (0.01 ) (0.01 ) (0.01 ) (0.23) (0.22) (0.29) (0.04) (0.04) (0.04) ------ ------ ------ -------- -------- -------- ------- ------- ------- (0.03 ) (0.01 ) (0.09 ) (0.23) (0.22) (0.29) (0.75) (0.71) (0.45) ------ ------ ------ -------- -------- -------- ------- ------- ------- Net asset value, end of period... $15.13 $15.08 $15.12 $15.87 $15.79 $15.85 $12.26 $12.26 $ 12.26 ------ ------ ------ -------- -------- -------- ------- ------- ------- ------ ------ ------ -------- -------- -------- ------- ------- ------- Total investment return(6)(9).... 26.35% 25.71% 8.75% 34.36% 33.59% 23.52% 8.54% 8.13% 2.92% ------ ------ ------ -------- -------- -------- ------- ------- ------- ------ ------ ------ -------- -------- -------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $3,616 $3,520 $3,413 $6,474 $6,753 $8,989 $4,467 $1,775 $12,199 Ratio of expenses to average net assets(4)(7).................... 1.50% 2.00% 1.00% 1.50% 2.00% 1.00% 0.85% 1.25% 0.45% Ratio of net investment income/(loss) to average net assets(4)(7)(9)................. 0.46% (0.06 )% 0.76% (0.66)% (1.09)% -- 5.76% 5.38% 5.93% Decrease reflected in above expense ratios and net investment income/ (loss) due to waivers and reimbursements(7)(9)............ 4.34% 4.39% 4.41% 2.32% 2.39% 2.45% 2.87% 2.95% 2.89% Portfolio turnover rate(8)....... 45.28% 45.28% 45.28% 40.79% 40.79% 40.79% 107.35% 107.35% 107.35% Average commission rate per share........................... $0.06 $0.06 $0.06 $ 0.06 $ 0.06 $ 0.06 -- -- --
- --------- * Commencement of operations. ** Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Commenced investment operations on April 4, 1995. Class Y shares commenced its initial public offering on August 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. (4) Reflects waivers and reimbursements. (5) The amount shown for a share outstanding throughout the respective period is not in accord with the change in the aggregate gains and losses in investments during the respective period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (6) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total 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 returns are not annualized. (7) Annualized. (8) Not annualized. (9) 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. The accompanying notes are an integral part of the financial statements. 17 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 3, 1995, April 4, 1995 and April 5, 1995 for Small Cap, Large 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 18 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. 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. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the period ended March 31, 1996, Bear Stearns Funds Management Inc. ("BSFM" or "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 period ended March 31, 1996, BSFM (or the "Administrator") serves 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 period ended March 31, 1996, PFPC Inc. has voluntarily waived a portion of its fee. These fees are computed daily and paid monthly, and are subject to reduction in any year to the extent that a 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. The Portfolios will not pay BSFM at a later time for any amounts it may waive, nor will the Portfolios reimburse BSFM for any amounts it may assume. During the period ended March 31, 1996, 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 19 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 through March 31, 1996, 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 period ended March 31, 1996, the Adviser waived advisory fees of $45,531, $88,955 and $51,869 for Large Cap, Small Cap and Bond Portfolio, respectively. In addition, the Adviser reimbursed $224,658, $191,607 and $282,573 for Large Cap, Small Cap and Bond Portfolio, respectively, in order to maintain the voluntary expense limitation. For the period ended March 31, 1996, Bear Stearns, an affiliate of the Adviser and the Administrator, earned approximately $1,200 and $1,700 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 period ended March 31, 1996, 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 period April 3, 1995 (commencement of operations) through March 31, 1996, Bear Stearns earned $36,633, $60,339 and $25,731 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 or will reallow 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% for the period April 15, 1996 through June 30, 1996. 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 period ended March 31, 1996, Bear Stearns has advised each Portfolio that it received approximately $60,000, $139,000 and $61,000 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 $100, $600 and $200 from the Portfolios, respectively, in contingent deferred sales charges upon certain redemptions by class C shareholders. 20 INVESTMENTS IN SECURITIES For U.S. federal income tax purposes, the costs of securities owned at March 31, 1996 were $9,202,993, $19,075,998 and $18,669,734 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..................... $1,313,814 $ (174,461) $1,139,353 Small Cap..................... 3,858,596 (1,176,199) 2,682,397 Bond Portfolio................ 78,512 (230,904) (152,392)
For the period April 3, 1995 (commencement of operations) through March 31, 1996, aggregate purchases and sales of investment securities (excluding short-term securities) for each Portfolio were as follows:
PORTFOLIO PURCHASES SALES - ------------------------------ ------------ ------------ Large Cap..................... $12,048,795 $ 2,878,529 Small Cap..................... 23,498,834 5,163,049 Bond Portfolio................ 31,380,166 12,507,625
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% 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, 1996, there was an unlimited amount of $0.001 par value shares of beneficial interest authorized for each Portfolio, of which Bear Stearns owned 63,675, 73,811 and 59,598 of class A shares and 63,564, 73,763 and 59,598 of class C shares of Large Cap, Small Cap and Bond Portfolio, respectively. Transactions in the classes of shares of beneficial interest for the period April 3, 1995 (commencement of operations) through March 31, 1996 were as follows:
SALES REINVESTMENTS REPURCHASES ------------------------------- ----------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- -------------------- ------- -------- ------- ----------- LARGE CAP Class A shares............. 315,696 $ 4,132,049 332 $ 4,945 78,059 $1,135,562 Class C shares............. 233,174 3,029,455 68 1,009 865 12,818 Class Y shares (1)......... 230,011 3,332,025 211 3,134 4,509 66,600 SMALL CAP Class A shares............. 670,342 9,119,686 3,827 55,602 267,203 3,916,200 Class C shares............. 431,865 5,897,544 4,544 65,802 9,820 142,216 Class Y shares (2)......... 564,644 8,187,086 8,725 126,525 6,293 92,770 BOND PORTFOLIO Class A shares............. 412,635 5,005,133 11,440 142,125 60,606 761,370 Class C shares............. 146,761 1,778,698 3,450 42,916 6,447 81,056 Class Y shares (3)......... 1,013,077 12,605,963 15,678 196,210 33,443 411,300
- --------- (1) Class Y shares commenced its initial public offering on August 11, 1995. (2) Class Y shares commenced its initial public offering on June 22, 1995. (3) Class Y shares commenced its initial public offering on September 8, 1995. 21 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. Large Cap had $50,000 outstanding under the line of credit agreement at March 31, 1996. Small Cap and Bond Portfolio had no amounts outstanding under the line of credit agreement at March 31, 1996. 22 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, 1996, and the related statements of operations, changes in net assets and the financial highlights for the periods presented. 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, 1996 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, 1996, 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, 1996 23 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 the Portfolio's fiscal year end (March 31, 1996) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the year ended March 31, 1996, the following ordinary income dividends per share were paid by each of the Portfolios: LARGE CAP VALUE PORTFOLIO
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS - ---------------------------------------- ---------------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ------------ ------------ ------------ ------------ ------------ ------------ $ 0.0247 -- $ 0.0752 $ 0.0064 $ 0.0052 $ 0.0064 - ------------ ------------ ------------ ------------ ------------ ------------ - ------------ ------------ ------------ ------------ ------------ ------------
The percentage of total net investment income dividends received from the Large Cap Value Portfolio qualifying for the corporate dividends received deduction is 100%. SMALL CAP VALUE PORTFOLIO
SHORT-TERM CAPITAL GAINS - ---------------------------------------- CLASS A CLASS C CLASS Y - ------------ ------------ ------------ $ 0.2314 $ 0.2211 $ 0.2911 - ------------ ------------ ------------ - ------------ ------------ ------------
There were no dividends for Small Cap Value Portfolio which would qualify for the dividends received deduction available to corporate shareholders. TOTAL RETURN BOND PORTFOLIO
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS - ---------------------------------------- ---------------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ------------ ------------ ------------ ------------ ------------ ------------ $ 0.7101 $ 0.6651 $ 0.4088 $ 0.0410 $ 0.0410 $ 0.0410 - ------------ ------------ ------------ ------------ ------------ ------------ - ------------ ------------ ------------ ------------ ------------ ------------
There were no dividends for Total Return Bond Portfolio which would qualify for the dividends received deduction available to corporate shareholders. 24 The extent to which dividends were derived from various security types is presented below. This information relates only to net investment income referenced above.
LARGE CAP SMALL CAP TOTAL RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- ------------ U.S. Government Obligations............ -- -- 24.81% Federal Farm Credit Bank............... -- -- 0.25 Federal Home Loan Bank................. 0.07% 0.12% 2.27 Federal Home Loan Mortgage Corporation........................... 0.17 0.04 19.02 Federal National Mortgage Association........................... -- -- 7.54 Government National Mortgage Association........................... -- -- 12.21 Corporate Obligations.................. -- -- 32.05 Dividend Income........................ 99.76 99.84 1.85 --------- --------- ------------ Total.................................. 100.00% 100.00% 100.00% --------- --------- ------------ --------- --------- ------------
This information is given to meet certain requirements of the Internal Revenue Code of 1986, as amended. Because the Portfolios' fiscal year is not the calendar year, another notification will be sent with respect to calendar year 1996. 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, 1997. 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. 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. 25 The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Robert S. Reitzes....................... Chairman of the Board Neil T. Eigen........................... 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 Frank J. Maresca........................ Vice President and Treasurer Raymond D. DeAngelo..................... Vice President Ellen T. Arthur......................... Secretary Vincent L. Pereira...................... Assistant Treasurer Eileen M. Coyle......................... Assistant Secretary Investment Adviser & Distributor 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 & 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 Stroock & Stroock & Lavan Deloitte & Touche 7 Hanover Square Deloitte & Touche House New York, NY 10004 Earlsfort Terrace Dublin 2, Ireland
This report is submitted for the general information of the shareholders of the Portfolio. It is not authorized for the 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 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 & Poor's-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-011-02 S&P STARS Portfolio Annual Report March 31, 1996 [LOGO] THE BEAR STEARNS FUNDS S&P STARS Portfolio LETTER TO SHAREHOLDERS April 25, 1996 Dear Shareholders, We are pleased to present the first annual report to shareholders of the S&P STARS Portfolio (the "Portfolio") for the period April 5, 1995 (commencement of investment operations) through March 31, 1996. The Portfolio gained 27.68% and 26.91% (without giving effect to sales charges and contingent deferred sales charges, if any) for class A and C shares, respectively, for the period ended March 31, 1996. The S&P 500 (Composite) Index ("S&P 500") returned 30.75% for the same time frame. For the one year ended April 5, 1996, the total return for the Portfolio was 29.91% and 29.13% (without giving effect to sales charges and contingent deferred sales charges) for class A and C shares, respectively, compared to 32.89% for the S&P 500. Since inception on August 7, 1995 through March 31, 1996, class Y shares gained 9.09% versus 17.55% for the S&P 500. Further performance data for each class of shares during this reporting period is available in the "Financial Highlights" section in this report. During the year, the Portfolio was heavily invested in the technology, financial, healthcare and consumer non-durable sectors. The Portfolio had only modest exposure in cyclical stocks. However, we believe that the economy will strengthen over the next two quarters and, therefore, have become more weighted in cyclical stocks. The Portfolio continues to hold large positions in the technology sector. In addition, we believe that stocks such as Bay Networks Inc., Oracle Systems Corp. and Amgen, Inc. have had price corrections, and therefore are attractive on a valuation basis. We have created new positions or added to our existing positions as stock prices have dropped. Although the networking stocks have come under some pressure, we expect the growth in this sector to remain strong for the foreseeable future. We continue to hold Adaptec Inc., Computer Associates and Sterling Software, Inc. -- all leaders in the fast-growing networking and electronic commerce sectors. Although the market is nervous about current demand, we believe that sales in this group will continue to improve. We believe that Windows NT and new PC developments will contribute to a new wave of corporate upgrading for computers in the U.S. Furthermore, we believe that demand outside the U.S. remains robust for these products. We continue to maintain significant positions in healthcare and healthcare-related companies. We believe that these companies will provide steady earnings growth during an uncertain economic environment. Recently, we have purchased Columbia/HCA Healthcare Corp. after it slipped 12% from its high. We expect this company to have strong earnings growth in the future. In addition, the Portfolio maintains a large position in the drug sector. We have also purchased several cyclical issues -- with concentrated holdings in Goodyear Tire & Rubber Co., Delta Air Lines Inc. and Grace (W.R.) & Co. Goodyear Tire & Rubber Co. is one of our largest holdings and should benefit from improved consumer demand and growth in the replacement tire market. We continue to hold Grace (W.R.) & Co. which should benefit from restructuring efforts and strong growth in its chemical business. Moreover, we have modestly increased our position in the oil service and energy sectors. Finally, we have developed a weighting in the defense and telecommunications industries. These industries appear to be poised to produce solid earnings gains. Although we have lowered our exposure in the financial stocks, we still maintain positions in Citicorp, Chubb Corp. and Federal National Mortgage Association. In short, we are positioning the Portfolio to take advantage of a modest upturn in the economy. In conclusion , we appreciate your support and would be pleased to respond to any questions or comments. If you have any questions concerning the Portfolio, please call 1-800-766-4111. Sincerely, [SIG] Robert S. Reitzes Chairman of the Board The Bear Stearns Funds Portfolio Manager S&P STARS Master Series 1 THE BEAR STEARNS FUNDS S&P STARS Portfolio(1) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
S&P STARS PORTFOLIO Class A Class C S&P 500 National Consumer Price Index April 3, 1995 $ 9,525.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 Apr 95 $ 9,636.13 $ 10,116.67 $ 10,189.00 $ 10,039.66 May 95 $ 10,096.50 $ 10,583.33 $ 10,595.00 $ 10,066.09 Jun 95 $ 10,572.75 $ 11,083.33 $ 10,842.00 $ 10,079.31 Jul 95 $ 11,271.25 $ 11,808.33 $ 11,202.00 $ 10,099.14 Aug 95 $ 11,342.69 $ 11,875.00 $ 11,320.00 $ 10,112.36 Sep 95 $ 11,445.88 $ 11,875.00 $ 11,704.00 10125.58 Oct 95 $ 11,263.31 $ 11,783.33 11662 $ 10,158.63 Nov 95 $ 11,652.25 $ 12,183.33 $ 12,174.00 $ 10,158.63 Dec 95 $ 11,648.38 $ 12,176.00 $ 12,409.00 $ 10,178.45 Jan 96 $ 11,941.83 $ 12,477.81 $ 12,831.00 $ 10,224.72 Feb 96 $ 12,259.73 $ 12,802.36 $ 12,950.00 $ 10,244.55 Mar 96 $ 12,161.91 $ 12,566.37 $ 13,075.00 $ 10,284.20
TOTAL RETURN WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS --------------------------- --------------------------- S&P STARS Portfolio(1)(4) Class A shares.......................... 21.62%(5) 27.68% Class C shares.......................... 25.91(6) 26.91 Class Y shares(2)(7).................... 9.09 9.09 S&P 500 (Composite) Index(3)................ 30.75 -- National Consumer Price Index(3)............ 2.84 --
- ---------- (1) For the period April 5, 1995 (commencement of investment operations) through March 31, 1996. (2) The return of class Y shares (for which August 7, 1995 was the initial public offering date) would have been higher than class A and C shares if operations were commenced on the same day. The higher return is due to the fact that there is no sales load, CDSC or 12b-1 fee charged to class Y shares. (3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects Portfolio expenses. Investors should note that the Portfolio invests in 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. (4) 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. (5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and expense reimbursements, the total return would have been 20.55% with a sales load charged and 26.56% without a sales load charged. (6) Reflects the maximum 1.00% contingent deferred sales charge. Excluding fee waivers and expense reimbursements, the total return would have been 24.92% with a CDSC charged at the end of the period and 25.92% without a CDSC charged at the end of the period. (7) Excluding fee waivers and expense reimbursements, the total return would have been 8.63%. CDSC -- Contingent Deferred Sales Charge. 2 THE BEAR STEARNS FUNDS S&P STARS Master Series MARCH 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Aerospace 2.83% Air Transport 3.28% Automotive Equipment 4.97% Banks 7.86% Cash & Cash Equivalents 6.52% Chemicals & Fertilizers 5.45% Computers & Office Equipment 2.41% Computer Networks 3.00% Computer Services 11.06% Credit & Finance 4.12% Drugs & Hospital Supplies 9.95% Electrical Equipment 6.65% Electronics 5.54% Food & Beverages 2.72% Forest Products & Paper 4.09% Insurance 2.29% Miscellaneous Manufacturing 2.75% Oil & Natural Gas 5.12% Other 5.84% Telecommunications 3.55%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ----- -------------------------------------------------- ----------------------------- ---------- 1. General Electric Co. ............................. Electrical Equipment 6.65 2. Sterling Software, Inc. .......................... Computer Services 5.07 3. Goodyear Tire & Rubber Co. ....................... Automotive Equipment 4.97 4. Computer Associates............................... Computer Services 4.50 5. Grace (W.R.) & Co. ............................... Chemicals & Feritilizers 4.39 6. Citicorp.......................................... Banks 4.19 7. Kimberly-Clark Corp. ............................. Forest Products & Paper 4.09 8. Johnson & Johnson................................. Drugs & Hospital Supplies 3.94 9. Delta Air Lines Inc. ............................. Air Transport 3.28 10. Adaptec Inc. ..................................... Electronics 3.24
3 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1996 ASSETS Investment in S&P STARS Master Series ("Master Series"), at value.................... $ 81,922,142 Receivable for Portfolio shares sold............ 1,023,063 Receivable for investment sold in Master Series......................................... 241,862 Receivable from Master Series' investment adviser........................................ 4,424 Deferred organization expenses and other assets......................................... 170,568 ------------- Total assets.............................. 83,362,059 ------------- LIABILITIES Payable for investment purchased in Master Series......................................... 1,023,063 Payable for Portfolio shares repurchased........ 241,862 Distribution fee payable (class A and C shares)........................................ 116,760 Administration fee payable...................... 11,547 Accrued expenses................................ 60,311 ------------- Total liabilities......................... 1,453,543 ------------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 5,495 Paid-in capital................................. 73,932,658 Net investment loss............................. (47,440) Accumulated net realized gain from Master Series......................................... 2,014,786 Net unrealized appreciation from Master Series......................................... 6,003,017 ------------- Net assets................................ $81,908,516 ------------- CLASS A Net assets...................................... $ 45,048,671 ------------- Shares of beneficial interest outstanding....... 3,019,876 ------------- Net asset value per share....................... $14.92 ------------- ------------- Maximum offering price per share (net asset value plus sales charge of 4.75%* of the offering price)................................ $15.66 ------------- ------------- CLASS C Net assets...................................... $ 28,080,540 ------------- Shares of beneficial interest outstanding....... 1,889,079 ------------- Net asset value and offering price per share**........................................ $14.86 ------------- ------------- CLASS Y Net assets...................................... $ 8,779,305 ------------- Shares of beneficial interest outstanding....... 586,530 ------------- Net asset value, offering and redemption price per share...................................... $14.97 ------------- -------------
- -------- * 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. 4 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF OPERATIONS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 INVESTMENT INCOME Allocated net investment income from Master Series......................................... $ 695,138 ------------- EXPENSES Distribution fees - class A..................... 152,980 Distribution fees - class C..................... 176,445 Federal and state registration fees............. 92,577 Administration fees............................. 78,090 Transfer agent fees and expenses................ 76,889 Accounting fees................................. 58,660 Reports and notices to shareholders............. 44,012 Amortization of organization expenses........... 40,563 Trustees' fees and expenses..................... 8,931 Legal and auditing fees......................... 7,910 Custodian fees and expenses..................... 4,945 Other........................................... 5,000 ------------- Total expenses before reimbursements...... 747,002 Less: reimbursements...................... (4,424) ------------- Total expenses after reimbursements....... 742,578 ------------- Net investment loss............................. (47,440) ------------- NET REALIZED AND UNREALIZED GAIN FROM MASTER SERIES Net realized gain............................... 3,768,620 Net change in unrealized appreciation........... 6,003,017 ------------- Net realized and unrealized gain................ 9,771,637 ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $ 9,724,197 ------------- -------------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 5 THE BEAR STEARNS FUNDS S&P STARS Portfolio STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment loss............................. $ (47,440) Net realized gain from Master Series............ 3,768,620 Net change in unrealized appreciation from Master Series.................................. 6,003,017 ----------- Net increase in net assets resulting from operations..................................... 9,724,197 ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class Y shares................................ (14,755) ----------- Net realized capital gains Class A shares ............................... (994,461) Class C shares................................ (560,676) Class Y shares................................ (183,942) ----------- (1,739,079) ----------- SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 86,911,640 Cost of shares repurchased...................... (14,635,820) Shares issued in reinvestment of dividends...... 1,537,317 ----------- Net increase in net assets derived from shares of beneficial interest transactions............ 73,813,137 ----------- Total increase in net assets.................... 81,783,500 NET ASSETS Beginning of period............................. 125,016 ----------- End of period................................... $81,908,516 ----------- -----------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 6 THE BEAR STEARNS FUNDS S&P STARS Portfolio FINANCIAL HIGHLIGHTS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 - -------------------------------------------------------------------------------- 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 the period. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
CLASS A CLASS C CLASS Y -------- -------- -------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period.......................... $ 12.00 $ 12.00 $14.13 -------- -------- -------- Net investment income/(loss) (1)............................. -- (0.06) 0.07 Net realized and unrealized gain on investment (2)............... 3.31 3.28 1.20 -------- -------- -------- Net increase in net assets resulting from operations....... 3.31 3.22 1.27 -------- -------- -------- Dividends and distributions to shareholders from: Net investment income.......... -- -- (0.03) Net realized capital gains..... (0.39) (0.36) (0.40) -------- -------- -------- (0.39) (0.36) (0.43) -------- -------- -------- Net asset value, end of period... $ 14.92 $ 14.86 $14.97 -------- -------- -------- -------- -------- -------- Total investment return (3)(6)... 27.68% 26.91% 9.09% -------- -------- -------- -------- -------- -------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)........................ $ 45,049 $ 28,081 $8,779 Ratio of expenses to average net assets (1)(4)................... 1.50% 2.00% 1.00% Ratio of net investment income/(loss) to average net assets (1)(4)(6)................ (0.01)% (0.45)% 0.82% Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (4)(5)(6)....................... 0.89% 0.92% 0.99%
- -------- * Commencement of investment operations. Class Y shares commenced its initial public offering on August 7, 1995. ** Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions which are based on actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amount shown for a share outstanding throughout the respective period is not in accord with the change in the aggregate gains and losses in investments during the respective period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total 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 returns are 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. 7 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. 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, 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, 1996). 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 not had any 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 $203,596 incurred by the Fund in connection with the organization, its registration with the Commission 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 investment income 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). 8 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. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the period ended March 31, 1996, 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. During the period ended March 31, 1996 PFPC Inc. has voluntarily waived a portion of its fee. 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 period ended March 31, 1996, 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). For the period ended March 31, 1996, the Adviser reimbursed $4,424 of the Portfolio's expenses in order to maintain the voluntary expense limitation. 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 subsidiary 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 period ended March 31, 1996, 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 paid monthly. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. For the period April 5, 1995 (commencement of investment operations) through March 31, 1996, Bear Stearns earned $329,425 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 or will reallow 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 9 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% for the period April 15, 1996 through June 30, 1996. In addition, Bear Stearns pays 1.00% in sales commissions on the sale of class C shares to dealers at the time of such sales. For the period ended March 31, 1996, Bear Stearns has advised the Portfolio that it received approximately $1,494,000 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 $25,500 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 $86,898,982 and $15,568,630, 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, 1996, 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 period April 5, 1995 (commencement of investment operations) through March 31, 1996 were as follows:
SALES REINVESTMENTS REPURCHASES ---------------------- ---------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- --------- ----------- -------- ---------- Class A shares ....................... 3,601,121 $48,488,374 58,847 $ 850,924 640,092 $9,215,429 Class C shares........................ 2,211,148 29,952,540 34,906 503,689 356,975 5,104,093 Class Y shares*....................... 595,898 8,595,742 12,618 182,704 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 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 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 at March 31, 1996. 10 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, 1996, and the related statements of operations, changes in net assets and the financial highlights for the period April 5, 1995 (commencement of investment 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 audit. We conducted our audit 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 audit provides 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, 1996, the results of its operations, the changes in its net assets and the financial highlights for the period presented in conformity with generally accepted accounting principles. Deloitte & Touche Dublin, Ireland May 9, 1996 11 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 shareholders within 60 days of the Portfolio's fiscal year end (March 31, 1996) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the year ended March 31, 1996, the following ordinary income dividends per share were paid by the Portfolio:
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS - ------------------------------- ------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - --------- --------- --------- --------- --------- --------- -- -- $ 0.0319 $ 0.3897 $ 0.3589 $ 0.3923
The percentage of total net investment income dividends received from the S&P STARS Portfolio qualifying for the corporate dividends received deduction is 32.05%. The extent to which dividends were derived from various security types is presented below. This information relates only to net investment income referenced above. Dividend Income................................................ 95.39% Federal Home Loan Bank......................................... 3.72 Federal Home Loan Mortgage Corporation......................... 0.89 ---------- 100.00% ---------- ----------
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 1996. 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, 1997. 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. 12 THE BEAR STEARNS FUNDS S&P STARS Master Series PORTFOLIO OF INVESTMENTS MARCH 31, 1996
---------------------------------------------------------- MARKET SHARES+ VALUE - ------------------------------------------------------------- COMMON STOCKS--93.48% AEROSPACE - 2.83% 39,500 Rockwell International Corp...... $ 2,325,562 ----------- AIR TRANSPORT - 3.28% 35,000 Delta Air Lines Inc. ............ 2,690,625 ----------- AUTOMOTIVE EQUIPMENT - 4.97% 80,000 Goodyear Tire & Rubber Co. ...... 4,080,000 ----------- BANKS - 7.86% 25,000 Bank of New York Co., Inc. ...... 1,287,500 43,000 Citicorp......................... 3,440,000 50,000 Green Tree Financial Corp.++*.... 1,718,750 ----------- 6,446,250 ----------- BROADCASTING - 1.06% 20,000 Infinity Broadcasting Co......... 867,500 ----------- CHEMICALS & FERTILIZERS - 5.45% 10,000 The Dow Chemical Co.............. 868,750 46,000 Grace (W.R.) & Co.+++ ........... 3,599,500 ----------- 4,468,250 ----------- COAL - 0.53% 30,000 Zeigler Coal Holding Co.......... 435,000 ----------- COMPUTERS & OFFICE EQUIPMENT - 2.41% 45,000 Cheyenne Software Inc.++*........ 708,750 27,000 Oracle Systems Corp.............. 1,272,375 ----------- 1,981,125 ----------- COMPUTER NETWORKS - 3.00% 80,000 Bay Networks Inc. ............... 2,460,000 ----------- COMPUTER SERVICES - 11.06% 31,000 Automatic Data Processing, Inc.++ .......................... 1,220,625 51,500 Computer Associates.............. 3,688,688 59,000 Sterling Software, Inc.*......... 4,159,500 ----------- 9,068,813 ----------- ---------------------------------------------------------- MARKET SHARES+ VALUE - ------------------------------------------------------------- CREDIT & FINANCE - 4.12% 39,000 American Express Co.............. $ 1,925,625 45,500 Federal National Mortgage Association...................... 1,450,312 ----------- 3,375,937 ----------- DRUGS & HOSPITAL SUPPLIES - 9.95% 40,000 Amgen, Inc....................... 2,325,000 35,000 Bio-Technology General Corp.*.... 229,688 36,000 Foundation Health Corp.++*....... 1,372,500 35,000 Johnson & Johnson................ 3,228,750 15,000 Pfizer Inc. ..................... 1,005,000 ----------- 8,160,938 ----------- ELECTRICAL EQUIPMENT - 6.65% 70,000 General Electric Co.............. 5,451,250 ----------- ELECTRONICS - 5.54% 55,000 Adaptec Inc.++*.................. 2,653,750 80,500 Dynatech Corp. .................. 1,891,750 ----------- 4,545,500 ----------- ENTERTAINMENT & LEISURE - 1.29% 60,000 Comcast Corp. Class A............ 1,061,250 ----------- FOOD & BEVERAGES - 2.72% 27,000 The Coca-Cola Co. ............... 2,230,875 ----------- FOREST PRODUCTS & PAPER - 4.09% 45,000 Kimberly-Clark Corp.+++.......... 3,352,500 ----------- INSURANCE - 2.29% 20,000 Chubb Corp....................... 1,877,500 ----------- MISCELLANEOUS MANUFACTURING - 2.75% 96,000 Whittaker Corp.*................. 2,256,000 -----------
The accompanying notes are an integral part of the financial statements. 13 THE BEAR STEARNS FUNDS S&P STARS Master Series PORTFOLIO OF INVESTMENTS MARCH 31, 1996
---------------------------------------------------------- MARKET SHARES+ VALUE - ------------------------------------------------------------- COMMON STOCKS (CONTINUED) OIL & NATURAL GAS - 5.12% 25,000 Baker Hughes, Inc................ $ 731,250 20,000 Dresser Industries, Inc.......... 610,000 16,000 Mobil Corp. ..................... 1,854,000 20,000 Williams Cos., Inc. ............. 1,007,500 ----------- 4,202,750 ----------- OIL-OFFSHORE DRILLING - 1.22% 100,000 Global Marine, Inc.*............. 1,000,000 ----------- RAILROADS - 1.74% 50,000 Illinois Central Corp.++......... 1,425,000 ----------- TELECOMMUNICATIONS - 3.55% 42,500 ECI Telecom Ltd.................. 950,938 65,000 MCI Communications Corp.++....... 1,966,250 ----------- 2,917,188 ----------- Total Common Stocks (cost - $70,673,439)............. 76,679,813 ----------- SHORT-TERM INVESTMENTS--7.18% INVESTMENT COMPANY - 1.08% 886,080 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares**........... 886,080 ----------- ---------------------------------------------------------- PRINCIPAL AMOUNT MARKET (000'S) VALUE - ------------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATION - 6.10% $5,000 Federal Home Loan Bank Discount Note, 5.25%, 04/01/96............ $ 5,000,000 ----------- Total Short Term Investments (cost - $5,886,080).............. 5,886,080 ----------- Total Investments (cost $76,559,519) - 100.66%..... 82,565,893 Liabilities in excess of other assets - (0.66)%................. (538,185) ----------- Net Assets - 100.00%............. $82,027,708 ----------- -----------
- --------- + Unless otherwise indicated all common stocks are ranked five stars. ++ Currently ranked four stars; ranked five stars when purchased. +++ Currently ranked three stars; ranked five stars when purchased. * 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. 14 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1996 ASSETS Investments, at value (cost--$76,559,519)....... $ 82,565,893 Receivable for investments sold................. 2,444,131 Receivable for beneficial interests sold........ 1,023,063 Dividends and interest receivable............... 140,998 Receivable from investment adviser.............. 79,750 Prepaid insurance............................... 15,768 Deferred organization expenses.................. 80,156 -------------- Total assets.............................. 86,349,759 -------------- LIABILITIES Payable for investments purchased............... 4,042,149 Payable for beneficial interests repurchased.... 241,862 Administration and accounting fee payable....... 5,901 Custodian fee payable........................... 2,800 Accrued expenses................................ 29,339 -------------- Total liabilities......................... 4,322,051 -------------- NET ASSETS Net proceeds from capital contributions and withdrawals.................................... 76,021,334 Net unrealized appreciation on investments...... 6,006,374 -------------- Net assets applicable to investors' beneficial interests....................... $ 82,027,708 -------------- --------------
The accompanying notes are an integral part of the financial statements. 15 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF OPERATIONS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 INVESTMENT INCOME Dividends....................................... $ 667,421 Interest........................................ 127,898 ----------- 795,319 ----------- EXPENSES Advisory fees................................... 384,778 Administration and accounting fees.............. 61,620 Custodian fees and expenses..................... 37,542 Legal and auditing fees......................... 22,783 Amortization of organizational expenses......... 19,844 Insurance expenses.............................. 17,302 Trustees' fees and expenses..................... 16,870 Other........................................... 3,521 ----------- Total expenses before waivers and reimbursements............................. 564,260 Less: waivers and reimbursements.......... (464,529) ----------- Total expenses after waivers and reimbursements............................. 99,731 ----------- Net investment income........................... 695,588 ----------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS, SECURITES SOLD SHORT AND OPTION TRANSACTIONS Net realized gain/(loss) from: Investments............................... 4,059,481 Option transactions....................... (65,149) Securities sold short..................... (224,962) Net change in unrealized appreciation on investments.................................... 6,006,374 ----------- Net realized and unrealized gain on investments, securities sold short and option transactions................................... 9,775,744 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $10,471,332 ----------- -----------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 16 THE BEAR STEARNS FUNDS S&P STARS Master Series STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 INCREASE IN NET ASSETS FROM OPERATIONS Net investment income..................................... $ 695,588 Net realized gain from investments, securities sold short and option transactions.................................. 3,769,370 Net change in unrealized appreciation on investments...... 6,006,374 --------------- Net increase in net assets resulting from operations...... 10,471,332 --------------- CAPITAL TRANSACTIONS Contributions............................................. 86,999,990 Withdrawals............................................... (15,568,630) --------------- Net increase in net assets derived from capital transactions............................................. 71,431,360 --------------- Total increase in net assets.............................. 81,902,692 NET ASSETS Beginning of period....................................... 125,016 --------------- End of period............................................. $82,027,708 --------------- ---------------
- -------- * Commencement of investment operations. The accompanying notes are an integral part of the financial statements. 17 THE BEAR STEARNS FUNDS S&P STARS Master Series FINANCIAL HIGHLIGHTS FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996 - -------------------------------------------------------------------------------- Contained below are ratios to average net assets and other supplemental data for the period. This information has been derived from information provided in the financial statements. - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)........................ $82,028 Ratio of expenses to average net assets (1)(2)................... 0.19% Ratio of net investment income to average net assets (1)(2)....... 1.36% Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements (2).......... 0.91% Portfolio turnover rate (3)...... 295.97% Average commission rate per share........................... $ 0.06
- ------- * Commencement of investment operations. (1) Reflects waivers and reimbursements. (2) Annualized. (3) Not annualized. The accompanying notes are an integral part of the financial statements. 18 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 not had any 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 $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 19 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 period ended March 31, 1996 was as follows:
CALL OPTIONS ---------------------------- CONTRACTS PREMIUMS ------------- ------------- Outstanding at beginning of period.............................................................. -- -- Options written................................................................................. 88,665 $ 4,008,132 Options closed or expired....................................................................... (88,665) (4,008,132) ------------- ------------- Outstanding at end of period.................................................................... -- -- ------------- ------------- PUT OPTIONS -------------------------- CONTRACTS PREMIUMS ------------- ----------- Outstanding at beginning of period.............................................................. -- -- Options written................................................................................. 75 $ 18,975 Options closed or expired....................................................................... (75) (18,975) ------------- ----------- Outstanding at end of period.................................................................... -- -- ------------- -----------
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 invest 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 period ended March 31, 1996, 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 period ended March 31, 1996, PFPC International Ltd. has voluntarily waived a portion of its fee. During the period ended March 31, 1996, 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 period ended March 31, 1996, the 20 Adviser waived $384,779 of its advisory fee and reimbursed $79,750 of the Master Series expenses 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 period ended March 31, 1996, Bear, Stearns & Co. Inc., an affiliate of the Adviser, earned $378,353 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, 1996 was $76,887,585. Accordingly, the net unrealized appreciation of investments of $5,678,308 was composed of gross appreciation of $6,807,564 for those investments having an excess of value over cost, and gross depreciation of $1,129,256 for those investments having an excess of cost over value. For the period April 5, 1995 (commencement of investment operations) through March 31, 1996, aggregate purchases and sales of investment securities (excluding short-term securities) were $209,191,856 and $142,577,898, 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 fund as a 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 fund 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 funds 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 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, 1996. 21 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, including the portfolio of investments, of S&P STARS Master Series (the "Master Series"), as of March 31, 1996, and the related statements of operations, changes in net assets and the financial highlights for the period April 5, 1995 (commencement of investment operations) to March 31, 1996. These financial statements and financial highlights are the responsibility of the Master Series' management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audit. We conducted our audit 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, 1996 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 audit provides 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, 1996, the results of its operations, the changes in its net assets and the financial highlights for the period presented in conformity with generally accepted accounting principles. Deloitte & Touche Dublin, Ireland May 9, 1996 22 -----END PRIVACY-ENHANCED MESSAGE-----