-----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, Ly966YXOkm897JK4z1sSrn3NWr8eDHc8OQiaabDwaTLTVTQtrp/IjXhpdCKWHKfe cdhOZNoGe1yIh0j1vVBxJw== 0000922423-02-000600.txt : 20020530 0000922423-02-000600.hdr.sgml : 20020530 20020530164423 ACCESSION NUMBER: 0000922423-02-000600 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20020530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS FUNDS CENTRAL INDEX KEY: 0000931145 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-84842 FILM NUMBER: 02666515 BUSINESS ADDRESS: STREET 1: 383 MADISON AVENUE STREET 2: 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 BUSINESS PHONE: (212) 272-9027 MAIL ADDRESS: STREET 1: 383 MADISON AVENUE STREET 2: 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS FUNDS CENTRAL INDEX KEY: 0000931145 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08798 FILM NUMBER: 02666516 BUSINESS ADDRESS: STREET 1: 383 MADISON AVENUE STREET 2: 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 BUSINESS PHONE: (212) 272-9027 MAIL ADDRESS: STREET 1: 383 MADISON AVENUE STREET 2: 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 485APOS 1 kl05044_485apos.txt POST EFFECTIVE AMENDMENT NO. 30 As filed via EDGAR with the Securities and Exchange Commission on May 30, 2002 File No. 33-84842 ICA No. 811-8798 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 30 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 30 THE BEAR STEARNS FUNDS (Exact Name of Registrant as Specified in Charter) 383 Madison Avenue, New York, New York 10179 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, including Area Code: (212) 272-2000 Copy to: Stephen A. Bornstein, Esq. Jay G. Baris, Esq. Bear, Stearns & Co., Inc. Kramer Levin Naftalis & 383 Madison Avenue Frankel LLP New York, New York 10179 919 Third Avenue (Name and Address of Agent for Service) New York, New York 10022 Approximate date of proposed public offering: As soon as practicable after this registration statement becomes effective. It is proposed that this filing will become effective: |_| Immediately upon filing pursuant |_| on (date) pursuant to paragraph to paragraph (b) (b) |_| 60 days after filing pursuant to |X| on August 1, 2002 pursuant to paragraph (a)(1) paragraph (a)(1) |_| 75 days after filing pursuant to |_| on (date) pursuant to paragraph paragraph (a)(2) (a)(2) of rule 485. If appropriate, check the following box: |_| this post-effective amendment designates a new effective date for a previously filed post-effective amendment. The Bear Stearns Funds Prospectus Dated August 1, 2002 Equity Funds o S&P STARS Portfolio o o o S&P STARS Opportunities Portfolio o o o The Insiders Select Fund o o o Intrinsic Value Portfolio o o o Small Cap Value Portfolio o o o Alpha Growth Portfolio o o o International Equity Portfolio Class A, B and C Shares This Prospectus provides important information about each Portfolio that you should know before investing. Please read it carefully and keep it for future reference. The Securities and Exchange Commission has not approved any Portfolio's shares or determined whether this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. The Bear Stearns Funds o 383 Madison Avenue, New York, NY 10179 1-800- 447-1139 Table of Contents .................................................................................. Risk/Return Summaries .................................................................................. S&P STARS Portfolio S&P STARS Opportunities Portfolio The Insiders Select Fund Intrinsic Value Portfolio Small Cap Value Portfolio Alpha Growth Portfolio International Equity Portfolio Investments Risk Factors .................................................................................. Management of the Portfolios .................................................................................. Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares Investing in the Portfolios .................................................................................. Investment Requirements Choosing a Class of Shares How the Trust Calculates Sales Charges Sales Charge Reductions and Waivers Distribution Fees and Shareholder Servicing Fees How to Buy Shares How to Sell Shares Exchanges Shareholder Services .................................................................................. Dividends, Distributions and Taxes .................................................................................. Additional Information .................................................................................. Financial Highlights .................................................................................. Each Portfolio described in this Prospectus is a series of The Bear Stearns Funds, a registered open-end management investment company (the "Trust"). It is important to keep in mind that mutual fund shares are: o not deposits or obligations of any bank; o not insured by the Federal Deposit Insurance Corporation; o subject to investment risk, including possible loss of the money invested. S&P STARS Portfolio RISK/RETURN SUMMARY Investment Objective To provide investment results that exceed the total return of publicly traded common stocks in the aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P 500 Index"). Principal Strategies Under normal circumstances, the S&P STARS Portfolio will invest at least 80% of its net assets in securities with any STARS ranking at the time of purchase. The S&P STARS Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. To achieve the investment objective of the S&P STARS Portfolio, Bear Stearns Asset Management Inc., the investment adviser for the S&P STARS Portfolio and each other Portfolio of the Trust ("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock Appreciation Ranking System (or "STARS") to identify common stocks in the highest category (five-STARS) for purchase and in the lowest category (one-STAR) for short selling. The Adviser believes that this approach will provide opportunities to achieve performance that exceeds the S&P 500 Index's total return. o Generally, the S&P STARS Portfolio will invest at least 85% of its total assets in U.S. common stocks and U.S. dollar-denominated American Depositary Receipts ("ADRs") that are listed on U.S. exchanges that, at the time of initial purchase, were ranked five-STARS or, at their time of short sale, were ranked one-STAR. o Generally, the S&P STARS Portfolio may invest up to 15% of its total assets in U.S. common stocks and ADRs without regard to STARS ranking. This strategy will allow the Adviser to consider a much larger universe of attractive stocks that S&P does not follow, which means that the S&P STARS Portfolio may purchase more "lower-rated" securities (or sell short more "higher-rated" securities) then it otherwise could. See "Principal Investment Strategies--Additional Information." In selecting investments, the Adviser analyzes the stocks ranked by S&P analysts according to the STARS ranking system and selects those it believes have the best potential for capital appreciation. The Adviser focuses on companies that show the potential to achieve growth at a reasonable price. The Adviser considers various factors including market segment, industry, earnings history, price-to-earnings ratio and management. The Adviser may select securities of companies with small, middle and large market capitalizations. If S&P downgrades a security held by the S&P STARS Portfolio to four-STARS from five-STARS, the Portfolio may purchase additional shares of that security without limitation. In addition, if S&P upgrades a security held by the S&P STARS Portfolio to two-STARS from one-STAR, the Portfolio may sell short additional shares of that security without limitation. If, however, S&P downgrades a security held by the S&P STARS Portfolio from five- or four-STARS to three-STARS or lower, that security is subject to the 15% limitation on acquiring securities without regard to STARS ranking. Similarly, if S&P upgrades a security sold short by the S&P STARS Portfolio from one- or two-STARS to three-STARS or higher, that security is also subject to the 15% limitation on investments made without regard to STARS ranking. S&P's research staff analyzes and ranks the stocks of approximately 1,000 issuers and evaluates their short- to- intermediate term (up to 12 months) appreciation potential , as shown below. S&P STARS Portfolio 1
o o o o o Buy Expected to be among the best performers over the next 6 to 12 months. o o o o Accumulate Expected to be an above-average performer. o o o Hold Expected to be an average performer. o o Avoid Expected to be a below-average performer. o Sell Expected to be a well-below-average performer.
The S&P STARS Portfolio may "sell short" securities that at their time of initial sale were rated one-STAR. In a short sale, the Adviser sells a security it has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will repurchase the security at a lower price and realize a gain for the S&P STARS Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the S&P STARS Portfolio. The S&P STARS Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the S&P STARS Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o Short sales may involve substantial risk and may involve leverage, which may increase potential losses. o Ratings by S&P's research group may not accurately assess the investment prospects of a particular security. 2 S&P STARS Portfolio The S&P STARS Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the S&P STARS Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the S&P STARS Portfolio The S&P STARS Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add an equity component to their portfolio. The S&P STARS Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the S&P STARS Portfolio by showing changes in its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows returns for Class A shares of the S&P STARS Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. S&P STARS Portfolio Annual Total Return (%)1 1996 27.77 1997 17.99 1998 39.69 1999 27.53 2000 2.89 2001 ( ) ==== ==== Past performance is not necessarily an indication of future results. (1)The S&P STARS Portfolio's year-to-date return as of June 30, 2002, was (______)%. During the period shown in the bar chart, the highest quarterly return was _______% (for the quarter ended _____________________) and the lowest quarterly return was (______)% (for the quarter ended ________________). S&P STARS Portfolio 3 The table below shows how average annual total returns for Class A, B and C shares of the S&P STARS Portfolio for one year, five years and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid- to large-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December 31, 2001) April 5, 1995 ------------------------------------------------ ---------- ------------- --------------- Class A ------------------------------------------------ ---------- ------------- --------------- Return before taxes ------------------------------------------------ ---------- ------------- --------------- Return after taxes on distributions ------------------------------------------------ ---------- ------------- --------------- Return after taxes on distributions and sale of Portfolio shares ------------------------------------------------ ---------- ------------- --------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------ ---------- ------------- --------------- Class B ------------------------------------------------ ---------- ------------- --------------- Return before taxes ------------------------------------------------ ---------- ------------- --------------- Class C ------------------------------------------------ ---------- ------------- --------------- Return before taxes ------------------------------------------------ ---------- ------------- --------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------ ---------- ------------- ---------------
* Total return figures for Class A shares reflect the current maximum sales load of 5.50%. Prior to December 24, 1997, the maximum sales load was 4.75%. ** Class B shares commenced operations on January 5, 1998. The average annual total return for Class B shares of the S&P STARS Portfolio for the period from January 5, 1998 to December 31, 2001 was ______%. The comparable return for the same period for the S&P 500 Index was ______%. 4 S&P STARS Portfolio Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the S&P STARS Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.50% None None Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale None** 5.00%(1) 1.00% price) Sales charge imposed on reinvested dividends None None None Redemption fees*** None None None Exchange fees None None None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------------------- Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.25% 0.75% 0.75% Other Expenses 0.35% 0.35% 0.35% Shareholder Servicing Fee 0.25% 0.25% 0.25% Total Other Expenses 0.60% 0.60% 0.60% ------- ------- ----- Total Annual Portfolio Operating Expenses 1.60% 2.10% 2.10% Fee Waiver and Expense Reimbursement (0.10)% (0.10)% (0.10)% -------- -------- ------- Net Expenses(2) 1.50% 2.00% 2.00% ===== ======= =====
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a contingent deferred sales charge ("CDSC") of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales ==== Charges--Class B Shares." ======= 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the S&P STARS Portfolio's net expenses do not exceed the amounts indicated above. S&P STARS Portfolio 5 Example This Example illustrates the cost of investing in the S&P STARS Portfolio over various time periods. It is intended to help you compare the cost of investing in the S&P STARS Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the S&P STARS Portfolio; o your investment returns 5% each year; o the S&P STARS Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period--
1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------------------------- Class A $694 $1,018 $1,364 $2,338 Class B $703 $ 948 $1,320 $2,296** Class C $303 $ 648 $1,120 $2,423 If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------------------------- Class B $203 $648 $1,120 $2,296** Class C $203 $648 $1,120 $2,423
* This Example assumes that net portfolio operating expenses will equal 1.50% for Class A and 2.00% for both Class B and C shares until July 31, 2003 and thereafter will equal 1.60% for Class A, 2.10% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." 6 S&P STARS Portfolio S&P STARS Opportunities Portfolio - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective To provide long-term capital appreciation. Principal Strategies To achieve the investment objective of the S&P STARS Opportunities Portfolio, Bear Stearns Asset Management Inc., the investment adviser ("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock Appreciation Ranking System (or "STARS") to identify common stocks in the highest category (five-STARS) for purchase and in the lowest category (one-STAR) for short selling. The Adviser believes that this approach will provide opportunities to achieve performance that exceeds the total return of the Standard & Poor's MidCap 400 Stock Index. |X| The Adviser generally selects securities of companies that, at the time of purchase, have market capitalizations of under $7 billion or are components of either the Standard & Poor's MidCap 400 Index or the Standard & Poor's SmallCap 600 Index. |X| Generally, the S&P STARS Opportunities Portfolio will invest at least 75% of its total assets in U.S. common stocks and U.S. dollar-denominated American Depositary Receipts ("ADRs") that are listed on U.S. exchanges that, at the time of initial purchase, were ranked five-STARS or, at the time of short sale, were ranked one-STAR. |X| Under normal circumstances, the S&P STARS Opportunities Portfolio will invest at least 80% of its net assets in securities with any STARS ranking at the time of purchase. The S&P STARS Opportunities Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. |X| Generally, the S&P STARS Opportunities Portfolio may invest up to 25% of its total assets in U.S. common stocks and ADRs without regard to any particular STARS ranking at the time of purchase. The strategy of investing up to 25% of total assets without regard to STARS ranking allows the Adviser to consider a larger universe of stocks of small and medium capitalization companies. These may be companies that S&P does not follow and therefore have no STARS ranking or companies that have STARS ranking below five-STARS. The strategy also permits the Adviser to sell short securities of companies that are ranked higher than one-STAR or that have no STARS ranking. See "Principal Investment Strategies - Additional Information." In selecting investments, the Adviser analyzes the stocks ranked by S&P analysts according to the STARS ranking system and selects those it believes have the best potential for capital appreciation. The Adviser focuses on companies that show the potential to achieve growth at a reasonable price. The Adviser considers various factors including market segment, industry, earnings history, price-to-earnings ratio and management. If S&P downgrades a security held by the S&P STARS Opportunities Portfolio to four-STARS from five-STARS, the Portfolio may purchase additional shares of that security without limitation. Similarly, if S&P upgrades a security held by the S&P STARS Opportunities Portfolio to two-STARS from one-STAR, the Portfolio may sell short additional shares of that security without limitation. If, however, S&P downgrades a security held by the S&P STARS Opportunities Portfolio from five- or four-STARS to three-STARS or lower, that security will be subject to the 25% limitation on acquiring securities without regard to STARS ranking. Similarly, if S&P upgrades a security sold short by the S&P STARS Opportunities Portfolio from one- or two-STARS to three-STARS or higher, that security will also be subject to the 25% limitation on investments made without regard to STARS ranking. S&P's research staff ranks the stocks of approximately 1,000 issuers in accordance with their expected short- to intermediate-term (up to 12 months) appreciation potential as follows: S&P STARS Portfolio 7 ***** Buy Expected to be among the best performers over the next 6 to 12 months. **** Accumulate Expected to be an above-average performer. *** Hold Expected to be an average performer. ** Avoid Expected to be a below-average performer. * Sell Expected to be a well-below-average performer. The S&P STARS Opportunities Portfolio may "sell short" securities that at the time of initial sale were ranked one-STAR. In a short sale, the Portfolio sells a security it does not own but has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will purchase the security at a lower price to return to the lender and realize a gain for the S&P STARS Opportunities Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the S&P STARS Opportunities Portfolio. The S&P STARS Opportunities Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the S&P STARS Opportunities Portfolio's net asset value, yield and/or total return: |X| The market value of portfolio securities may decline. |X| A particular strategy may not be executed effectively or otherwise generate the intended result. |X| A security's value will fluctuate in response to events affecting an issuer's profitability or viability. |X| A small- or middle-capitalization company's stock may decline in value because, among other reasons, the company lacks the management experience, operating experience, financial resources or product diversification that permit larger companies to adapt to changing market conditions. |X| Small- or middle-capitalization company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. |X| Short sales may involve substantial risk and may involve leverage, which may increase potential losses. |X| Rankings by S&P's research group may not accurately assess the investment prospects of a particular security. The S&P STARS Opportunities Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the S&P STARS Opportunities Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the S&P STARS Opportunities Portfolio The S&P STARS Opportunities Portfolio may be appropriate for investors who: |X| are investing for the long-term; |X| want to add an equity component to their portfolio. The S&P STARS Opportunities Portfolio may not be appropriate for investors who: 8 S&P STARS Portfolio |X| are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance No bar chart or performance table is available because the S&P STARS Opportunities Portfolio has not been in operation for a full calendar year. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the S&P STARS Opportunities Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ------------------------------------------------------------------------------- ----------- ------------ ------------ Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.50% None None ------------------------------------------------------------------------------- ----------- ------------ ------------ Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None** 5.00%(1) 1.00% ------------------------------------------------------------------------------- ----------- ------------ ------------ Sales charge imposed on reinvested dividends None None None ------------------------------------------------------------------------------- ----------- ------------ ------------ Redemption fees*** None None None ------------------------------------------------------------------------------- ----------- ------------ ------------ Exchange fees None None None ------------------------------------------------------------------------------- ----------- ------------ ------------ Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------- ----------- ------------ ------------ Management Fees 0.75% 0.75% 0.75% ------------------------------------------------------------------------------- ----------- ------------ ------------ Distribution (12b-1) Fees 0.25% 0.75% 0.75% ------------------------------------------------------------------------------- ----------- ------------ ------------ Other Expenses 0.49% 0.49% 0.49% ------------------------------------------------------------------------------- ----------- ------------ ------------ Shareholder Servicing Fee 0.25% 0.25% 0.25% ------------------------------------------------------------------------------- ----------- ------------ ------------ Total Other Expenses2 0.74% 0.74% 0.74% ----- ----- ----- ------------------------------------------------------------------------------- ----------- ------------ ------------ Total Annual Portfolio Operating Expenses 1.74% 2.24% 2.24% ------------------------------------------------------------------------------- ----------- ------------ ------------ Fee Waiver and Expense Reimbursement (0.24)% (0.24)% (0.24)% ------- ------- ------- ------------------------------------------------------------------------------- ----------- ------------ ------------ Net Expenses3 1.50% 2.00% 2.00% ===== ===== =====
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a contingent deferred sales charge ("CDSC") of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges-Class B Shares." 2 Other Expenses are based on amounts estimated for the current fiscal year. 3 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the S&P STARS Opportunities Portfolio's net expenses do not exceed the amounts indicated above. Example This example illustrates the cost of investing in the S&P STARS Opportunities Portfolio over various time periods. It is intended to help you compare the cost of investing in the S&P STARS Opportunities Portfolio with the cost of investing in other mutual funds. The example assumes that: |X| you invest $10,000 in the S&P STARS Opportunities Portfolio; |X| your investment returns 5% each year; |X| the S&P STARS Opportunities Portfolio's operating expenses remain the same.* S&P STARS Portfolio 9 Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period-- 1 Year 3 Years ---------------------- ---------------- ------------------ Class A $694 $1,046 ---------------------- ---------------- ------------------ Class B $703 $997 ---------------------- ---------------- ------------------ Class C $303 $677 ---------------------- ---------------- ------------------ If you do not sell your shares at the end of each period-- ** 1 Year 3 Years ---------------------- ---------------- ------------------ Class B $203 $677 ---------------------- ---------------- ------------------ Class C $203 $677 ---------------------- ---------------- ------------------ * This Example assumes that net portfolio operating expenses will equal 1.50% for Class A and 2.00% for both Class B and C shares until July 31, 2003 and thereafter will equal 1.74% for Class A, 2.24% for both Class B and C shares. ** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." 10 S&P STARS Portfolio The Insiders Select Fund --------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, The Insiders Select Fund primarily invests its assets in the equity securities of U.S. issuers that it believes provide opportunities for capital appreciation. Equity securities consist of common stocks, convertible securities and preferred stocks. In selecting investments for The Insiders Select Fund, the Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. From the universe of equity securities that pass the value screen, the Adviser further considers ownership of and trading in a company's securities by corporate insiders, officers, directors and significant stockholders, as well as a company's corporate finance activities, including stock repurchase programs, dividend policies and new securities issuance. In its analysis of these insider signals, the Adviser relies on publicly-available data. It is possible that value screening criteria may outweigh insider signals in the Adviser's selection of portfolio securities. Insiders Select Fund 11 Principal Risks You may lose money by investing in The Insiders Select Fund. The Insiders Select Fund is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect The Insiders Select Fund's net asset value, yield and/or total return: |X| The market value of portfolio securities may decline. |X| A particular strategy may not be executed effectively or otherwise generate the intended result. |X| A security's value will fluctuate in response to events affecting an issuer's profitability or viability. |X| To the extent that The Insider Select Fund invests in middle-capitalization stocks, these stocks may decline in value because the company lacks management experience, operating experience, financial resources and product diversification that permit larger companies to adapt to changing market conditions. Middle capitalization company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. |X| Corporate insiders may trade their company's securities for personal reasons which may not necessarily reflect anticipated price movements. The Insiders Select Fund is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make The Insiders Select Fund more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in The Insiders Select Fund The Insiders Select Fund may be appropriate for investors who: |X| are investing for the long-term; |X| believe that insider buying patterns may be a good indicator of the future direction of a company's stock price. The Insiders Select Fund may not be appropriate for investors who: |X| are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. 12 Insiders Select Fund Performance The bar chart and table below illustrate the risks of investing in The Insiders Select Fund by showing changes in its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows returns for Class A of The Insiders Select Fund. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. The Insiders Select Fund Annual Total Return (%)1 1996 21.38 1997 29.64 1998 9.29 1999 9.12 2000 17.32 2001 ( ) ==== ======== Past performance is not necessarily an indication of future results. 1The Insider's Select Fund's year-to-date return as of June 30, 2002 was ______%. During the period shown in the bar chart, the highest quarterly return was ______% (for the quarter ended _______________________) and the lowest quarterly return was (_______)% (for the quarter ended ____________________). The table below shows how average annual total returns for Class A, B and C shares of the The Insiders elect Fund for one year, five years and since the date of inception compared to the S&P MidCap 400 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges. Insiders Select Fund 13
Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December 31, 2001) June 16, 1995 Class A Return before taxes Return after taxes on distributions Return after taxes on distributions and sale of Portfolio shares S&P MidCap 400 (reflects no deduction for fees, expenses or taxes) Class B Return before taxes Class C Return before taxes S&P MidCap 400 Index (reflects no deduction for fees, expenses or taxes)
* Total return figures for Class A shares reflect the current maximum sales load of 5.50%. Prior to December 24, 1997, the maximum sales load was 4.75%. ** Class B shares commenced operations on January 6, 1998. The average annual total return for Class B shares of the Insiders Select Fund for the period from January 6, 1998 to December 31, 2001 was _____%. The comparable return for the same period for the S&P MidCap 400 Index was _____%. 14 Insiders Select Fund Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of The Insiders Select Fund.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.50% None None Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None** 5.00%(1) 1.00% Sales charge imposed on reinvested dividends None None None Redemption fees*** None None None Exchange fees None None None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------------------------- Management Fees2 1.00% 1.00% 1.00% Distribution (12b-1) Fees 0.25% 0.75% 0.75% Other Expenses 1.29% 1.29% 1.29% Shareholder Servicing Fee 0.25% 0.25% 0.25% Total Other Expenses 1.54% 1.54% 1.54% ----- ------ ----- Total Annual Portfolio Operating Expenses 2.79% 3.29% 3.29% Fee Waiver and Expense Reimbursement (1.14)% (1.14)% (1.14)% ------- ------- ------- Net Expenses3 1.65% 2.15% 2.15% ====== ====== =====
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales ==== Charges-- Class B Shares." 2 The management fee may increase or decrease by 0.50% based on The Insiders Select Fund's performance. 3 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that The Insiders Select Fund's net expenses do not exceed the amounts indicated above. Insiders Select Fund 15 Example This Example illustrates the cost of investing in The Insiders Select Fund over various time periods. It is intended to help you compare the cost of investing in The Insiders Select Fund with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in The Insiders Select Fund; o your investment returns 5% each year; o The Insiders Select Fund's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
If you sell your shares at the end of each period-- 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------- Class A $709 $1,266 $1,848 $3,419 Class B $718 $1,206 $1,819 $3,390** Class C $318 $ 906 $1,619 $3,508 If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------- Class B $218 $906 $1,619 $3,390** Class C $218 $906 $1,619 $3,508
* This Example assumes that net portfolio operating expenses will equal 1.65% for Class A and 2.15% for both Class B and C shares until July 31, 2003, and thereafter will equal 2.79% for Class A and 3.29% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." 16 Insiders Select Fund Intrinsic Value Portfolio (formerly known as Large Cap Value Portfolio) - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Intrinsic Value Portfolio ("Intrinsic Portfolio") invests at least 65% of its total assets in equity securities of companies with market capitalizations (at time of purchase) of more than $10 billion ("large companies") that the Adviser identifies as "value" securities. Within this 65% category, the Intrinsic Portfolio may invest up to 10% of its total assets in equity securities of foreign issuers in the form of ADRs. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Intrinsic Portfolio may invest must be rated at least "investment grade" by a nationally recognized statistical rating organization ("NRSRO") at the time of purchase. The Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash-flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. The weighted average market capitalization of issuers in whose securities the Intrinsic Portfolio invests will vary depending on market conditions. As of June 30, 2002, the weighted average market capitalization of issuers of securities held by the Intrinsic Portfolio was greater than $___ billion. Principal Risks You may lose money by investing in the Intrinsic Portfolio. The Intrinsic Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Intrinsic Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. Intrinsic Portfolio 17 Who May Want to Invest in the Intrinsic Portfolio The Intrinsic Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add a large-cap equity component to their portfolio. The Intrinsic Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. 18 Intrinsic Portfolio Performance The bar chart and table below illustrate the risks of investing in the Intrinsic Portfolio by showing changes in its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows returns for Class A shares of the Intrinsic Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. Intrinsic Value Portfolio Annual Total Return (%)1 1996 14.37 1997 31.07 1998 15.61 1999 0.23 2000 20.95 2001 10.76 ==== ===== Past performance is not necessarily an indication of future results. 1The Intrinsic Portfolio's year-to-date return as of June 30, 2002 was _____%. During the period shown in the bar chart, the highest quarterly return was 17.59% (for the quarter ended June 30, 1997 and the lowest quarterly return was 13.08% (for the quarter ended September 30, 2000). The table below shows how average annual total returns for Class A, B and C shares of the Intrinsic Portfolio for one year, five years and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid- to large-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December 31, 2001) April 3, 1995 ------------------------------------------------------------------- -------- -------- ---------------- Class A ------------------------------------------------------------------- -------- -------- ---------------- Return before taxes (7.00) 11.31 14.15* ------------------------------------------------------------------- -------- -------- ---------------- Return after taxes on distributions ------------------------------------------------------------------- -------- -------- ---------------- Return after taxes on distributions and sale of Portfolio shares ------------------------------------------------------------------- -------- -------- ---------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------- -------- -------- ---------------- Class B ** ------------------------------------------------------------------- -------- -------- ---------------- Return before taxes (6.82) N/A 7.72 ------------------------------------------------------------------- -------- -------- ---------------- Class C ------------------------------------------------------------------- -------- -------- ---------------- Return before taxes (2.99) 12.04 14.65 ------------------------------------------------------------------- -------- -------- ---------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) 0.24 ------------------------------------------------------------------- -------- -------- ----------------
* Total return figures for Class A shares reflect the current maximum sales load of 5.50%. Prior to Intrinsic Portfolio 19 December 24, 1997, the maximum sales load was 4.75%. ** Class B shares commenced operations on January 28, 1998. The average annual total return for Class B shares of the Intrinsic Portfolio for the period from January 28, 1998 to December 31, 2001 was 7.72%. The comparable return for the same period for the S&P 500 Index was ______%. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Intrinsic Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C --------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.50% None None Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None** 5.00%(1) 1.00% Sales charge imposed on reinvested dividends None None None Redemption fees*** None None None Exchange fees None None None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) --------------------------------------------------------------------------------------------------------- Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.25% 0.75% 0.75% Other Expenses 1.00% 1.00% 1.00% Shareholder Servicing Fee 0.25% 0.25% 0.25% Total Other Expenses 1.25% 1.25% 1.25% Total Annual Portfolio Operating Expenses 2.25% 2.75% 2.75% Fee Waiver and Expense Reimbursement 0.75% 0.75% 0.75% Net Expenses(2) 1.50% 2.00% 2.00% ====== ====== =====
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% on the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges--Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Intrinsic Portfolio's net expenses do not exceed the amounts indicated above. 20 Intrinsic Portfolio Example This Example illustrates the cost of investing in the Intrinsic Portfolio over various time periods. It is intended to help you compare the cost of investing in the Intrinsic Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the Intrinsic Portfolio; o your investment returns 5% each year; o the Intrinsic Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
If you sell your shares at the end of each period-- 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------- Class A $694 $1,147 $1,624 $2,938 Class B $703 $1,082 $1,388 $2,905** Class C $303 $782 $1,388 $3,026 If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------- Class B $203 $782 $1,388 $2,905 Class C $203 $782 $1,388 $3,026
* This Example assumes that net portfolio operating expenses will equal 1.50% for Class A and 2.00% for both Class B and C shares until July 31, 2003 and thereafter will equal 2.25% for Class A and 2.75% for both Class B and Class C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." Intrinsic Portfolio 21 Small Cap Value Portfolio - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal circumstances, the Small Cap Value Portfolio ("Small Cap Portfolio") will invest at least 80% of its net assets in equity securities of "small companies" that the Adviser identifies as "value" securities. Small companies include companies that have market capitalizations, measured at the time of purchase, that are no more than the upper market capitalization range of the companies that comprise the Russell 2000 Index, or $2 billion, whichever is greater. As of March 31, 2002, the upper market capitalization range of the companies that comprise the Russell 2000 Index was $____ billion, which may increase or decrease over time. The Small Cap Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. Within this 80% category, the Small Cap Portfolio may invest up to 10% of its net assets in equity securities of foreign issuers in the form of ADRs. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Small Cap Portfolio may invest must be rated at least "investment grade" by an NRSRO at the time of purchase. The Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash-flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. The weighted average market capitalization of issuers in whose securities the Small Cap Portfolio invests will vary depending on market conditions. As of June 30, 2002 the weighted average market capitalization of issuers whose securities were held by the Small Cap Portfolio was approximately $_____ billion. Principal Risks You may lose money by investing in the Small Cap Portfolio. The Small Cap Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Small Cap Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o A small company's stock may decline in value because the company lacks management experience, operating experience, financial resources and product diversification that permit larger companies to adapt to changing market conditions. 22 Small Cap Portfolio o Small company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. Who May Want to Invest in the Small Cap Portfolio The Small Cap Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add a small-cap equity component to their portfolio. The Small Cap Portfolio may not be appropriate for investors who: o want to invest only in larger, more established companies; o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with smaller-company stocks or lose money on their investment. Small Cap Portfolio 23 Performance The bar chart and table below illustrate the risks of investing in the Small Cap Portfolio by showing changes in its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows the returns for Class A shares of the Small Cap Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. Small Cap Value Portfolio Annual Total Return (%)1 1996 15.45 1997 32.64 1998 (1.41) 1999 14.11 2000 (0.59) 2001 ( ) ==== ===== Past performance is not necessarily an indication of future results. 1The Small Cap Portfolio's year-to-date return as of June 30, 2002 was ________%. During the period shown in the bar chart, the highest quarterly return was ______% (for the quarter ended ______________) and the lowest quarterly return was (________)% (for the quarter ended ___________________). The table below shows how average annual total returns for Class A, B and C shares of the Small Cap Portfolio for one year, five years and since the date of inception compared to the Russell 2000 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of small-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December 31, 2001) April 3, 1995 ---------------------------------------------------------------- ----------- ------------ ------------------- Class A ---------------------------------------------------------------- ----------- ------------ ------------------- Return before taxes ---------------------------------------------------------------- ----------- ------------ ------------------- Return after taxes on distributions ---------------------------------------------------------------- ----------- ------------ ------------------- Return after taxes on distributions and sale of Portfolio shares ---------------------------------------------------------------- ----------- ------------ ------------------- Russell 2000 Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------------------------------- ----------- ------------ ------------------- Class B ---------------------------------------------------------------- ----------- ------------ ------------------- Return before taxes ---------------------------------------------------------------- ----------- ------------ ------------------- Class C ---------------------------------------------------------------- ----------- ------------ ------------------- Return before taxes ---------------------------------------------------------------- ----------- ------------ ------------------- Russell 2000 Stock Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------------------------------- ----------- ------------ -------------------
24 Small Cap Portfolio * Total return figures for Class A shares reflect the current maximum sales load of 5.50%. Prior to December 24, 1997, the maximum sales load was 4.75%. ** Class B shares commenced operations on January 21, 1998. The average annual total return for Class B shares of the Small Cap Portfolio for the period from January 21, 1998 to December 31, 2001 was _____%. The comparable return for the same period for the Russell 2000 Index was _____%. Small Cap Portfolio 25 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Small Cap Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ----------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.50% None None Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None** 5.00%(1) 1.00% Sales charge imposed on reinvested dividends None None None Redemption fees*** None None None Exchange fees None None None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ----------------------------------------------------------------------------------------------------- Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.25% 0.75% 0.75% Other Expenses 0.76% 0.76% 0.76% Shareholder Servicing Fee 0.25% 0.25% 0.25% Total Other Expenses 1.01% 1.01% 1.01% ------ ------- ----- Total Annual Portfolio Operating Expenses 2.01% 2.51% 2.51% Fee Waiver and Expense Reimbursement (0.51)% (0.51)% (0.51)% -------- -------- ------- Net Expenses(2) 1.50% 2.00% 2.00% ======== ======== =======
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges-- Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Small Cap Portfolio's net expenses do not exceed the amounts indicated above. 26 Small Cap Portfolio Example This Example illustrates the cost of investing in the Small Cap Portfolio over various time periods. It is intended to help you compare the cost of investing in the Small Cap Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the Small Cap Portfolio; o your investment returns 5% each year; o the Small Cap Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
If you sell your shares at the end of each period-- 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------ Class A $694 $1,099 $1,529 $2,720 Class B $703 $1,033 $1,490 $2,685** Class C $303 $ 733 $1,290 $2,808 If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------ Class B $203 $733 $1,290 $2,685** Class C $203 $733 $1,290 $2,808
* This Example assumes that net portfolio operating expenses will equal 1.50% for Class A and 2.00% for both Class B and C shares until July 31, 2003, and thereafter will equal 2.01% for Class A and 2.51% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." Small Cap Portfolio 27 Alpha Growth Portfolio (formerly, Focus List Portfolio) --------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal circumstances, the Alpha Growth Portfolio will invest substantially all of its assets in equity securities selected by one or more growth models. Generally, these growth models identify equity securities having the following characteristics: High projected earnings for the next three to five years; Positive earnings momentum; Positive price momentum; and Reasonable valuation metrics. At least once a year, the Adviser will reapply the model, which usually results in changes in Portfolio holdings. The model may change from time to time, depending on the Adviser's ongoing research efforts. When the Adviser re-allocates the Portfolio's holdings, each equity security identified by a particular growth model will be allocated an equal amount of the Portfolio's assets. Generally, the Adviser will purchase securities on a pro rata basis when it receives new assets resulting from the purchase of shares of the Portfolio. Generally, the Adviser will sell securities on a pro rata basis when required to raise cash when shares of the Portfolio are redeemed. The Portfolio may invest in equity securities with any market capitalization, except as determined by particular models established by the Adviser. If the Adviser determines that earnings or other factual criteria that form the basis for identifying an equity security in a particular model are false or incorrect, it may replace that security with another investment that does meet the criteria. Principal Risks There can be no assurance of the success of any investment decision or growth model. You may lose money by investing in the Alpha Growth Portfolio. The Alpha Growth Portfolio is also subject to the following principal risks. Some or all of these risk factors may affect the Alpha Growth Portfolio's net asset value, yield and/or total return: o The model may select equity securities that decrease in value. 28 Alpha Growth Portfolio o The Portfolio may continue to hold equity securities that the model initially selected, even if circumstances subsequently change so that the equity security would no longer qualify under that model. o Re-allocation of Portfolio assets may result in the sale of equity securities that have recently performed well, and may increase investments with relatively lower historical returns. o The Adviser's selection of criteria for particular models may be out of favor with the market, or the market may change after the Adviser has applied particular models. The Alpha Growth Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the Alpha Growth Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the Alpha Growth Portfolio The Alpha Growth Portfolio may be appropriate for investors who: o are investing for the long-term; o are seeking an equity component for their portfolio. The Alpha Growth Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with equity securities selected by quantitative growth models rather than by fundamental analysis, or lose money on their investment; o are seeking preservation of capital as an important investment objective. Performance The bar chart shows returns for Class A shares of the Alpha Growth Portfolio. The figures shown in the table assume reinvestment of dividends and distributions. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. [CHART] Past performance is not necessarily an indication of future results. 1 The Portfolio's year-to-date return as of June 30, 2002 was ______. During the period shown in the bar chart, the highest quarterly return was _______% (for the quarter ended _____________, 19) and the lowest quarterly return was (_______)% (for the quarter ended _________, 19__). Prior to August 1, 2002, the Alpha Growth Portfolio was known as the Focus List Portfolio and employed a different principal investment strategy. Accordingly, historical performance prior to this time does not indicate how the Alpha Growth Portfolio will perform. You should not decide to invest in the Alpha Growth Portfolio based on performance prior to August 1, 2002. The table below shows how average annual total returns for Class A, B and C shares of the Alpha Growth Portfolio for one year and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged Alpha Growth Portfolio 29 index that represents the general performance of domestically traded common stocks of mid- to large-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rates (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges. 30 Growth Portfolio
Average Annual Total Returns (for the periods ended One Year Since Inception* December 31, 2001 ------------------------------------------------------------- -------------------- -------------------- Class A ------------------------------------------------------------- -------------------- -------------------- Return before taxes ------------------------------------------------------------- -------------------- -------------------- Return after taxes on distributions ------------------------------------------------------------- -------------------- -------------------- Return after taxes on distributions and sale of Portfolio shares ------------------------------------------------------------- -------------------- -------------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------- -------------------- -------------------- Class B ------------------------------------------------------------- -------------------- -------------------- Return before taxes ------------------------------------------------------------- -------------------- -------------------- Class C ------------------------------------------------------------- -------------------- -------------------- Return before taxes ------------------------------------------------------------- -------------------- -------------------- S&P 500 Stock Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------- -------------------- --------------------
* This table does not reflect any performance information for the initial period of December 29, 1997 through December 31, 1997. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Alpha Growth Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a 5.50% None None percentage of offering price) Maximum deferred sales charge (load) None** 5.00%(1) 1.00% (as a percentage of the lower of purchase or sale price) Sales charge imposed on reinvested dividends None None None Redemption fees*** None None None Exchange fees None None None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------------------------- Management Fees 0.65% 065% 0.65% Distribution (12b-1) Fees 0.25% 0.75% 0.75% Other Expenses 1.31% 1.31% 1.31% Shareholder Servicing Fee 0.25% 0.25% 0.25% Total Other Expenses 1.56% 1.56% 1.56% Total Annual Portfolio Operating Expenses 2.46% 2.96% 2.96% Fee Waiver and Expense Reimbursement (1.06)% (1.06)% (1.06)% Net Expenses2 1.40% 1.90% 1.90%
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges--Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, Alpha Growth Portfolio 31 2003, so that the Alpha Growth Portfolio's net expenses do not exceed the amounts indicated above. 32 Alpha Growth Portfolio Example This Example illustrates the cost of investing in the Alpha Growth Portfolio over various time periods. It is intended to help you compare the cost of investing in the Alpha Growth Portfolio with the cost of investing in other mutual funds. The example assumes that: o you invest $10,000 in the Alpha Growth Portfolio; o your investment returns 5% each year; o the Alpha Growth Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
----------------------- -------------------- --------------------- --------------------- -------------------- 1 Year 3 Years 5 Years 10 Years ----------------------- -------------------- --------------------- --------------------- -------------------- Class A ----------------------- -------------------- --------------------- --------------------- -------------------- Class B ----------------------- -------------------- --------------------- --------------------- -------------------- Class C ----------------------- -------------------- --------------------- --------------------- -------------------- If you sell your shares at the end of each period--
Although your actual costs may be higher or lower, based on these assumptions your costs would be:
----------------------- -------------------- --------------------- --------------------- -------------------- 1 Year 3 Years 5 Years 10 Years ----------------------- -------------------- --------------------- --------------------- -------------------- Class A ----------------------- -------------------- --------------------- --------------------- -------------------- Class B ----------------------- -------------------- --------------------- --------------------- -------------------- Class C ----------------------- -------------------- --------------------- --------------------- --------------------
* This Example assumes that net portfolio operating expenses will equal 1.40% for Class A and 1.90% for both Class B and C shares until July 31, 2003, and thereafter will equal 2.37% for Class A and 2.87% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." Alpha Growth Portfolio 33 International Equity Portfolio - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Long-term capital appreciation. Principal Strategies Under normal market conditions, the International Equity Portfolio invests at least 80% of its assets in equity securities of foreign companies. Foreign securities include equity securities of companies that are organized outside the United States or whose securities are principally traded outside the United States, including common stock, preferred stock, depositary receipts for stock, and other securities having the characteristics of stock (such as an equity or ownership interest in a company). The International Equity Portfolio's investments may be denominated in U.S. dollars, foreign currencies or multinational currency units. Under normal market circumstances, the International Equity Portfolio will invest at least 80% of its net assets in equity securities of foreign companies. Foreign securities include equity securities of companies that are organized outside the United States or whose securities are principally traded outside the United States, including common stock, preferred stock, depositary receipts for stock, and other securities having the characteristics of stock (such as an equity or ownership interest in a company). The International Equity Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. In selecting investments for the International Equity Portfolio, Marvin & Palmer Associates, Inc., the International Equity Portfolio's investment sub-adviser (the "Sub-Adviser"), evaluates whether a particular country's securities markets have higher-than-average potential for capital appreciation. The Sub-Adviser will then seek out companies with strong fundamental characteristics, including solid management, sound balance sheets and the potential for positive earnings growth. The International Equity Portfolio also may invest in the securities of issuers located in countries that are considered to be emerging or developing ("emerging countries") by the World Bank, the International Finance Corporation, or the United Nations and its authorities. These countries are located primarily in Africa, Asia (ex-Japan), the Caribbean islands, Latin America, the Middle East and certain parts of Europe (Cyprus, the Czech Republic, Estonia, Greece, Hungary, Poland, Russia, Slovakia and Turkey). A company is considered to be an emerging country issuer if any of the following apply: o Its securities are principally traded in an emerging country. o It derives at least 50% of its total revenue from (a) providing goods or services in emerging countries or (b) sales made in emerging countries. o It maintains 50% or more of its assets in one or more emerging countries. o It is organized under the laws of, or has a principal office in, an emerging country. 34 International Equity Portfolio Foreign Currency Hedging--Use of Forward Foreign Exchange Contracts. The International Equity Portfolio may purchase or sell forward foreign currency exchange contracts ("forward contracts") for hedging purposes. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date. When the Sub-Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, the International Equity Portfolio may enter into a forward sale contract by selling an amount of that foreign currency up to 95% of the value of the Portfolio's securities denominated in such foreign currency. The International Equity Portfolio may enter into a forward contract for any of the following reasons: o To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). o To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). o To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against another foreign currency (cross hedge). Principal Risks You may lose money by investing in the International Equity Portfolio. The International Equity Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the International Equity Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, fluctuations in currency exchange rates, and the risks that a foreign government may confiscate assets, restrict the ability to exchange currency or restrict the delivery of securities. o The value of the International Equity Portfolio's investment in forward contracts may suffer from unanticipated changes in currency prices. o Foreign securities issued in emerging countries generally are more volatile than securities issued in established markets because the securities markets in these countries have comparatively less trading volume and fewer participants. o Inefficient settlement procedures in emerging countries may cause the International Equity Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. o Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. International Equity Portfolio 35 Who May Want to Invest in the International Equity Portfolio The International Equity Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add an international equity component to their portfolio. The International Equity Portfolio may not be appropriate for investors who: o are not willing to accept the risks associated with foreign securities markets or currency fluctuation; o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with foreign stocks or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the International Equity Portfolio by showing its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows returns for Class A shares of the International Equity Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. International Equity Portfolio Annual Total Return (%)1 1998 25.86 1999 81.89 2000 (21.27) 2001 ( ) ==== ======== Past performance is not necessarily an indication of future results. 1The International Equity Portfolio's year-to-date return as of June 30, 2002 was _____%. During the period shown in the bar chart, the highest quarterly return was ______% (for the quarter ended __________) and the lowest quarterly return was (______)% (for the quarter ended The table below shows how average annual total returns for Class A, B and C shares of the International Equity Portfolio for one year and since the date of inception compared to the Morgan Stanley Capital International Europe, Australasia, Far East Index (the "MSCI EAFE Index"), a broad-based unmanaged index that represents the general performance of common stocks of issuers located in developed countries in Europe and the Pacific Basin, weighted by each component country's market capitalization. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges. 36 International Equity Portfolio
Average Annual Total Returns 1 Year Since Inception* (for the periods ended December 31, 2001) December 29, 1997 ------------------------------------------------------------------------- ------------ ----------------------- Class A ------------------------------------------------------------------------- ------------ ----------------------- Return before taxes ------------------------------------------------------------------------- ------------ ----------------------- Return after taxes on distributions ------------------------------------------------------------------------- ------------ ----------------------- Return after taxes on distributions and sale of Portfolio shares ------------------------------------------------------------------------- ------------ ----------------------- MSCI EAFEIndex (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------------- ------------ ----------------------- Class B ------------------------------------------------------------------------- ------------ ----------------------- Return before taxes ------------------------------------------------------------------------- ------------ ----------------------- Class C ------------------------------------------------------------------------- ------------ ----------------------- Return before taxes ------------------------------------------------------------------------- ------------ ----------------------- MSCI EAFE Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------------- ------------ -----------------------
* This table does not reflect any performance information for the initial period of December 29, 1997 through December 31, 1997. Internatoional Equity Portfolio 37 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the International Equity Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C - --------------------------------------------------------------------------------- ------------ ------------ ------------ Maximum sales charge (load) imposed on purchases (as a percentage of 5.50% None None offering price) - --------------------------------------------------------------------------------- ------------ ------------ ------------ Maximum deferred sales charge (load) (as a percentage of the None** 5.00%1 1.00% lower of purchase or sale price) - --------------------------------------------------------------------------------- ------------ ------------ ------------ Sales charge imposed on reinvested dividends None None None - --------------------------------------------------------------------------------- ------------ ------------ ------------ Redemption fees*** 1.00% 1.00% 1.00% (as a percentage of total redemption proceeds) - --------------------------------------------------------------------------------- ------------ ------------ ------------ Exchange fees None None None - --------------------------------------------------------------------------------- ------------ ------------ ------------ Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) - --------------------------------------------------------------------------------- ------------ ------------ ------------ Management Fees 1.00% 1.00% 1.00% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Distribution (12b-1) Fees 0.25% 0.75% 0.75% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Other Expenses 0.78% 0.78% 0.78% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Shareholder Servicing Fee 0.25% 0.25% 0.25% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Total Other Expenses 1.03% 1.03% 1.03% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Total Annual Portfolio Operating Expenses 2.28% 2.78% 2.78% - --------------------------------------------------------------------------------- ------------ ------------ ------------ Fee Waiver and Expense Reimbursement (0.53)% (0.53)% (0.53)% ------- ------- ------- - --------------------------------------------------------------------------------- ------------ ------------ ------------ Net Expenses(2) 1.75% 2.25% 2.25% ==== ==== ==== - --------------------------------------------------------------------------------- ------------ ------------ ------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** The redemption fee will apply to shares you purchase on or after June 1, 2001 and hold for 60 days or less. See the section entitled "Additional Information About Redemptions" for more information on when this fee will apply. Also, there is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges - Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the International Equity Portfolio's net expenses do not exceed the amounts indicated above. International Equity Portfolio 38 Example This Example illustrates the cost of investing in the International Equity Portfolio over various time periods. It is intended to help you compare the cost of investing in the International Equity Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the International Equity Portfolio; o your investment returns 5% each year; o the International Equity Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period--
1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------------------ Class A $718 $1,175 $1,657 $2,983 Class B $728 $1,112 $1,622 $2,951** Class C $328 $ 812 $1,422 $3,071
If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------------------------ Class B $228 $812 $1,422 $2,951** Class C $228 $812 $1,422 $3,071
* This Example assumes that net portfolio operating expenses will equal 1.75% for Class A and 2.25% for both Class B and C shares until July 31, 2003, and thereafter will equal 2.28% for Class A and 2.78% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." International Equity Portfolio 39 INVESTMENTS Principal Investment Strategies -- Additional Information S&P STARS Portfolio S&P introduced S&P STARS in January 1987. Since 1993, on average, each S&P STARS category has consisted of approximately the number of stocks shown below. Rankings may change frequently as S&P analysts evaluate developments affecting individual securities and the markets. S&P STARS Category Number of Stocks ------------------------------------------------------------ Five-STARS 93 Four-STARS 353 Three-STARS 528 Two-STARS 90 One-STAR 15 To evaluate the performance of stocks in the various categories, and thus the performance of its analysts, S&P STARS initially gives equal weight by dollar amount to each stock, does not rebalance the portfolio based on changes in values or rankings and does not reflect dividends or transaction costs. While the performance of S&P STARS categories cannot be used to predict actual results, S&P believes it is useful in evaluating its analysts. The pool of S&P analysts changes and their past performance does not necessarily predict future results either of S&P STARS-ranked stocks or of the S&P STARS Portfolio. From January 1, 1987 through April 30, 2002: o The S&P 500 Index (measured on a total return basis, without dividend reinvestment) increased by _______%. During this period, the average dividend yield of securities included in the S&P 500 Index was _____% and the average dividend yield of five-STARS stocks was _____%. o The ranked stocks experienced the following changes in value: S&P STARS Category Percentage change in value -------------------------------------------------------------- Five-STARS 1157.19 Four-STARS 543.79 Three-STARS 340.13 Two-STARS 208.24 One-STAR 16.88 The Adviser believes that this information means only that, historically, five-STARS stocks have significantly outperformed lower-ranked stocks and that one-STAR stocks have significantly under-performed the higher-ranked stocks. You should not use this information to predict whether past results will occur in the future or the actual performance of a particular category. STARS' performance has been more volatile than that of conventional indices such as the Dow Jones Industrial Average and the S&P 500 Index. In addition, the performance of five-STARS and one-STAR stocks has not borne a consistent relationship to each other or to the performance of the S&P 500 Index, as shown below. The S&P STARS Portfolio is managed actively. Its performance will depend primarily on the Adviser's investment decisions. The S&P STARS Portfolio will incur transaction and other costs, including management and distribution fees, that are not reflected in the information shown below. 40 International Equity Portfolio
Relative Performance Rankings (1 = highest performance) 1995 1996 1997 1998 1999 2000 2001 ------------------------------------------------------------------------------------------------------------------------------ 1 S&P 500 Index Five-STARS Five-STARS Five-STARS Five-STARS Five-STARS One-STAR stocks stocks stocks stocks stocks stocks ------------------------------------------------------------------------------------------------------------------------------ 2 Five- STARS S&P 500 Index S&P 500 Index S&P 500 Index S&P 500 IndexS&P 500 Index Five-STARS stocks stocks ------------------------------------------------------------------------------------------------------------------------------ 3 One-STAR stocks One-STAR stocks One-STAR stocks One-STAR stocks One-STAR stocks One-STAR stocks S&P 500 Index ------------------------------------------------------------------------------------------------------------------------------
The S&P STARS Portfolio need not sell a security whose S&P STARS ranking has been downgraded. Also, the S&P STARS Portfolio need not terminate a "short" position if a one star security's STARS ranking has been upgraded. In addition, if S&P downgrades a security held by the S&P STARS Portfolio to four-STARS from five-STARS, the Portfolio may purchase additional shares of that security without limitation, as if that security were ranked five-STARS. Similarly, if S&P upgrades a shorted security from one-STAR to two-STARS, the Portfolio may sell short additional shares of that security without limitation, as if that security were ranked one-STAR. For purposes of calculating the 85% of total assets that the S&P STARS Portfolio will invest pursuant to its principal investment strategy, "total assets" will not include the Portfolio's investment in money market instruments to maintain liquidity. "Standard & Poor's(R)", "S&P(R)" and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co., Inc. The S&P STARS Portfolio is not sponsored, managed, advised, sold or promoted by S&P. S&P STARS Opportunities Portfolio The S&P STARS Opportunities Portfolio need not sell a security whose S&P ranking has been downgraded or whose market capitalization increases beyond the initial market capitalization criteria considered when first investing in a security. The S&P STARS Opportunities Portfolio need not terminate a "short" position if a one-STAR security's STARS ranking has been upgraded. If S&P downgrades a security held by the S&P STARS Opportunities Portfolio to four-STARS from five-STARS, the S&P STARS Opportunities Portfolio may purchase additional shares of that security without limitation, as if the security were ranked five-STARS. Similarly, if S&P upgrades a shorted security from one-STAR to two-STARS, the S&P STARS Opportunities Portfolio may sell short additional shares of that security without limitation, as if the security were ranked one-STAR. For purposes of calculating the 75% of total assets that the S&P STARS Opportunities Portfolio will invest pursuant to its principal investment strategy, "total assets" will not include the Portfolio's investment in money market instruments to maintain liquidity. "Standard & Poor's(R)", "S&P(R) and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co. Inc. The S&P STARS Opportunities Portfolio is not sponsored, managed, advised, sold or promoted by S&P. The Insiders Select Fund The Adviser believes that collecting, classifying and analyzing legally required reports of corporate insider transactions provides valuable investment management information, because these insiders are in the best position to understand their companies' near-term prospects. Corporate insiders trade their company's stock for various reasons. Some transactions are unrelated to the future of the company, such as the sale of stock to buy a home or finance a child's college education, tax planning or token purchases to signal confidence in the company. Other transactions, however, are related directly to the insider's beliefs about the near-term price expectations for the company's stock. An insider who exercises long-term options early for small profits may believe that the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells may indicate broad agreement within a firm as to the direction of the stock's price. Financial analysts employ a number of research tools to learn more about the companies they follow, including visits to the company and in-depth discussions with management. Successful analysts learn to interpret management's 41 words and actions. Management may use discussions with certain analysts to signal its views to the market. The Adviser also believes that revisions in analysts' earnings and ratings predictions may indicate a stock's future returns. A company must routinely decide whether to maintain or change its dividend policy, buy its own stock in the open market or issue new securities. From time to time the company may decide that its stock is undervalued, providing an opportunity to buy back the stock in the open market. By contrast, a company's decision to sell securities may indicate that the company believes that its stock has reached a near-term high, a possible sell signal. Alpha Growth Portfolio About model investing. The Adviser employs a quantitative approach to selecting Portfolio securities by developing and historically testing growth models. This approach differs from conventional portfolio management in that generally, the Adviser strictly adheres to underlying models in selecting portfolio securities. In unusual circumstances, the Adviser may deviate from the model. Strong price momentum: At the time of purchase, all Portfolio securities selected will usually have extremely high 6 month price appreciation. Generally this means that they will be in the upper decile of all securities in the universe when ranked by 6 month price appreciation. High 3-5 year earnings forecasts: At the time of purchase, many of the Portfolio securities selected will have high 3-5 year forecasted EPS growth rates. Generally this means they will be in the upper quartile of all securities in the universe when ranked by forecasted EPS growth rates. Compelling valuation metrics: At the time of purchase, all of the Portfolio securities selected will have price-to-sales ratios under 10 or PE ratios below 100. The Adviser generally exercises voting privileges with respect to those equity securities held by the Portfolio and votes proxies with management, absent compelling circumstances that require a different result in an individual case. The Alpha Growth Portfolio may experience a turnover rate exceeding 100% annually. Portfolios with high turnover rates may incur higher transaction costs and are more likely to distribute capital gains. 42 Investments and Techniques This table summarizes some of the principal investments and techniques, described below, that each Portfolio may use to achieve its investment objectives. The absence of a checkmark in the table does not preclude a Portfolio from engaging in the indicated transaction as part of a secondary investment strategy. In addition, a Portfolio may engage in transactions not described below as part of a principal or secondary investment strategy. For a more complete description of these and other investments and techniques, see the SAI.
S&P STARS S&P STARS The Intrinsic Small Cap Alpha International Portfolio Opportunities Insiders Portfolio Portfolio Growth Equity Portfolio Select Fund Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------------------ ADRs |X| |X| |X| |X| |X| Asset-backed securities Convertible securities |X| |X| |X| |X| Debt securities Equity securities |X| |X| |X| |X| |X| |X| Money market funds |X| |X| |X| |X| |X| |X| |X| Mortgage-related securities Real estate investment trusts ("REITs") Short sales |X| |X|
[Alpha Growth to be provided] o ADRs are receipts for the foreign company shares held by a United States depositary institution, entitling the holder to all dividends and capital gains of the underlying shares. ADRs are quoted in U.S. dollars and are traded on U.S. exchanges. o Asset-backed securities have a structure that is similar to mortgage-related securities (see below). The collateral for these securities includes home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. o Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for common stock. Convertible securities are characterized by higher yields than common stocks, but lower yields than comparable non-convertible securities, less price fluctuation than the underlying common stock since they have fixed income characteristics, and potential for capital appreciation if the market price of the underlying common stock increases. o Debt securities, including bills, bonds, and notes, represent money borrowed that must be repaid, usually having a fixed amount, a specific maturity date or dates, and a specific rate of interest (or formula for determining the interest rate) or an original purchase discount. o Equity securities include foreign and domestic common or preferred stocks, rights and warrants. o Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. o REITs are pooled investment vehicles that invest primarily in either real estate or real estate-related loans. The value of a REIT may increase or decrease based on changes in the value of the underlying properties or mortgage loans. o Short sales. In a short sale, a Portfolio sells a security it does not own anticipating that the price will decline. To complete a short sale, the Portfolio must borrow the security to make delivery and must then replace the security borrowed by buying it at the prevailing market price, which may be higher or lower than the price at which the Portfolio sold the security short. Short sales involve leverage, which may involve substantial gains or losses. 43 Other Investment Strategies o Temporary defensive measures. From time to time, during unfavorable market conditions, the Adviser may invest "defensively." This means a Portfolio may make temporary investments that are not consistent with its investment objective and principal strategies. Engaging in temporary defensive measures may reduce the benefit from any upswing in the market and may cause a Portfolio to fail to meet its investment objective. For temporary defensive purposes, each Portfolio may hold cash (U.S. dollars) and may invest all of its assets in high-quality fixed-income securities, repurchase agreements or U.S. or foreign money market instruments. For temporary defensive purposes, the International Equity Portfolio may hold foreign currencies or multinational currency units. o Uninvested Cash and Cash Collateral. Each Portfolio may invest uninvested cash and cash collateral from securities lending transactions ("Uninvested Cash") in shares of the Prime Money Market Portfolio to the extent that a Portfolio's aggregate investment of Uninvested Cash in the Prime Money Market Portfolio does not exceed 25% of the Portfolio's total assets. Each Portfolio's acquisition of shares of the Prime Money Market Portfolio is subject to the following conditions: (a) the Prime Money Market Portfolio continues to operate as a money market fund in compliance with Rule 2a-7 under the Investment Company Act of 1940; and (b) the Prime Money Market Portfolio will invest only in high quality, U.S. dollar-denominated short-term liquid instruments, including: U.S. government obligations; commercial paper, notes, certificates of deposit, banker's acceptances; repurchase agreements; floating and variable rate securities; time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. o Portfolio turnover. The Adviser (Sub-Adviser) may trade actively to achieve a Portfolio's goals. Emerging country markets are especially volatile and may result in more frequent trading. High portfolio turnover rates will generally result in higher transaction costs and higher levels of taxable realized gains to the Portfolio's shareholders. The SAI describes each Portfolio's investment strategies in more detail. RISK FACTORS As with all mutual funds, investing in the Portfolios involves certain risks. There is no guarantee that a Portfolio will meet its investment objective. You can lose money by investing in a Portfolio if you sell your shares after it declines in value below your original cost. There is never any assurance that a Portfolio will perform as it has in the past. The Portfolios may use various investment techniques, some of which involve greater amounts of risk than others. You will find a detailed discussion of these investment techniques in the SAI. To reduce risk, the Portfolios are subject to certain limitations and restrictions on their investments, which are also described in the SAI. Each Portfolio is subject to the following principal risks, except as noted. General Risks o Market risk is the risk that the market value of a security may go up or down, sometimes rapidly. These fluctuations may cause the security to be worth less than it was at the time it was acquired. Market risk may involve a single security or a particular sector. o Management risk is the risk that the portfolio management team's investment strategy may not produce the intended results. Management risk also involves the possibility that the portfolio management team fails to 44 execute an investment strategy effectively. Risks of Equity Securities o Equity risk is the risk that a security's value will fluctuate in response to events affecting an issuer's profitability or viability. Unlike debt securities, which have a superior claim to a company's assets in case of liquidation, equity securities benefit from a company's earnings and cash flow only after the company meets its other obligations. For example, a company must pay interest on its bonds before it pays stock dividends to shareholders, and bondholders have a superior claim to the company's assets in the event of bankruptcy. Risks of Hedging or Leverage Transactions o Correlation risk. Futures and options contracts and other derivative instruments can be used in an effort to hedge against risk. Generally, an effective hedge generates an offset to gains or losses of other investments made by a Portfolio. Correlation risk is the risk that a hedge using futures or options contracts (or any derivative, for that matter) does not, in fact, respond to economic or market conditions in the manner the portfolio manager expected. In such a case, the hedge may not generate gains sufficient to offset losses and may actually generate losses due to the cost of the hedge or otherwise. o Leverage risk is the risk associated with those techniques in which a relatively small amount of money invested puts a much larger amount of money at risk through borrowing or futures trading, for example. Selling short securities or using derivatives for hedging may involve leverage. If a portfolio manager does not execute the strategy properly, or the market does not move as anticipated, losses may substantially exceed the amount of the original investment. A Portfolio's use of derivatives for asset substitution may also involve leverage. Risks of Foreign Securities o Foreign issuer risk. Compared to U.S. companies, less information is generally available to the public about foreign companies. Foreign brokers and issuers may not be subject to the uniform accounting, auditing, and financial reporting standards and practices prevalent in the U.S. In addition, foreign stock exchanges and other securities markets may be more volatile and subject to less governmental supervision than their counterparts in the U.S. Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. o Currency risk (International Equity Portfolio only). Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency-denominated investments and may widen any losses. Political and economic risks, along with other factors, could adversely affect the value of the International Equity Portfolio's securities. o Emerging markets risk (International Equity Portfolio only). Emerging country economies often compare unfavorably with the United States economy in growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain emerging countries have experienced and continue to experience high rates of inflation, sharply eroding the value of their financial assets. An emergency may arise where trading of emerging country securities may cease or may be severely limited or where an emerging country governmental or corporate issuer defaults on its obligations. The governments of certain emerging countries impose restrictions or controls that may limit or preclude the International Equity Portfolio's investment in certain securities. The International Equity Portfolio may need governmental approval for the repatriation of investment income, capital or sales proceeds. An emerging country government may also impose temporary restrictions on the disposition of portfolio securities. 45 Risks of Debt Securities o Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. o Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. o Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments on a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. o Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch IBCA, Duff & Phelps or Moody's. o Below investment-grade securities ("junk bonds") may be less liquid, more susceptible to real or perceived adverse economic conditions and more difficult to evaluate than higher-rated securities. The market for these securities has relatively few participants, mostly institutional investors, and low trading volume. At times, a Portfolio may have difficulty selling particular high yield securities at a fair price and obtaining accurate valuations in order to calculate its net asset value. Risks of Mortgage-Related and Asset-Backed Securities o Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the risk that, because prepayments generally occur when interest rates are falling, a Portfolio may have to reinvest the proceeds from prepayments at lower interest rates. Asset-backed securities are also subject to prepayment risk, to the extent of the average life of the underlying receivables, which generally are shorter than those of mortgages. o Extension risk is the risk that the rate of anticipated prepayments of principal may not occur, typically because of a rise in interest rates, and the expected maturity of the security will increase. During periods of rapidly rising interest rates, the weighted average maturity of a security may be extended past what was anticipated. The market value of securities with longer maturities tends to be more volatile. Risks of Real Estate Securities o Real estate risk is the risk that the value of a security will fluctuate because of changes in, among other things, property values, rental property vacancies, overbuilding, changes in local laws, increased property taxes and operating expenses. o Regulatory risk. Certain REITs may fail to qualify for pass-through of income under federal tax law, or to maintain their exemption from federal securities laws registration requirements. 46 Particular Risks of the S&P STARS and S&P STARS Opportunities Portfolios Only o S&P STARS rankings represent the subjective determination of S&P analysts. Past performance of securities included in the S&P STARS system does not necessarily predict the future performance of the S&P STARS and S&P STARS Opportunities Portfolios. 47 MANAGEMENT OF THE PORTFOLIOS Investment Adviser BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the investment adviser of the Portfolios. The Adviser was established in 1985 and is located at 383 Madison Avenue, New York, NY 10179. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading United States investment banking, securities trading and brokerage firm serving U.S. and foreign corporations, governments and institutional and individual investors. The Adviser is a registered investment adviser and offers investment advisory and administrative services to open-end investment funds and other managed accounts with aggregate assets at June 30, 2002 of approximately $_____ billion. The Adviser supervises and assists in the overall management of the affairs of the Trust, subject to oversight by the Trust's Board of Trustees. For the fiscal year ended March 31, 2002, the Adviser received management fees based on a percentage of the average daily net assets of each Portfolio, after waivers, as shown in the following table. S&P STARS Portfolio S&P STARS Opportunities Portfolio Insiders Select Fund Intrinsic Portfolio Small Cap Portfolio Alpha Growth Portfolio International Equity Portfolio The Adviser and/or an affiliate, at its own expense, and from its own resources and without reimbursement from the Portfolios, may compensate certain persons who provide certain shareholder services or services in connection with the sale or expected sale of shares of the Portfolios, subject to applicable laws and regulations. Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. A team usually consists of senior portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of each Portfolio. Investment Sub-Adviser -- International Equity Portfolio Marvin & Palmer Associates, Inc. (the "Sub-Adviser") serves as the investment sub-adviser to the International Equity Portfolio, pursuant to an agreement with the Adviser and subject to the overall supervision of the Adviser. The Sub-Adviser, a registered investment adviser, was founded in 1986 and specializes in global, non-U.S., emerging market and U.S. equity portfolio management for institutional accounts. As of June 30, 2002, the Sub-Adviser managed approximately $____ billion in assets. The Sub-Adviser is located at 1201 North Market Street, Suite 2300, Wilmington, DE 19801. 48 HOW THE PORTFOLIOS VALUE THEIR SHARES The net asset value ("NAV"), multiplied by the number of Portfolio shares you own, gives you the value of your investment. Each Portfolio calculates its share price, called its NAV, each business day as of the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m. Eastern time. You may buy, sell or exchange shares on any business day at a price that is based on the NAV that is calculated after you place your order. A business day is a day on which the NYSE is open for trading or any day in which enough trading has occurred in the securities held by a Portfolio to affect the NAV materially. Portfolio securities that are listed primarily on foreign exchanges may trade on weekends or on other days on which the Portfolios do not price their shares. In this case, the NAV of a Portfolio's shares may change on days when you are not able to buy or sell shares. The Portfolios value their investments based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by the Adviser pursuant to fair value procedures adopted by the Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant Portfolio's investments and other assets, subtracting its liabilities, and then dividing that figure by the number of outstanding shares of the class. NAV = Total Assets Less Liabilities ----------------------------------- Number of Shares Outstanding You can request each Portfolio's current NAV by calling 1-800- 447-1139. INVESTING IN THE PORTFOLIOS This section provides information to assist you in purchasing shares of the Portfolios. It describes the minimum investment requirements for the Portfolios, the expenses and sales charges applicable to each Class of shares and the procedures to follow if you decide to buy shares. Please read the entire Prospectus carefully before buying shares of a Portfolio. Investment Requirements Minimum Initial Investment: o Non-Retirement Account: $1,000 o Retirement Account: $250 Minimum Subsequent Investment: o Non-Retirement Account: $50 o Retirement Account: $25 Choosing a Class of Shares Once you decide to buy shares of a Portfolio, you must determine which class of shares to buy. Each Portfolio offers Class A, B and C shares. Each class has its own cost structure and features that will affect the results of your investment over time in different ways. Your financial adviser or account representative can help you choose the class of shares that best suits your investment needs. 49 o Class A shares have a front-end sales charge, which is added to the Class A NAV to determine the offering price per share. o Class B and C shares do not have a front-end sales charge, which means that your entire investment is available to work for you right away. However, Class B and C shares have a contingent deferred sales charge ("CDSC") that you must pay if you sell your shares within a specified period of time. In addition, the annual expenses of Class B and C shares are higher than the annual expenses of Class A shares. In deciding which class is best, you may consider, among other things: o how much you intend to invest; o the length of time you expect to hold your investment. 50 Relative Advantages of Each Share Class
Investor Characteristics Advantages Class o Long-term investment horizon and/or o Lower expense structure and the amount of the qualify for waiver or reduction of sales initial sales charge decreases as you invest more charge money Class B o Long-term investment horizon o No front-end sales charge so the full amount of your investment is put to work right away; converts to Class A shares after eight years Class C o Short-term investment horizon o No front-end sales charge so the full amount of your investment is put to work right away and the CDSC is lower than that of Class B shares, declining to zero after one year
You should consult your financial adviser or account representative before investing in a Portfolio. You may be eligible to use the Right of Accumulation or Letter of Intent privileges to reduce your Class A sales charges. See "Reduction of Class A Sales Charges" below. The following table summarizes the differences in the expense structures of the three classes of shares:
Class A Class B Class C - ---------------------------------------------------------------------------------------------------------------------------------- Front End 5.50% None None Sales Charge* - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- CDSC None** 5% to 0%, declining the longer you 1%, if you sell shares within one hold your shares year of purchase - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Annual Lower than Class B and C Higher than Class A shares (Note: Higher than Class A shares; same as Expenses shares Class B shares convert to Class A Class B shares shares 8 years after purchase)*** - ----------------------------------------------------------------------------------------------------------------------------------
* There are several ways that you can reduce these charges, as described under "Sales Charge Reductions and Waivers." ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** Class B shares will not convert to Class A shares if the Adviser believes that the Internal Revenue Service will consider the conversion to be a taxable event. If Class B shares do not convert to Class A shares, they will continue to be subject to higher expenses than Class A shares indefinitely. 51 How the Trust Calculates Sales Charges Class A Shares The public offering price for Class A shares is the NAV that the Trust calculates after you place your order plus the applicable sales load, as determined in the following table.
Total Sales Load ---------------------------------------------------------------------------------------------------------------- Amount of Investment As a % of offering As a % of NAV price per share ---------------------------------------------------------------------------------------------------------------- Less than $50,000 5.50 5.82 $50,000 or more but less than $100,000 4.75 4.99 $100,000 or more but less than $250,000 3.75 3.90 $250,000 or more but less than $500,000 2.75 2.83 $500,000 or more but less than $1,000,000 2.00 2.04 $1,000,000 and above 0.00* 0.00 ----------------------------------------------------------------------------------------------------------------
* You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. Class B Shares The public offering price for Class B shares is the NAV that the Trust calculates after you place your order. You pay no initial sales charge on Class B shares, but you will pay a CDSC if you sell your shares up to six years after the date of purchase. The amount of the CDSC, if any, will vary depending on the number of years from the time you buy until the time you sell your Class B shares. Class B shares have higher annual expenses than Class A shares. For the purpose of determining the number of years from the time of any purchase, the Trust will aggregate all payments during a month and consider them made on the first day of that month. CDSC as a % of Dollar Year Since Purchase Amount Subject to CDSC ------------------------------------------------------------------ First 5% Second 4% Third 3% Fourth 3% Fifth 2% Sixth 1% Seventh 0% Eighth* 0% ------------------------------------------------------------------ * Class B shares of a Portfolio will automatically convert into Class A shares of the same Portfolio at the end of the calendar quarter that is eight years after the initial purchase of the Class B shares. Class B shares acquired by exchange will convert into Class A shares of the new Portfolio based on the date of the initial purchase of the shares of the exchanged Portfolio. Class B shares acquired through reinvestment of distributions will convert into Class A shares based on the date of the initial purchase of the underlying shares, on a pro rata basis. The Trust does not consider conversion to Class A shares, to be a purchase or sale for federal income tax purposes. You should consult with your own tax adviser. 52 Class C Shares The public offering price for Class C shares is the NAV that the Trust calculates after you place your order. You pay no initial sales charge at the time of purchase. You will pay a CDSC of 1%, however, if you sell Class C shares up to one year after the date of purchase. The Trust will calculate the CDSC on Class B and C shares in a manner that results in the lowest possible charge. The Portfolios will apply the CDSC to the lower of o the purchase price of the shares, or o the current market value of the shares being sold. You will pay no CDSC when you sell shares you have acquired through reinvestment of dividends or capital gain distributions. Sales Charge Reductions and Waivers Waiver of Class A Sales Charges The following categories of investors may buy Class A shares without a front-end sales charge: o Bear Stearns, its affiliates and their officers, directors or employees (including retired employees); any partnership of which Bear Stearns is a general partner, any Trustee or officer of the Trust and certain family members of any of the these individuals. o Employees or registered representatives of any broker-dealers with whom the Distributor has entered into sales agreements ("Authorized Dealers") and their spouses and minor children. o Qualified retirement plans of Bear Stearns. o Trustees or directors of investment companies for which BSAM or an affiliate acts as sponsor. o Any state, county or city, or any instrumentality, department, authority or agency that is prohibited by law from paying a sales load or commission in connection with the purchase of shares of a Portfolio. o Institutional investment clients, including corporate-sponsored pension and profit-sharing plans, other benefit plans and insurance companies. o Pension funds, state and municipal governments or funds, Taft-Hartley plans and qualified non-profit organizations, foundations and endowments. o Trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients. o Service providers to the Portfolios. o Accounts for which an Authorized Dealer or investment adviser charges an asset management fee (including "wrap" fees). 53 To take advantage of the sales charge waiver, you must indicate your eligibility on your Account Information Form. If you think you may be eligible for a sales charge waiver, please contact your account representative or call PFPC Inc., the Portfolios' Transfer Agent, at 1-800- 447-1139. Reduction of Class A Sales Charges You may reduce your Class A sales charge by taking advantage of the following privileges: o Right of Accumulation. Lets you add the value of all Class A shares of the Portfolios that you currently own for purposes of calculating the sales charge on future purchases of Class A shares. You may count share purchases made by the following investors to calculate the reduced sales charge: you, your spouse and your children under the age of 21 (including shares in certain retirement accounts), and a company that you, your spouse or your children control; a trustee or other fiduciary account (including an employee benefit plan); a trustee or other fiduciary that buys shares concurrently for two or more employee benefit plans of a single employer or of affiliated employers. o Letter of Intent. Lets you buy Class A shares of any Portfolio over a 13-month period at the same sales charge as if all shares had been bought at once. You are not obligated to buy the full amount of the shares. However, you must complete the intended purchase to obtain the reduced sales load. To qualify for this plan, check the "Letter of Intent" box on the Account Information Form at the time you buy shares of any Portfolio. Waiver of CDSC The Trust will waive the CDSC of Class A, B and C shares under the following circumstances: o redemptions made within one year after the death or disability of a shareholder; o redemptions by employees participating in eligible benefit plans, including separation of service; o redemptions as a result of a combination of any investment company with a Portfolio by merger, acquisition of assets or otherwise; o a mandatory distribution under a tax-deferred retirement plan; o redemptions made through the Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder account based on the value of the account, at the time you establish the automatic withdrawal feature. If you believe you may qualify for a waiver of the CDSC, please contact your account representative or the Transfer Agent. Distribution Fees and Shareholder Servicing Fees Distribution Fees. The Trust has adopted a distribution plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended, for each Portfolio's Class A, B and C shares. Under the distribution plan, each Portfolio pays the Distributor a fee for the sale and distribution of its shares. The plan provides that each Portfolio's Class A shares pays 0.25% of its average daily net assets and each Portfolio's Class B and C shares each pay 0.75% of its average daily net assets. 54 Keep in mind that: o Each Portfolio pays distribution fees on an ongoing basis. Over time, these fees will increase the cost of your investment and may cost you more than paying higher front-end or back-end sales charges. o The Distributor will waive its distribution fees to the extent that a Portfolio would exceed the limitations imposed by the National Association of Securities Dealers on asset-based sales charges. Shareholder Servicing Fees. The Trust has adopted a shareholder servicing plan for the Class A, B and C shares of each Portfolio. The shareholder servicing plan allows the Portfolios or the Distributor to pay shareholder servicing agents an annual fee of up to 0.25% of the average daily net assets of each of these classes of shares for personal shareholder services and for maintaining shareholder accounts. Shareholder servicing agents may include Authorized Dealers, fiduciaries, and financial institutions that sponsor "mutual fund supermarkets, " "no-transaction fee" programs or similar programs. How to Buy Shares You may buy shares of the Portfolios through your account representative by check or by wire or through the Transfer Agent. If you place your order before the close of regular trading on the NYSE (usually 4:00 p.m., Eastern time), you will receive the NAV that the Trust calculates that day. Orders placed after the close of trading on the NYSE will be priced at the next business day's NAV. When you buy shares, you must specify the class of shares. Otherwise, the Trust will assume that you wish to buy Class A shares. Purchase Procedures Purchase through the Distributor or Authorized Dealers Method of Purchase Instructions
[GRAPHIC] In person/ o Contact your account representative. [GRAPHIC] By mail o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o For a new account, your account representative will help you to complete the application. o Mail your application or additional purchase to : PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 o Send overnight mail to: PFPC Inc. Attention: The Bear Stearns Funds 400 Bellevue Parkway Wilmington, DE 19899 55 [GRAPHIC]/ By telephone/ o Contact your account representative. [GRAPHIC] wire o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o On the day of purchase, call the Transfer Agent at 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time) to give notice of the purchase and before wiring any funds. o Wire funds to: PNC Bank, N.A. ABA#: 031000053 Credit Account #85-5102-0143 From: Name of Investor For the purchase of: Name of Portfolio Amount: Amount to be invested o After calling the Transfer Agent, contact your financial institution to wire funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed. Additional Purchases Through the Transfer Agent: Method of Purchase Instructions [GRAPHIC] By mail o Mail your application or additional purchase to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 [GRAPHIC]/ By telephone/ [GRAPHIC] Wire o On the day of purchase, call the Transfer Agent at 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time) to give notice of the purchase and before wiring any funds. o When you call the Transfer Agent: 1.Obtain wire instructions for Bear Stearns. 2.Place your trade by specifying the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o After calling the Transfer Agent, contact your financial institution to wire funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed.
How to Sell Shares o You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. Please refer to the instructions under "How to Buy Shares" for information on selling your shares in person, by telephone, by mail or by wire. o When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. o The Trust will send you payment proceeds generally within seven days after it receives your redemption request. 56 Additional Information About Redemptions o Waiting period. If you buy shares by check, the Trust will wait for your check to clear (up to 15 days) before it sends the proceeds of redemption. o Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. o Signature guarantees. If your redemption proceeds exceed $100,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including:
- -- a U.S. bank, trust company, credit union or savings association; - -- a foreign bank that has a U.S. correspondent bank; - -- a U.S. registered dealer or broker in securities, municipal securities or government securities; or - -- a U.S. national securities exchange, a registered securities association or a clearing agency.
If you are signing on behalf of a corporation, partnership or other business or as a fiduciary, you must also include your title in the signature. o Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. o Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative or the Transfer Agent by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. o Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. To the extent allowed under applicable law, the Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a share of actual portfolio securities. Call the Transfer Agent for details. o Redemption Fees. The International Equity Portfolio will impose a redemption fee of 1.00% of the total redemption amount (calculated at market value) if you sell your shares 60 days or less after you purchase them. The Trust may waive this fee under certain circumstances. The redemption fee is paid directly to the International Equity Portfolio, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. For purposes of determining whether the redemption fee applies, the shares that you have held the longest will be redeemed first. The redemption fee will only apply to shares purchased on or after June 1, 2001. The redemption fee may not apply in certain circumstances, such as redemptions on certain omnibus accounts, including 401(k) plans, and in the event of shareholder death or disability. Please see the SAI for details. o Suspension of the Right of Redemption. A Portfolio may suspend your right to redeem your shares under any of the following circumstances: 57 -- during non-routine closings of the NYSE; -- when the Securities and Exchange Commission ("SEC") determines either that trading on the NYSE is restricted or that an emergency prevents the sale or valuation of the Portfolio's securities; or -- when the SEC orders a suspension to protect the Portfolio's shareholders. Exchanges You may exchange shares of one Portfolio for shares of the same class of another Portfolio described in this Prospectus or the same class of another Portfolio of the Trust, usually without paying any additional sales charges. (You may obtain more information about other Portfolios of the Trust by calling the Transfer Agent at 1-800- 447-1139.) You may pay a sales charge if the Portfolio you are exchanging did not impose an initial sales charge. You will not have to pay an additional sales charge if the Portfolio you are exchanging was acquired in any of the following ways: o by a previous exchange from shares bought with a sales charge; o through reinvestment of dividends and distributions paid with respect to these shares. The Trust does not currently charge a fee for exchanges, although it may change this policy in the future. Exchange procedures. To exchange your shares, you must give exchange instructions to your account representative or the Transfer Agent in writing or by telephone. Exchange policies. When exchanging your shares, please keep in mind: o An exchange of shares may create a tax liability for you. You may have a gain or loss on the transaction, since the shares you are exchanging will be treated like a sale. o When the market is very active, telephone exchanges may be difficult to complete. You may have to submit exchange requests to your account representative or the Transfer Agent in writing, which will cause a delay. o The shares you exchange must have a value of at least $250 (except in the case of certain retirement plans). If you are establishing a new account, you must exchange the minimum dollar amount needed to open that account. o Before you exchange your shares, you must review a copy of the current prospectus of the Portfolio that you would like to buy. o You may qualify for a reduced sales charge. See the SAI for details, or call your account representative. o Your exchange request may not be accepted if the Trust determines that your exchange would be detrimental to the interests of a Portfolio's shareholders. The Trust specifically reserves the right to refuse your request if it is part of multiple purchase or exchange requests that the Trust, in its sole discretion, deems to involve excessive trading or to be part of a market timing strategy since these types of trading practices may require a Portfolio to sell securities at a disadvantageous time or price. In making its determination, the Trust may consider orders you have placed individually, orders placed in combination with a group of shareholders or commonly controlled accounts and orders placed by your securities dealer or service agent. The Trust may modify or terminate the exchange option at any time. 58 SHAREHOLDER SERVICES The Trust offers several additional shareholder services. If you would like to take advantage of any of these services, please call your account representative or the Transfer Agent at 1-800- 447-1139 to obtain the appropriate forms. These services may be changed or terminated at any time with 60 days' notice. o Automatic investment plan. You may buy shares of a Portfolio at regular intervals by direct transfer of funds from your bank. You may invest a set amount ($250 for the initial purchase; minimum subsequent investments of $50 or $25 for retirement accounts). o Directed distribution option. You may automatically reinvest your dividends and capital gain distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may buy Class A shares without a sales charge at the current NAV. However, if you buy Class B or Class C shares, they may be subject to a CDSC when you sell them. You may not use this service to establish a new account. o Systematic withdrawal plan. You may withdraw a set amount ($25 minimum) as long as you have a beginning account balance of at least $5,000. You or the Transfer Agent may terminate the arrangement at any time. If you plan to buy new shares when you participate in a systematic plan, you may have to pay an additional sales charge. o Reinstatement privilege. If you sell some or all of your Class A or Class B shares of a Portfolio, you have up to 90 days to reinvest all or part of the redemption proceeds in Class A shares of the Portfolio or other Portfolios of the Trust without paying a sales charge. This privilege applies only to the Class A shares that you purchased subject to the initial sales charge and to Class A and Class B shares on which you paid a CDSC when you sold them. This privilege does not apply to Class C shares. If you believe you may qualify for this privilege, you must notify your account representative or the Transfer Agent when you send your payment. 59 DIVIDENDS, DISTRIBUTIONS AND TAXES If you buy shares of a Portfolio shortly before it declares a dividend or a distribution, a portion of your investment in the Portfolio may be returned to you in the form of a taxable distribution. Distributions The Portfolios pass along your share of their investment earnings in the form of dividends. Dividend distributions are the net dividends or interest earned on investments after expenses. As with any investment, you should consider the tax consequences of an investment in a Portfolio. Ordinarily, each Portfolio declares and pays dividends from its net investment income annually. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: o Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account Application, you will receive your distributions this way. o Cash. The Trust will send you a check no later than seven days after the payable date. o Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. o Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio. See the description of this option in the "Shareholder Services" section above. o Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account Information Form. If you would like to change the option you selected, please call your account executive or the Transfer Agent at 1-800- 447-1139. Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. Depending on the type of account in which the shares are held and the nature of the shareholder, a shareholder may be taxed on distributions received from a Portfolio. It is important for you to be aware of the following information about the tax treatment of your investment. o Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain (which may be taxable at different rates depending on the length of time a Portfolio holds its assets). o Dividends and distributions are treated in the same manner for federal income tax purposes whether you receive them in the form of cash or additional shares. They may also be subject to state and local taxes. 60 o Dividends from the Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. o Certain dividends and distributions paid to you in January will be taxable as if they had been paid to you the previous December. o The Trust will mail you tax statements every January showing the amounts and tax status of distributions you received. o When you sell (redeem) or exchange shares of a Portfolio, you must recognize any gain or loss. o Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. o You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 61 ADDITIONAL INFORMATION Performance The Trust, the Distributor, the Adviser and certain financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These entities and publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, unless instructed to the contrary. Investors may request that the Trust send these documents to each shareholder individually by calling the Trust at 1-800-766-4111. 62 Financial Highlights -- S&P STARS Portfolio The financial highlights table is intended to help you understand the financial performance of the S&P STARS Portfolio for the past five years for the Class A and Class C shares and since inception (January 5, 1998) for the Class B shares. This information reflects financial results for a single share of the S&P STARS Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the S&P STARS Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the S&P STARS Portfolio's financial statements, are included in the S&P STARS Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Distributions Net Value, Investment and from Net Asset Beginning Loss**(1) Unrealized Realized Value, of Period Gain (Loss) on Capital Gains End of Investments**(2) Period - ------------------------------------------------------------------------------------------------------------------------------ Class A For the fiscal year ended March 31, 2002 $27.85 $(0.30) $(2.44) $-- $25.11 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 36.42 (0.27) (7.82) (0.48) 27.85 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 24.39 (0.21) 12.53 (0.29) 36.42 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 19.97 (0.12) 5.46 (0.92) 24.39 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1998 16.13 (0.13) 6.69 (2.72) 19.97 - ------------------------------------------------------------------------------------------------------------------------------ Class B For the fiscal year ended March 31, 2002 27.26 (0.41) (2.39) -- 24.46 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 35.83 (0.37) (7.72) (0.48) 27.26 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 24.11 (0.27) 12.28 (0.29) 35.83 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 19.86 (0.12) 5.29 (0.92) 24.11 - ------------------------------------------------------------------------------------------------------------------------------ For the period January 5, 1998* through 17.37 (0.04) 2.53 -- 19.86 March 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Class C For the fiscal year ended March 31, 2002 27.25 (0.42) (2.38) -- 24.45 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 35.82 (0.38) (7.71) (0.48) 27.25 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 24.10 (0.30) 12.31 (0.29) 35.82 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 19.85 (0.22) 5.39 (0.92) 24.10 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1998 16.06 (0.22) 6.65 (2.64) 19.85
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 63 Financial Highlights -- S&P STARS Portfolio
Total Net Assets, Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment End of Expenses to Investment Reflected in Turnover Return(3) Period Average Net (Loss) to Average Expense and Rate (000's Assets(1) Net Assets(1) Net Investment omitted) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------- Class A - ------------------------------------------------------------------------------------------------------------------------------- (9.80)% $1,151,482 1.50% (1.12)% 0.08% 110.80% - ------------------------------------------------------------------------------------------------------------------------------- (22.36) 1,173,464 1.50 (1.04) 0.10 42.93 - ------------------------------------------------------------------------------------------------------------------------------- 50.82 673,550 1.50 (1.12) 0.18 54.67 - ------------------------------------------------------------------------------------------------------------------------------- 27.46 206,130 1.50 (0.73) 0.27 76.17 - ------------------------------------------------------------------------------------------------------------------------------- 43.53 109,591 1.50(6) (0.83)(6) 0.38 172.78(7) - ------------------------------------------------------------------------------------------------------------------------------- Class B - ------------------------------------------------------------------------------------------------------------------------------- (10.27) 672,833 2.00 (1.65) 0.08 110.80 - ------------------------------------------------------------------------------------------------------------------------------- (22.73) 620,784 2.00 (1.58) 0.10 42.93 - ------------------------------------------------------------------------------------------------------------------------------- 50.13 300,693 2.00 (1.63) 0.18 54.67 - ------------------------------------------------------------------------------------------------------------------------------- 26.75 49,319 2.00 (1.23) 0.27 76.17 - ------------------------------------------------------------------------------------------------------------------------------- 14.34(4) 5,800 2.00(5) (1.47)(4,5) 0.53(4)(5) 172.78(7) - ------------------------------------------------------------------------------------------------------------------------------- Class C - ------------------------------------------------------------------------------------------------------------------------------- (10.28) 568,726 2.00 (1.65) 0.08 110.80 - ------------------------------------------------------------------------------------------------------------------------------- (22.74) 540,150 2.00 (1.58) 0.10 42.93 - ------------------------------------------------------------------------------------------------------------------------------- 50.15 314,794 2.00 (1.63) 0.18 54.67 - ------------------------------------------------------------------------------------------------------------------------------- 26.75 97,654 2.00 (1.23) 0.27 76.17 - ------------------------------------------------------------------------------------------------------------------------------- 42.80 63,330 2.00(6) (1.32)(6) 0.38 172.78(7)
- ------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 The total investment return and ratios for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to the timing differences in the commencement of the initial public offerings. 5 Annualized. 6 Includes S&P STARS' share of S&P STARS Master Series' expenses for the period prior to June 25, 1997. 7 Portfolio turnover rate is related to S&P STARS Master Series for the period prior to June 25, 1997. 64 Financial Highlights -- S&P STARS Opportunities Portfolio The financial highlights table is intended to help you understand the financial performance of the S&P STARS Opportunities Portfolio for the Class A, Class B and Class C shares since inception (October 1, 2001). This information reflects financial results for a single share of the S&P STARS Opportunities Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the S&P STARS Opportunities Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the S&P STARS Opportunities Portfolio's financial statements, are included in the S&P STARS Opportunities Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Value, Investment and Beginning Loss**(1) Unrealized Net of Period Gain (Loss) on Asset Value Investments**(2) End of Pierod - --------------------------------------------------------------------------------------------------------------- Class A For the period October 1, 2001* through March $12.00 $(0.04) $2.31 $14.27 31, 2002 - --------------------------------------------------------------------------------------------------------------- Class B For the period October 1, 2001* through March 12.00 (0.06) 2.29 14.23 31, 2002 - --------------------------------------------------------------------------------------------------------------- Class C For the period October 2, 2001* through March 12.00 (0.06) 2.29 14.23 31, 2002 - ---------------------------------------------------------------------------------------------------------------
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. Net realized and unrealized gain/(loss) on investments include short sale transactions. 65 Financial Highlights -- S&P STARS Opportunities Portfolio
Total Net Assets, Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment End of Expenses to Investment Reflected in Turnover Return(3) Period Average Net (Loss) to Average Expense and Rate (000's Assets(1) Net Assets(1) Net Investment omitted) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------- Class A - ------------------------------------------------------------------------------------------------------------------------------- 18.92% $30,004 1.50% (0.90)%(4) 0.85%(4) 66.89% - ------------------------------------------------------------------------------------------------------------------------------- Class B - ------------------------------------------------------------------------------------------------------------------------------- 18.58 21,094 2.00 (1.48)(4) 0.85(4) 66.89 - ------------------------------------------------------------------------------------------------------------------------------- Class C <------------------------------------------------------------------------------------------------------------------------------- 18.58 16,412 2.00 (1.43)(4) 0.85(4) 66.89 - ------------------------------------------------------------------------------------------------------------------------------- - -------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 Annualized. 66 Financial Highlights -- The Insiders Select Fund The financial highlights table is intended to help you understand the financial performance of The Insiders Select Fund for the past five years for the Class A and Class C shares and since inception (January 6, 1998) for the Class B shares. This information reflects financial results for a single share of The Insiders Select Fund. The total returns in the table represent the rate that an investor would have gained or lost on an investment in The Insiders Select Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with The Insiders Select Fund 's financial statements, are included in The Insiders Select Fund's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Realized Dividends Distributions Net Asset Value, Net and Unrealized from Net from Net Value, Beginning Investment Gain/(Loss) on Investment Realized End of of Period (Loss)**(1) Investments**(2) Income Capital Gains Period - ------------------------------------------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March $17.84 $(0.01) $0.73 - $(1.69) $16.87 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 16.90 0.01 3.05 - (2.12) 17.84 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 17.02 - 0.07 - (0.19) 16.90 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 17.88 - (0.01) - (0.85) 17.02 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 14.58 - 6.30 - (3.00) 17.88 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 17.32 (0.07) 0.68 - (1.69) 16.24 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 16.54 (0.05) 2.95 - (2.12) 17.32 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 16.75 (0.05) 0.03 - (0.19) 16.54 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 17.69 - (0.09) - (0.85) 16.75 1999 - ------------------------------------------------------------------------------------------------------------------------------ For the period January 6, 1998* 15.72 0.01 1.96 - - 17.69 through March 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 17.32 (0.08) 0.69 - (1.69) 16.24 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 16.54 (0.07) 2.97 - (2.12) 17.32 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 16.74 (0.05) 0.04 - (0.19) 16.54 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 17.68 - (0.09) - (0.85) 16.74 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 14.48 (0.07) 6.21 - (2.94) 17.68 31, 1998 - ------------------------------------------
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 67 Financial Highlights -- The Insiders Select Fund
Total Net Assets, Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment End of Expenses to Investment Reflected in Turnover Return(3) Period Average Income/(Loss) Expense and Rate (000's Net to Average Net Investment omitted) Assets(1) Net Assets(1) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------------------------------------------ 4.62% $19,060 1.65% 0.03% 0.80% 57.26% - ------------------------------------------------------------------------------------------------------------------------------ 17.92 17,372 1.65 0.08 1.14 99.36 - ------------------------------------------------------------------------------------------------------------------------------ 0.40 15,187 1.65 0.10 0.81 76.06 - ------------------------------------------------------------------------------------------------------------------------------ 0.29 24,395 1.65 0.02 0.81 99.71 - ------------------------------------------------------------------------------------------------------------------------------ 46.02 21,912 1.65 0.03 1.09 115.64 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 4.11 10,357 2.15 0.53 0.80 57.26 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 17.32 7,378 2.15 (0.42) 1.14 99.36 - ------------------------------------------------------------------------------------------------------------------------------ (0.13) 5,469 2.15 (0.40) 0.81 76.06 - ------------------------------------------------------------------------------------------------------------------------------ (0.16) 8,426 2.15 0.03 0.81 99.71 - ------------------------------------------------------------------------------------------------------------------------------ 12.53(4) 2,253 2.15(5) (0.95)(4,5) 1.82(4,5) 115.64 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------------------------------------------ 4.11 8,566 2.15 0.53 0.80 57.26 - ------------------------------------------------------------------------------------------------------------------------------ 17.32 7,328 2.15 (0.42) 1.14 99.36 - ------------------------------------------------------------------------------------------------------------------------------ (0.07) 6,908 2.15 (0.40) 0.81 76.06 - ------------------------------------------------------------------------------------------------------------------------------ (0.16) 11,902 2.15 0.02 0.81 99.71 - ------------------------------------------------------------------------------------------------------------------------------ 45.17 12,297 2.15 (0.46) 1.10 115.64 - ------------------------------------------------------------------------------------------------------------------------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 The total investment return and ratios for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to timing differences in the commencement of the initial public offerings. 5 Annualized. 68 Financial Highlights -- Intrinsic Portfolio (formerly known as Large Cap Value Portfolio) The financial highlights table is intended to help you understand the financial performance of the Intrinsic Portfolio for the past five years for the Class A and Class C shares and since inception (January 28, 1998) for the Class B shares. This information reflects financial results for a single share of the Intrinsic Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Intrinsic Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Intrinsic Portfolio's financial statements, are included in the Intrinsic Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111. Net Asset Net Net Realized Dividends Distributions Net Asset Value, Investment and Unrealized from Net from Net Value, Beginning Income/ Gain/(Loss) on Investment Realized End of of Period (Loss)**(1) Investments**(2) Income Capital Gains Period - --------------------------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March $19.63 $0.04 $0.87 $(0.01) $(0.49) $20.04 31, 2002 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 16.71 0.11 3.85 (0.13) (0.91) 19.63 31, 2001 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 19.74 0.11 (0.94) (0.10) (2.10) 16.71 31, 2000 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 20.83 0.11 0.59 (0.11) (1.68) 19.74 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 17.17 0.05 7.15 (0.02) (3.52) 20.83 31, 1998 Class B For the fiscal year ended March 19.35 (0.02) 0.81 - (0.49) 19.65 31, 2002 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 16.49 0.03 3.78 (0.04) (0.91) 19.35 31, 2001 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 19.51 0.01 (0.93) - (2.10) 16.49 31, 2000 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 20.66 0.08 0.52 (0.07) (1.68) 19.51 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- For the period January 28, 1998* (0.01) 2.50 - - 20.66 through March 31, 1998 18.17 - --------------------------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 19.43 (0.01) 0.81 - (0.49) 19.74 31, 2002 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 16.55 0.02 3.80 (0.03) (0.91) 19.43 31, 2001 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 19.57 0.01 (0.93) - (2.10) 16.55 31, 2000 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 20.66 0.07 0.53 (0.01) (1.68) 19.57 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 17.11 (0.03) 7.10 - (3.52) 20.66 31, 1998
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 69 Financial Highlights -- Intrinsic Portfolio (formerly known as Large Cap Value Portfolio)
Total Net Assets, End Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment of Period Expenses to Investment Reflected in Turnover Return(3) (000's omitted) Average Income/(Loss) Expense and Rate Net to Average Net Investment Assets(1) Net Assets(1) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------------------------------------------ 4.72% $20,953 1.50% 0.38% 0.75% 20.60% - ------------------------------------------------------------------------------------------------------------------------------ 23.79 11,983 1.50 0.72 1.50 60.46 - ------------------------------------------------------------------------------------------------------------------------------ (4.91) 7,950 1.50 0.56 1.78 55.66 - ------------------------------------------------------------------------------------------------------------------------------ 3.68 9,677 1.50 0.54 1.46 38.27 - ------------------------------------------------------------------------------------------------------------------------------ 44.59 8,358 1.50 0.32 1.73 61.75 - ------------------------------------------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------------------------------------------ 4.17 9,733 2.00 (0.07) 0.75 20.60 - ------------------------------------------------------------------------------------------------------------------------------ 23.19 3,687 2.00 0.15 1.50 60.46 - ------------------------------------------------------------------------------------------------------------------------------ (5.41) 1,379 2.00 0.03 1.75 55.66 - ------------------------------------------------------------------------------------------------------------------------------ 3.21 1,911 2.00 0.08 1.46 38.27 - ------------------------------------------------------------------------------------------------------------------------------ 13.70(4) 446 2.00(5) (0.73)(4,5) 1.05(4,5) 61.75 - ------------------------------------------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------------------------------------------ 4.20 13,528 2.00 0.02 0.75 20.60 - ------------------------------------------------------------------------------------------------------------------------------ 23.16 5,675 2.00 0.11 1.50 60.46 - ------------------------------------------------------------------------------------------------------------------------------ (5.39) 3,359 2.00 0.03 1.75 55.66 - ------------------------------------------------------------------------------------------------------------------------------ 3.22 5,250 2.00 0.08 1.46 38.27 - ------------------------------------------------------------------------------------------------------------------------------ 43.94 4,987 2.00 (0.19) 1.73 61.75 - ------------------------------------------------------------------------------------------------------------------------------ - --------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 The total investment return and ratios for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to timing differences in the commencement of the initial public offerings. 5 Annualized. 70 Financial Highlights -- Small Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Small Cap Portfolio for the past five years for the Class A and Class C shares and since inception (January 21, 1998) for the Class B shares. This information reflects financial results for a single share of the Small Cap Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Small Cap Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Small Cap Portfolio's financial statements, are included in the Small Cap Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Distributions Net Asset Value, Investment and Unrealized from Net Value, Beginning Loss**(1) Income/(Loss) on Realized End of of Period Investments**(2) Capital Period Gains - --------------------------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, 2002 $18.13 $(0.04) $3.30 $(1.00) $20.39 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 23.10 (0.14) (2.61) (2.22) 18.13 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 17.93 (0.15) 6.69 (1.37) 23.10 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 23.65 (0.13) (4.65) (0.94) 17.93 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.48 (0.14) 8.06 (1.75) 23.65 - --------------------------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2002 17.76 (0.12) 3.18 (1.00) 19.82 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 22.80 (0.20) (2.62) (2.22) 17.76 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 17.71 (0.24) 6.60 (1.27) 22.80 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 23.48 (0.16) (4.67) (0.94) 17.71 - --------------------------------------------------------------------------------------------------------------------------- For the period January 21, 1998* through 19.95 - 3.53 - 23.48 March 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2002 17.77 (0.12) 3.18 (1.00) 19.83 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 22.80 (0.22) (2.59) (2.22) 17.77 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 17.70 (0.26) 6.62 (1.26) 22.80 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 23.48 (0.26) (4.58) (0.94) 17.70 - --------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.38 (0.24) 8.00 (1.66) 23.48 - --------------
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 71 Financial Highlights -- Small Cap Portfolio
Total Net Assets, End Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment of Period Expenses to Investment Reflected in Turnover Return(3) (000's omitted) Average Loss to Expense and Rate Net Average Net Investment Assets(1) Net Assets(1) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------------------------------------------ 18.51% $23,902 1.50% (0.24)% 0.53% 75.76% - ------------------------------------------------------------------------------------------------------------------------------ (11.64) 17,194 1.50 (0.63) 1.02 65.32 - ------------------------------------------------------------------------------------------------------------------------------ 38.21 24,086 1.50 (0.75) 0.65 65.85 - ------------------------------------------------------------------------------------------------------------------------------ (20.26) 18,520 1.50 (0.60) 0.65 84.12 - ------------------------------------------------------------------------------------------------------------------------------ 46.86 25,111 1.50 (0.71) 0.76 90.39 - ------------------------------------------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------------------------------------------ 17.76 6,944 2.00 (0.74) 0.53 75.76 - ------------------------------------------------------------------------------------------------------------------------------ (12.12) 4,301 2.00 (1.14) 1.02 65.32 - ------------------------------------------------------------------------------------------------------------------------------ 37.53 4,030 2.00 (1.24) 0.65 65.85 - ------------------------------------------------------------------------------------------------------------------------------ (20.63) 2,716 2.00 (1.10) 0.65 84.12 - ------------------------------------------------------------------------------------------------------------------------------ 17.69(4) 901 2.00(5) (1.49)(4,5) 1.31(4,5) 90.39 - ------------------------------------------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------------------------------------------ 17.75 16,112 2.00 (0.74) 0.53 75.76 - ------------------------------------------------------------------------------------------------------------------------------ (12.07) 11,460 2.00 (1.14) 1.02 65.32 - ------------------------------------------------------------------------------------------------------------------------------ 37.54 13,399 2.00 (1.24) 0.65 65.85 - ------------------------------------------------------------------------------------------------------------------------------ (20.67) 11,112 2.00 (1.10) 0.65 84.12 - ------------------------------------------------------------------------------------------------------------------------------ 46.10 18,082 2.00 (1.21) 0.76 90.39 - -------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 The total investment return and ratios for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to timing differences in the commencement of the initial public offerings. 5 Annualized. 72 Financial Highlights -- Alpha Growth Portfolio (formerly known as Focus List Portfolio) The financial highlights table is intended to help you understand the financial performance of the Alpha Growth Portfolio since its inception. This information reflects financial results for a single share of the Alpha Growth Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the Alpha Growth Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Alpha Growth Portfolio's financial statements, are included in the Alpha Growth Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Distributions Net Asset Value, Investment and from Net Value, End Beginning (Loss)**(1) Unrealized Realized of Period of Period Gain/(Loss) Capital Gains on Investments**(2) - ------------------------------------------------------------------------------------------------------------------------------ Class A For the fiscal year ended March 31, 2002 $16.75 $(0.03) $2.12 $ - $18.84 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 21.21 (0.09) (4.37) - 16.75 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 17.32 (0.07) 3.96 - 21.21 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 13.40 (0.07) 4.01 (0.02) 17.32 - ------------------------------------------------------------------------------------------------------------------------------ For the period December 29, 1997* through March 12.00 (0.01) 1.41 - 13.40 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Class B For the fiscal year ended March 31, 2002 16.46 (0.06) 2.01 - 18.41 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 20.93 (0.17) (4.30) - 16.46 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 17.18 (0.16) 3.91 - 20.93 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 13.38 (0.13) 3.95 (0.02) 17.18 - ------------------------------------------------------------------------------------------------------------------------------ For the period December 29, 1997* through March 12.00 (0.01) 1.39 - 13.38 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Class C For the fiscal year ended March 31, 2002 16.46 (0.06) 2.02 - 18.42 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 20.94 (0.17) (4.31) - 16.46 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 17.19 (0.18) 3.93 - 20.94 - ------------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 13.38 (0.13) 3.96 (0.02) 17.19 - ------------------------------------------------------------------------------------------------------------------------------ For the period December 29, 1997* through March 12.00 (0.01) 1.39 - 13.38 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ - --------------
* Commencement of operations. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 73 Financial Highlights-- Alpha Growth Portfolio (formerly known as Focus List Portfolio)
Total Net Assets, End Ratio of Ratio of Increase/(Decrease) Portfolio Investment of Period Expenses to Net Investment Reflected in Turnover Rate Return(3) (000's omitted) Average Net Loss to Expense and Assets(1) Average Net Investment Net Assets(1) Income/(Loss) Ratios Due to Waivers and Related Reimbursements - ------------------------------------------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------------------------------------------ 12.48% $23,176 1.40% (0.42)% 1.06% 82.40% - ------------------------------------------------------------------------------------------------------------------------------ (21.03) 17,316 1.40 (0.46) 0.97 81.37 - ------------------------------------------------------------------------------------------------------------------------------ 22.46 22,580 1.40 (0.63) 1.33 56.26 - ------------------------------------------------------------------------------------------------------------------------------ 29.47 6,546 1.40 (0.57) 2.89 84.49 - ------------------------------------------------------------------------------------------------------------------------------ 11.67 3,201 1.40(4) (0.30)(4) 5.01(4) 28.91 - ------------------------------------------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------------------------------------------ 11.85 9,061 1.90 (0.92) 1.06 82.40 - ------------------------------------------------------------------------------------------------------------------------------ (21.36) 7,441 1.90 (0.96) 0.97 81.37 - ------------------------------------------------------------------------------------------------------------------------------ 21.83 9,124 1.90 (1.11) 1.33 56.26 - ------------------------------------------------------------------------------------------------------------------------------ 28.61 4,460 1.90 (1.07) 2.89 84.49 - ------------------------------------------------------------------------------------------------------------------------------ 11.50 2,399 1.90(4) (0.78)(4) 5.27(4) 28.91 - ------------------------------------------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------------------------------------------ 11.91 6,546 1.90 (0.92) 1.06 82.40 - ------------------------------------------------------------------------------------------------------------------------------ (21.40) 4,973 1.90 (0.96) 0.97 81.37 - ------------------------------------------------------------------------------------------------------------------------------ 21.81 6,398 1.90 (1.09) 1.33 56.26 - ------------------------------------------------------------------------------------------------------------------------------ 28.69 3,304 1.90 (1.07) 2.89 84.49 - ------------------------------------------------------------------------------------------------------------------------------ 11.50 1,687 1.90(4) (0.62)(4) 5.52(4) 28.91 - ------------------------------------------------------------------------------------------------------------------------------
- ------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 Annualized. 74 Financial Highlights -- International Equity Portfolio The financial highlights table is intended to help you understand the financial performance of the International Equity Portfolio since its inception. This information reflects financial results for a single share of the International Equity Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the International Equity Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the International Equity Portfolio's financial statements, are included in the International Equity Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Dividends Distributions Net Asset Value, Investment and Unrealized from Net from Net Value, End Beginning Income/ Gain/(Loss) on Investment Realized of Period of Period (Loss)**(1) Investments**(2) Income Gains ---------------------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, $17.55 $(0.04) $(2.87) - - $14.64 2002 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 27.84 (0.06) (9.92) - (0.31) 17.55 2001 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 15.14 (0.05) 12.98 - (0.23) 27.84 2000 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 13.77 (0.03) 1.40 -+ - 15.14 1999 ---------------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* 12.00 0.01 1.76 - - 13.77 through March 31, 1998 ---------------------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 17.26 (0.12) (2.82) - - 14.32 2002 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 27.52 (0.18) (9.77) - (0.31) 17.26 2001 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 15.05 (0.10) 12.80 - (0.23) 27.52 2000 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 13.75 (0.02) 1.32 -+ - 15.05 1999 ---------------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* 12.00 - 1.75 - - 13.75 through March 31, 1998 ---------------------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 17.25 (0.10) (2.83) - - 14.32 2002 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 27.52 (0.15) (9.81) - (0.31) 17.25 2001 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 15.05 (0.09) 12.79 - (0.23) 27.52 2000 ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 13.75 (0.02) 1.32 -+ - 15.05 1999 ---------------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* 12.00 - 1.75 - - 13.75 through March 31, 1998 ----------------------------------------------------------------------------------------------------------------------
* Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. + Amount is less than $0.01 per share. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 75 Financial Highlights -- International Equity Portfolio
Total Net Assets, End Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment of Period Expenses to Investment Reflected in Turnover Return(3) (000's omitted) Average Income/(Loss) Expense Ratios and Rate Net to Average Net Investment Assets(1) Net Assets(1) Income/(Loss) Due to Waivers and Related Reimbursements ------------------------------------------------------------------------------------------------------------------------- Class A (16.58%) $31,455 1.75% (0.09)% 0.57% 168.32% ------------------------------------------------------------------------------------------------------------------------- (35.99) 54,096 1.75 (0.31) 0.53 168.04 ------------------------------------------------------------------------------------------------------------------------- 85.67 61,508 1.75 (0.77) 1.12 96.36 ------------------------------------------------------------------------------------------------------------------------- 9.97 8,299 1.75 0.05 2.38 114.68 ------------------------------------------------------------------------------------------------------------------------- 14.75 3,765 1.75(4) 0.53(4) 4.06(4) 3.26 ------------------------------------------------------------------------------------------------------------------------- Class B ------------------------------------------------------------------------------------------------------------------------- (17.03) 7,751 2.25 (0.59) 0.57 168.32 ------------------------------------------------------------------------------------------------------------------------- (36.30) 11,754 2.25 (0.81) 0.53 168.04 ------------------------------------------------------------------------------------------------------------------------- 84.66 15,656 2.25 (1.27) 1.12 96.36 ------------------------------------------------------------------------------------------------------------------------- 9.48 3,156 2.25 (0.45) 2.38 114.68 ------------------------------------------------------------------------------------------------------------------------- 14.58 2,137 2.25(4) (0.06)(4) 4.04(4) 3.26 ------------------------------------------------------------------------------------------------------------------------- Class C ------------------------------------------------------------------------------------------------------------------------- (16.99) 21,025 2.25 (0.59) 0.57 168.32 ------------------------------------------------------------------------------------------------------------------------- (36.34) 25,833 2.25 (0.81) 0.53 168.04 ------------------------------------------------------------------------------------------------------------------------- 84.65 18,238 2.25 (1.27) 1.12 96.36 ------------------------------------------------------------------------------------------------------------------------- 9.48 2,926 2.25 (0.45) 2.38 114.68 ------------------------------------------------------------------------------------------------------------------------- 14.58 2,173 2.25(4) (0.06)(4) 4.04(4) 3.26 -------------------------------------------------------------------------------------------------------------------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 Annualized. 76 The Bear Stearns Funds 383 Madison Avenue New York, NY 10179 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 383 Madison Avenue PFPC Inc. New York, NY 10179 Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 INVESTMENT ADVISER COUNSEL Bear Stearns Asset Management Inc. Kramer Levin Naftalis & Frankel LLP 383 Madison Avenue 919 Third Avenue New York, NY 10179 New York, NY 10022 INVESTMENT SUB-ADVISER INDEPENDENT AUDITORS (INTERNATIONAL EQUITY PORTFOLIO) Deloitte & Touche LLP Marvin & Palmer Associates, Inc. Two World Financial Center 1201 North Market Street, Suite 2300 New York, NY 10281 Wilmington, DE 19801 ADMINISTRATOR Bear Stearns Funds Management Inc. 383 Madison Avenue New York, NY 10179 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 77 Statement of Additional Information. The Statement of Additional Information ("SAI") provides a more complete discussion of several of the matters contained in this Prospectus and is incorporated by reference, which means that it is legally a part of this Prospectus as if it were included here. Annual and Semi-Annual Reports. The annual and semi-annual reports to shareholders contain additional information about each Portfolio's investments, including a discussion of the market conditions and investment strategies that significantly affected a Portfolio's performance during its last fiscal year. o To obtain a free copy of the SAI and the current annual or semi-annual reports or to make any other inquiries about a Portfolio, you may call or write: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 Telephone: 1-800- 447-1139 or 1-800-766-4111 o You may obtain copies of the SAI or financial reports o for free by calling or writing broker-dealers or other financial intermediaries that sell a Portfolio's shares; o upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102; or o for free by visiting the SEC's Worldwide Web site at http://www.sec.gov. o You may review and copy information about the Portfolios (including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 to obtain information on the operation of the SEC's Public Reference Room. Investment Company Act File No. 811-8798 BSF-P-015-03 78 The Bear Stearns Funds Prospectus Dated August 1, 2002 Equity Funds o S&P STARS Portfolio o o o S&P STARS Opportunities Portfolio o o o The Insiders Select Fund o o o Intrinsic Value Portfolio o o o Small Cap Value Portfolio o o o Alpha Growth Portfolio o o o International Equity Portfolio Class Y Shares This Prospectus provides important information about each Portfolio that you should know before investing. Please read it carefully and keep it for future reference. The Securities and Exchange Commission has not approved any Portfolio's shares or determined whether this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. The Bear Stearns Funds o 383 Madison Avenue, New York, NY 10179 1-800-447-1139 Table of Contents Risk/Return Summaries .......................................................................... S&P STARS Portfolio S&P STARS Opportunities Portfolio The Insiders Select Fund Intrinsic Value Portfolio Small Cap Value Portfolio Alpha Growth Portfolio International Equity Portfolio Investments ........................................................................... Risk Factors ........................................................................... Management of the Portfolios ........................................................................... Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares ........................................................................... Investing in the Portfolios ........................................................................... How to Buy Shares How to Sell Shares Exchanges Dividends, Distributions and Taxes ........................................................................... Additional Information ........................................................................... Financial Highlights ........................................................................... Each Portfolio described in this Prospectus is a series of The Bear Stearns Funds, a registered open-end management investment company (the "Trust"). It is important to keep in mind that mutual fund shares are: o not deposits or obligations of any bank; o not insured by the Federal Deposit Insurance Corporation; o subject to investment risk, including possible loss of the money invested. S&P STARS Portfolio 3 S&P STARS Portfolio RISK/RETURN SUMMARY Investment Objective To provide investment results that exceed the total return of publicly traded common stocks in the aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P 500 Index"). Principal Strategies Under normal circumstances, the S&P STARS Portfolio will invest at least 80% of its net assets in securities with any STARS ranking at the time of purchase. The S&P STARS Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. To achieve the investment objective of the S&P STARS Portfolio, Bear Stearns Asset Management Inc., the investment adviser for the S&P STARS Portfolio and each other Portfolio of the Trust ("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock Appreciation Ranking System (or "STARS") to identify common stocks in the highest category (five-STARS ) for purchase and in the lowest category (one-STAR) for short selling. The Adviser believes that this approach will provide opportunities to achieve performance that exceeds the S&P 500 Index's total return. o Generally, the S&P STARS Portfolio will invest at least 85% of its total assets in U.S. common stocks and U.S. dollar-denominated American Depositary Receipts ("ADRs") that are listed on U.S. exchanges that, at the time of initial purchase, were ranked five-STARS or, at their time of short sale, were ranked one-STAR. o Generally, the S&P STARS Portfolio may invest up to 15% of its total assets in U.S. common stocks and ADRs without regard to STARS ranking. This strategy will allow the Adviser to consider a much larger universe of attractive stocks that S&P does not follow, which means that the S&P STARS Portfolio may purchase more "lower-rated" securities (or sell short more "higher-rated" securities) than it otherwise could. See "Principal Investment Strategies--Additional Information." In selecting investments, the Adviser analyzes the stocks ranked by S&P analysts according to the STARS ranking system and selects those it believes have the best potential for capital appreciation. The Adviser focuses on companies that show the potential to achieve growth at a reasonable price. The Adviser considers various factors including market segment, industry, earnings history, price-to-earnings ratio and management. The Adviser may select securities of companies with small, middle and large market capitalizations. If S&P downgrades a security held by the S&P STARS Portfolio to four-STARS from five-STARS, the Portfolio may purchase additional shares of that security without limitation. In addition, if S&P upgrades a security held by the S&P STARS Portfolio to two-STARS from one-STAR, the Portfolio may sell short additional shares of that security without limitation. If, however, S&P downgrades a security held by the S&P STARS Portfolio from five- or four-STARS to three-STARS or lower, that security is subject to the 15% limitation on acquiring securities without regard to STARS ranking. Similarly, if S&P upgrades a security sold short by the S&P STARS Portfolio from one- or two-STARS to three-STARS or higher, that security is also subject to the 15% limitation on investments made without regard to STARS ranking. S&P STARS Portfolio 1 S&P's research staff analyzes and ranks the stocks of approximately 1,000 issuers and evaluates the short- to intermediate-term (up to 12 months) appreciation potential of the reviewed stocks, as shown below.
o o o o o Buy Expected to be among the best performers over the next 6 to 12 months. o o o o Accumulate Expected to be an above-average performer. o o o Hold Expected to be an average performer. o o Avoid Expected to be a below-average performer. o Sell Expected to be a well-below-average performer.
The S&P STARS Portfolio may "sell short" securities that at their time of initial sale were rated one-STAR. In a short sale, the Adviser sells a security it has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will repurchase the security at a lower price and realize a gain for the S&P STARS Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the S&P STARS Portfolio. The S&P STARS Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the STARS Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o Short sales may involve substantial risk and may involve leverage, which may increase potential losses. o Ratings by S&P's research group may not accurately assess the investment prospects of a particular security. The S&P STARS Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the S&P STARS Portfolio more susceptible to price changes of securities of a particular issuer. S&P STARS Portfolio 2 Who May Want to Invest in the S&P STARS Portfolio The S&P STARS Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add an equity component to their portfolio. The S&P STARS Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the S&P STARS Portfolio by showing changes in the performance of its Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. S&P STARS Portfolio Annual Total Return (%)1 1996 28.42 1997 18.59 1998 40.33 1999 38.20 2000 3.45 2001 ( ) Past performance is not necessarily an indication of future results. (1) The S&P STARS Portfolio's year-to-date return as of June 30, 2002 was (_______)%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended _____________________), and the lowest quarterly return was (______)% (for the quarter ended __________). The table shows how the average annual total return for Class Y shares of the S&P STARS Portfolio for one year, five year and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid-to large-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rates (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns 1 Year 5 Year Since Inception (for the periods ended December 31, 2001) August 7, 1995 ------------------------------------------------------------------------------------------------------ S&P STARS Portfolio--Class Y ------------------------------------------------------------------------------------------------------ Return before taxes ------------------------------------------------------------------------------------------------------ Return after taxes on distriubtions ------------------------------------------------------------------------------------------------------ Return after taxes on distributions and on sale of Portfolio Shares ------------------------------------------------------------------------------------------------------ S&P 500 Index (reflects no deduction for fees expenses or taxes) ------------------------------------------------------------------------------------------------------ S&P 500 Index ------------------------------------------------------------------------------------------------------
S&P STARS Portfolio 3 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the S&P STARS Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ---------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on None purchases (as a percentage of offering price) ---------------------------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) None (as a percentage of the lower of purchase or sale price) ---------------------------------------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None ---------------------------------------------------------------------------------------------------------------- Redemption fees None ** ---------------------------------------------------------------------------------------------------------------- Exchange fees None ---------------------------------------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ---------------------------------------------------------------------------------------------------------------- Management Fees 0.75% ---------------------------------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% ---------------------------------------------------------------------------------------------------------------- Other Expenses 0.35% ---------------------------------------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.10% ---------------------------------------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.10)% ---------------------------------------------------------------------------------------------------------------- Net Expenses1 1.00% ----------------------------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the S&P STARS Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the S&P STARS Portfolio over various time periods. It is intended to help you compare the cost of investing in the S&P STARS Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the S&P STARS Portfolio; o your investment returns 5% each year; o the S&P STARS Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------ Class Y $102 $340 $597 $1,331 ------------------------------------------------------------------------------------
o This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2003, and thereafter will equal 1.10%. S&P STARS Portfolio 4 S&P STARS Opportunities Portfolio - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective To provide long-term capital appreciation. Principal Strategies To achieve the investment objective of the S&P STARS Opportunities Portfolio, Bear Stearns Asset Management Inc., the investment adviser ("BSAM" or the "Adviser"), principally uses the Standard & Poor's Stock Appreciation Ranking System (or "STARS") to identify common stocks in the highest category (five-STARS) for purchase and in the lowest category (one-STAR) for short selling. The Adviser believes that this approach will provide opportunities to achieve performance that exceeds the total return of the Standard & Poor's MidCap 400 Stock Index. o The Adviser generally selects securities of companies that, at the time of purchase, have market capitalizations of under $7 billion or are components of either the Standard & Poor's MidCap 400 Index or the Standard & Poor's SmallCap 600 Index. o Generally, the S&P STARS Opportunities Portfolio will invest at least 75% of its total assets in U.S. common stocks and U.S. dollar-denominated American Depositary Receipts that are listed on U.S. exchanges ("ADRs") that, at the time of initial purchase, were ranked five-STARS or, at the time of short sale, were ranked one-STAR. o Under normal circumstances, the S&P STARS Opportunities Portfolio will invest at least 80% of its net assets in securities with any STARS ranking at the time of purchase. The S&P STARS Opportunities Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. o Generally, the S&P STARS Opportunities Portfolio may invest up to 25% of its total assets in U.S. common stocks and ADRs without regard to any particular STARS ranking at the time of purchase. The strategy of investing up to 25% of total assets without regard to STARS ranking allows the Adviser to consider a larger universe of stocks of small and medium capitalization companies. These may be companies that S&P does not follow and therefore have no STARS ranking or companies that have STARS rankings below five-STARS. The strategy also permits the Adviser to sell short securities of companies that are ranked higher than one-STAR or that have no STARS ranking. See "Principal Investment Strategies - Additional Information." In selecting investments, the Adviser analyzes the stocks ranked by S&P analysts according to the STARS ranking system and selects those it believes have the best potential for capital appreciation. The Adviser focuses on companies that show the potential to achieve growth at a reasonable price. The Adviser considers various factors including market segment, industry, earnings history, price-to-earnings ratio and management. If S&P downgrades a security held by the S&P STARS Opportunities Portfolio to four-STARS from five-STARS, the Portfolio may purchase additional shares of that security without limitation. Similarly, if S&P upgrades a security held by the S&P STARS Opportunities Portfolio to two-STARS from one-STAR, the S&P STARS Opportunities Portfolio may sell short additional shares of that security without limitation. If, however, S&P downgrades a security held by the S&P STARS Opportunities Portfolio from five- or four-STARS to three-STARS or lower, that security will be subject to the 25% limitation on acquiring securities without regard to STARS ranking. Similarly, if S&P upgrades a security sold short by the S&P STARS Opportunities Portfolio from one- or two-STARS to three-STARS or higher, that security will also be subject to the 25% limitation on investments made without regard to STARS ranking. S&P's research staff ranks the stocks of approximately 1,000 issuers in accordance with their expected short- to intermediate-term (up to 12 months) appreciation potential as follows: S&P STARS Opportunities Portfolio 5 * * * * * Buy Expected to be among the best performers over the next 6 to 12 months. * * * * Accumulate Expected to be an above-average performer. * * * Hold Expected to be an average performer. * * Avoid Expected to be a below-average performer. * Sell Expected to be a well-below-average performer. The S&P STARS Opportunities Portfolio may "sell short" securities that at the time of initial sale were ranked one-STAR. In a short sale, the Portfolio sells a security it does not own but has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will purchase the security at a lower price to return to the lender and realize a gain for the S&P STARS Opportunities Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the S&P STARS Opportunities Portfolio. The S&P STARS Opportunities Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the S&P STARS Opportunities Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o A small- or middle-capitalization company's stock may decline in value because the company lacks the management experience, operating experience, financial resources and product diversification that permit larger companies to adapt to changing market conditions. o Small- or middle-capitalization company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. o Short sales may involve substantial risk and may involve leverage, which may increase potential losses. o Rankings by S&P's research group may not accurately assess the investment prospects of a particular security. The S&P STARS Opportunities Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the S&P STARS Opportunities Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the S&P STARS Opportunities Portfolio The S&P STARS Opportunities Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add an equity component to their portfolio. The S&P STARS Opportunities Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. S&P STARS Portfolio 6 S&P STARS Portfolio 6 Performance No bar chart or performance table is available because the S&P STARS Opportunities Portfolio has not been in operation for a full calendar year. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the S&P STARS Opportunities Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ------------------------------------------------------------------------------------------ ---------------- Maximum sales charge (load) imposed on purchases None (as a percentage of offering price) ------------------------------------------------------------------------------------------ ---------------- Maximum deferred sales charge (load) None (as a percentage of the lower of purchase or sale price) ------------------------------------------------------------------------------------------ ---------------- Sales charge imposed on reinvested dividends None ------------------------------------------------------------------------------------------ ---------------- Redemption fees None ** ------------------------------------------------------------------------------------------ ---------------- Exchange fees None ------------------------------------------------------------------------------------------ ---------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------------ ---------------- Management Fees 0.75% ------------------------------------------------------------------------------------------ ---------------- Distribution (12b-1) Fees 0.00% ------------------------------------------------------------------------------------------ ---------------- Other Expenses1 0.49% ------------------------------------------------------------------------------------------ ---------------- Total Annual Portfolio Operating Expenses 1.24% ------------------------------------------------------------------------------------------ ---------------- Fee Waiver and Expense Reimbursement (0.24)% ------------------------------------------------------------------------------------------ ---------------- Net Expenses2 1.00% ------------------------------------------------------------------------------------------ ----------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 Other Expenses are based on amounts estimated for the current fiscal year. 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the S&P STARS Opportunities Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the S&P STARS Opportunities Portfolio over various time periods. It is intended to help you compare the cost of investing in the S&P STARS Opportunities Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the S&P STARS Opportunities Portfolio; o your investment returns 5% each year; o the S&P STARS Opportunities Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years -------------- ---------------- --------------------- Class Y $102 $370 -------------- ---------------- --------------------- S&P STARS Opportunities Portfolio 7 * This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2003, and thereafter will equal 1.24%. S&P STARS Portfolio 8 The Insiders Select Fund RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, The Insiders Select Fund invests its assets in the equity securities of U.S. issuers that it believes provide opportunities for capital appreciation. Equity securities consist of common stocks, convertible securities and preferred stocks. In selecting investments for The Insiders Select Fund, the Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. From the universe of equity securities that pass the value screen, the Adviser further considers ownership of and trading in a company's securities by corporate insiders, officers, directors and significant stockholders, as well as a company's corporate finance activities, including stock repurchase programs, dividend policies and new securities issuance. In its analysis of these insider signals, the Adviser relies on publicly-available data. It is possible that value screening criteria may outweigh insider signals in the Adviser's selection of portfolio securities. Principal Risks You may lose money by investing in The Insiders Select Fund. The Insiders Select Fund is also subject to the following principal risks, more fully described in "Risk Factors" in this The Insiders Select Fund 8 Prospectus. Some or all of these risks may adversely affect The Insiders Select Fund's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o To the extent that The Insider Select Fund invests in middle-capitalization stocks, these stocks may decline in value because the company lacks management experience, operating experience, financial resources and product diversification that permit larger companies to adapt to changing market conditions. Middle capitalization company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. o Corporate insiders may trade their company's securities for personal reasons which may not necessarily reflect anticipated price movements. The Insiders Select Fund is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make The Insiders Select Fund more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in The Insiders Select Fund The Insiders Select Fund may be appropriate for investors who: o are investing for the long-term; o believe that insider buying patterns may be a good indicator of the future direction of a company's stock price. The Insiders Select Fund may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in The Insiders Select Fund by showing changes in the performance of its Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The Insiders Select Fund Annual Return (%)1 1996 21.89 1997 30.18 1998 9.82 1999 9.64 2000 17.74 2001 (_____) Past performance is not necessarily an indication of future results. 1The Insiders Select Fund's year-to-date return as of June 30, 2002, was ______%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended ________________) and the lowest quarterly return was (_____)% (for the quarter ended _____________). The Insiders Select Fund 9 The table shows how the average annual total return for Class Y shares of The Insiders Select Fund for one year and since the date of inception compared to the S&P MidCap 400 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid-size companies.
Average Annual Total Returns 1 Year 5 year Since Inception (for the periods ended December 31, 2001) June 20, 1995 -------------------------------------------------------------------------------------------------------- The Insiders Select Fund--Class Y -------------------------------------------------------------------------------------------------------- Return before taxes -------------------------------------------------------------------------------------------------------- Return after taxes on distriubtions -------------------------------------------------------------------------------------------------------- Return after taxes on distributions and on sale of Portfolio Shares -------------------------------------------------------------------------------------------------------- S&P MidCap 400 Index (reflects no deduction for fees expenses or taxes) -------------------------------------------------------------------------------------------------------- S&P MidCap 400 Index --------------------------------------------------------------------------------------------------------
Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of The Insiders Select Fund.
Shareholder Fees (paid directly from your investment)* Class Y -------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None -------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) None (as a percentage of the lower of purchase or sale price) -------------------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None -------------------------------------------------------------------------------------------- Redemption fees None** -------------------------------------------------------------------------------------------- Exchange fees None -------------------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) -------------------------------------------------------------------------------------------- Management Fees1 1.00% -------------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% -------------------------------------------------------------------------------------------- Other Expenses 1.29% -------------------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.29% -------------------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.14)% -------------------------------------------------------------------------------------------- Net Expenses2 1.15% --------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The management fee may increase or decrease by up to 0.50% based on The Insiders Select Fund's performance. 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that The Insiders Select Fund's net expenses do not exceed the amount indicated above. The Insiders Select Fund 10 Example This Example illustrates the cost of investing in The Insiders Select Fund over various time periods. It is intended to help you compare the cost of investing in The Insiders Select Fund with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in The Insiders Select Fund; o your investment returns 5% each year; o The Insiders Select Fund's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years -------------------------------------------------------------------------------------------- Class Y $117 $606 $1,121 $2,537
* This Example assumes that net portfolio operating expenses will equal 1.15% until July 31, 2003 and thereafter will equal 2.29%. The Insiders Select Fund 11 Intrinsic Portfolio Intrinsic Value Portfolio (formerly known as Large Cap Value Portfolio) RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Intrinsic Value Portfolio ("Intrinsic Portfolio") invests at least 65% of its total assets in equity securities of companies with market capitalizations (at time of purchase) of more than $10 billion ("large companies") that the Adviser identifies as "value" securities. Within this 65% category, the Intrinsic Portfolio may invest up to 10% of its total assets in equity securities of foreign issuers in the form of ADRs. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Intrinsic Portfolio may invest must be rated at least "investment grade" by a nationally recognized statistical rating organization ("NRSRO") at the time of purchase. The Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash-flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. The weighted average market capitalization of issuers in whose securities the Intrinsic Portfolio invests will vary depending on market conditions. As of June 30, 2002, the weighted average market capitalization of issuers of securities held by the Intrinsic Portfolio was greater than $__ billion. Principal Risks You may lose money by investing in the Intrinsic Portfolio. The Intrinsic Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Intrinsic Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. Intrinsic Portfolio 12 Who May Want to Invest in the Intrinsic Portfolio The Intrinsic Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add a large-cap equity component to their portfolio. The Intrinsic Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the Intrinsic Portfolio by showing changes in the performance of its Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. Intrinsic Value Portfolio Annual Total Return (%)1 1996 14.87 1997 31.64 1998 16.24 1999 0.79 2000 21.47 2001 ( ) Past performance is not necessarily an indication of future results. 1The Intrinsic Portfolio's year-to-date return as of June 30, 2002 was ______%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended ____________________) and the lowest quarterly return was (_____)% (for the quarter ended ____________). The table shows how the average annual total return for Class Y shares of the Intrinsic Portfolio for one year, five year and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid-to large-size companies.
Average Annual Total Returns 1 Year Since Inception (for the periods ended December 31, 2001) September 11, 1995 ---------------------------------------------------------------------------------------------------------- Intrinsic Portfolio--Class Y ---------------------------------------------------------------------------------------------------------- Return before taxes ---------------------------------------------------------------------------------------------------------- Return after taxes on distriubtions ---------------------------------------------------------------------------------------------------------- Return after taxes on distributions and on sale of Portfolio Sahres ---------------------------------------------------------------------------------------------------------- S&P 500 Index (reflects no deduction for fees expenses or taxes) ---------------------------------------------------------------------------------------------------------- S&P 500 Index ----------------------------------------------------------------------------------------------------------
Intrinsic Portfolio 13 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Intrinsic Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ---------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases None (as a percentage of offering price) Maximum deferred sales charge (load) None (as a percentage of the lower of purchase or sale price) Sales charge imposed on reinvested dividends None Redemption fees None** Exchange fees None Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ---------------------------------------------------------------------------------- Management Fees 0.75% Distribution (12b-1) Fees 0.00% Other Expenses 1.50% Total Annual Portfolio Operating Expenses 2.25% Fee Waiver and Expense Reimbursement (1.25)% Net Expenses 1.00%1
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003 so that the Intrinsic Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Intrinsic Portfolio over various time periods. It is intended to help you compare the cost of investing in the Intrinsic Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the Intrinsic Portfolio; o your investment returns 5% each year; o the Intrinsic Portfolio's operating expenses remain the same* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period - 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------- Class Y $102 $635 $1,195 $2,723 ---------------------------------------------------------------------------- * This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2003, and thereafter will equal _____%. Intrinsic Portfolio 14 Small Cap Value Portfolio RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal circumstances, the Small Cap Value Portfolio ("Small Cap Portfolio") will invest at least 80% of its net assets in equity securities of "small companies" that the Adviser identifies as "value" securities. Small companies include companies that have market capitalizations, measured at the time of purchase, that are no more than the upper market capitalization range of the companies that comprise the Russell 2000 Index, or $2 billion, whichever is greater. As of March 31, 2002, the upper market capitalization range of the companies that comprise the Russell 2000 Index was $____ billion, which may increase or decrease over time. The Small Cap Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. Within this 80% category, the Small Cap Portfolio may invest up to 10% of its net assets in equity securities of foreign issuers in the form of ADRs. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Small Cap Portfolio may invest must be rated at least "investment grade" by an NRSRO at the time of purchase. The Adviser uses a "value" approach to investing. The Adviser looks for equity securities that have relatively low price-to-book ratios, low price-to-earnings ratios or lower-than-average price-to-cash-flow ratios and dividend payments. The Adviser may consider factors such as the company's earnings growth, dividend payout ratios, return on equity, stock price volatility relative to the market, new management and upcoming corporate restructuring, the general business cycle, the company's position within a specific industry and the company's responsiveness to changing conditions. The weighted average market capitalization of issuers in whose securities the Small Cap Portfolio invests will vary depending on market conditions. As of June 30, 2002, the weighted average market capitalization of issuers whose securities were held by the Small Cap Portfolio was approximately $____ billion. Principal Risks You may lose money by investing in the Small Cap Portfolio. The Small Cap Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Small Cap Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result . o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o A small company's stock may decline in value because the company lacks management experience, operating experience, financial resources and product diversification that permit larger companies to adapt to changing market conditions. Small Cap Portfolio 15 o Small company stocks may be subject to wider price swings or be less liquid because they trade less frequently and in smaller volume than large company stocks. o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. Who May Want to Invest in the Small Cap Portfolio The Small Cap Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add a small-cap equity component to their portfolio. The Small Cap Portfolio may not be appropriate for investors who: o want to invest only in larger, more established companies; o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with smaller-company stocks or lose money on their investment. Small Cap Portfolio 16 Performance The bar chart and table below illustrate the risks of investing in the Small Cap Portfolio by showing changes in the performance of the Small Cap Portfolio's Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. Small Cap Value Portfolio Annual Total Return (%)1 ----------------------- --------------- 1996 15.89 ----------------------- --------------- 1997 33.28 ----------------------- --------------- 1998 -0.93 ----------------------- --------------- 1999 14.67 ----------------------- --------------- 2000 -0.05 ----------------------- --------------- 2001 ( ) ----------------------- --------------- Past performance is not necessarily an indication of future results. 1The Small Cap Portfolio's year-to-date return as of June 30, 2002 was ______%. During the period shown in the bar chart, the highest quarterly return was ______% (for the quarter ended _________________________) and the lowest quarterly return was (______)% (for the quarter ended ________). The table shows how the average annual total return for Class Y shares of the Small Cap Portfolio for one year, five yars and since the date of inception compared to the Russell 2000 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of small-size companies.
Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December 31, 2001) June 22, 1995 ------------------------------------------------------------------------------------------- Small Cap Portfolio--Class Y ------------------------------------------------------------------------------------------- Return before taxes ------------------------------------------------------------------------------------------- Return after taxes on distriubtions ------------------------------------------------------------------------------------------- Return after taxes on distributions and on sale of Portfolio Shares ------------------------------------------------------------------------------------------- Russell 2000 Index (reflects no deduction for fees expenses or taxes) ------------------------------------------------------------------------------------------- Russell 2000 Index -------------------------------------------------------------------------------------------
Small Cap Portfolio 17 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Small Cap Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None ------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None ------------------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None ------------------------------------------------------------------------------------------- Redemption fees None** ------------------------------------------------------------------------------------------- Exchange fees None ------------------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------------- Management Fees 0.75% ------------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% ------------------------------------------------------------------------------------------- Other Expenses 0.76% ------------------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.51% ------------------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.51)% ------------------------------------------------------------------------------------------- Net Expenses1 1.00% -------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Small Cap Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Small Cap Portfolio over various time periods. It is intended to help you compare the cost of investing in the Small Cap Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the Small Cap Portfolio; o your investment returns 5% each year; o the Small Cap Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------- Class Y $102 $427 $775 $1,568 * This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2003, and thereafter will equal 1.51%. Small Cap Portfolio 18 Alpha Growth Portfolio (fomerly, Focus List Portfolio) RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal circumstances, the Alpha Growth Portfolio will invest substantially all of its assets in equity securities selected by one or more growth models. Generally, these growth models identify equity securities having the following characteristics: o High projected earnings for the next three to five years; o Positive earnings momentum; o Positive price momentum; and o Reasonable valuation metrics. At least once a year, the Adviser will reapply the model, which usually results in changes in Portfolio holdings. The model may change from time to time, depending on the Adviser's ongoing research efforts. When the Adviser re-allocates the Portfolio's holdings, each equity security identified by a particular growth model will be allocated an equal amount of the Portfolio's assets. Generally, the Adviser will purchase securities on a pro rata basis when it receives new assets resulting from the purchase of shares of the Portfolio. Generally, the Adviser will sell securities on a pro rata basis when required to raise cash when shares of the Portfolio are redeemed. The Portfolio may invest in equity securities with any market capitalization, except as determined by particular models established by the Adviser. If the Adviser determines that earnings or other factual criteria that form the basis for identifying an equity security in a particular model are false or incorrect, it may replace that security with another investment that does meet the criteria. Principal Risks There can be no assurance of the success of any investment decision or growth model. You may lose money by investing in the Alpha Growth Portfolio. The Alpha Growth Portfolio is also subject to the following principal risks. Some or all of these risk factors may affect the Alpha Growth Portfolio's net asset value, yield and/or total return: o The model may select equity securities that decrease in value. o The Portfolio may continue to hold equity securities that the model initially selected, even if circumstances subsequently change so that the equity security would no longer qualify under that model. o Re-allocation of Portfolio assets may result in the sale of equity securities that have recently performed well, and may increase investments with relatively lower historical returns. o The Adviser's selection of criteria for particular models may be out of favor with the market, or the market may change after the Adviser has applied particular models. Alpha Growth Portfolio 19 The Alpha Growth Portfolio is a non-diversified mutual fund, which means that it may invest a larger portion of its assets in a single issuer than if it were diversified. This could make the Alpha Growth Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the Alpha Growth Portfolio The Alpha Growth Portfolio may be appropriate for investors who: o are investing for the long-term; o are seeking an equity component for their portfolio. The Alpha Growth Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with equity securities selected by quantitative growth models rather than by fundamental analysis, or lose money on their investment; o are seeking preservation of capital as an important investment objective. Performance The bar chart shows returns for Class A shares of the Alpha Growth Portfolio. The figures shown in the table assume reinvestment of dividends and distributions. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. [CHART] Past performance is not necessarily an indication of future results. 1 The Portfolio's year-to-date return as of June 30, 2002 was ______. ==== ==== During the period shown in the bar chart, the highest quarterly return was _______% (for the quarter ended _____________, 19) and the lowest quarterly return was (_______)% (for the quarter ended _________, 19__). Prior to August 1, 2002, the Alpha Growth Portfolio was known as the Focus List Portfolio and employed a different principal investment strategy. Accordingly, historical performance prior to this time does not indicate how the Alpha Growth Portfolio will perform. You should not decide to invest in the Alpha Growth Portfolio based on performance prior to August 1, 2002. The table below shows how average annual total returns for Class A, B and C shares of the Alpha Growth Portfolio for one year and since the date of inception compared to the S&P 500 Index, a broad-based unmanaged index that represents the general performance of domestically traded common stocks of mid- to large-size companies. After-tax returns are calculated using the historical highest individual federal marginal income tax rates (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges . Alpha Growth Portfolio 20
- ------------------------------------------------------------- -------------------- -------------------- Average Annual Total Returns (for the periods ended Since Inception* December 31, 2001 One Year - ------------------------------------------------------------- -------------------- -------------------- Class A - ------------------------------------------------------------- -------------------- -------------------- Return before taxes - ------------------------------------------------------------- -------------------- -------------------- Return after taxes on distributions - ------------------------------------------------------------- -------------------- -------------------- Return after taxes on distributions and sale of Portfolio shares - ------------------------------------------------------------- -------------------- -------------------- S&P 500 Index (reflects no deduction for fees, expenses or taxes) - ------------------------------------------------------------- -------------------- -------------------- Class B - ------------------------------------------------------------- -------------------- -------------------- Return before taxes - ------------------------------------------------------------- -------------------- -------------------- Class C - ------------------------------------------------------------- -------------------- -------------------- Return before taxes - ------------------------------------------------------------- -------------------- -------------------- S&P 500 Stock Index (reflects no deduction for fees, expenses or taxes) - ------------------------------------------------------------- -------------------- -------------------- * This table does not reflect any performance information for the initial period of December 29, 1997 through December 31, 1997. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Alpha Growth Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ---------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None ---------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None ---------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None ---------------------------------------------------------------------------------- Redemption fees None** ---------------------------------------------------------------------------------- Exchange fees None ---------------------------------------------------------------------------------- Annual Portfolio Operating Expenses enses that are deducted from Portfolio assets) ---------------------------------------------------------------------------------- Management Fees 0.65% ---------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% ---------------------------------------------------------------------------------- Other Expenses 1.22% ---------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.87% ---------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.97)% ---------------------------------------------------------------------------------- Net Expenses1 0.90% ----------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The expenses shown are based on estimated expenses of Class Y shares of the Alpha Growth Portfolio for the fiscal year ending March 31, 2003. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Focus List Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Alpha Growth Portfolio over various time periods. It is intended to help you compare the cost of investing in the Alpha Growth Portfolio with the cost of investing in other mutual funds. The example assumes that: o you invest $10,000 in the Alpha Growth Portfolio; o your investment returns 5% each year; o the Alpha Growth Portfolio's operating expenses remain the same.* Alpha Growth Portfolio 21 Although your actual costs may be higher or lower, based on these assumptions your costs would be:
- ----------------------- --------------------- -------------------- --------------------- -------------------- 1 Year 3 years 5 Years 10 Years - ----------------------- --------------------- -------------------- --------------------- -------------------- Class A - ----------------------- --------------------- -------------------- --------------------- -------------------- Class B - ----------------------- --------------------- -------------------- --------------------- -------------------- Class C - ----------------------- --------------------- -------------------- --------------------- -------------------- If you sell your shares at the end of each period -- Although your actual costs may be higher or lower, based on these assumptions your costs would be: - ----------------------- --------------------- -------------------- --------------------- -------------------- 1 Year 3 years 5 Years 10 Years - ----------------------- --------------------- -------------------- --------------------- -------------------- Class A - ----------------------- --------------------- -------------------- --------------------- -------------------- Class B - ----------------------- --------------------- -------------------- --------------------- -------------------- Class C - ----------------------- --------------------- -------------------- --------------------- --------------------
* This Example assumes that net portfolio operating expenses will equal 1.40% for Class A and 1.90% for both Class B and C shares until July 31, 2003, and thereafter will equal 2.37% for Class A and 2.87% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." Alpha Growth Portfolio 22 International Equity Portfolio RISK/RETURN SUMMARY Investment Objective Long-term capital appreciation. Principal Strategies Under normal market circumstances, the International Equity Portfolio will invest at least 80% of its net assets in equity securities of foreign companies. Foreign securities include equity securities of companies that are organized outside the United States or whose securities are principally traded outside the United States, including common stock, preferred stock, depositary receipts for stock, and other securities having the characteristics of stock (such as an equity or ownership interest in a company). The International Equity Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. The International Equity Portfolio's investments may be denominated in U.S. dollars, foreign currencies or multinational currency units. Under normal market conditions, the International Equity Portfolio invests in the securities of companies located in at least three countries outside of the United States. The International Equity Portfolio expects to invest a substantial portion of its assets in the securities of issuers located in Australia, Canada, Japan, New Zealand and the developed countries of Western Europe. In selecting investments for the International Equity Portfolio, Marvin & Palmer Associates, Inc., the International Equity Portfolio's investment sub-adviser (the "Sub-Adviser"), evaluates whether a particular country's securities markets have higher-than-average potential for capital appreciation. The Sub-Adviser will then seek out companies with strong fundamental characteristics, including solid management, sound balance sheets and the potential for positive earnings growth. The International Equity Portfolio also may invest in the securities of issuers located in countries that are considered to be emerging or developing ("emerging countries") by the World Bank, the International Finance Corporation, or the United Nations and its authorities. These countries are located primarily in Africa, Asia (ex-Japan), the Caribbean islands, Latin America, the Middle East and certain parts of Europe (Cyprus, the Czech Republic, Estonia, Greece, Hungary, Poland, Russia, Slovakia and Turkey). A company is considered to be an emerging country issuer if any of the following apply: o Its securities are principally traded in an emerging country. o It derives at least 50% of its total revenue from (a) providing goods or services in emerging countries or (b) sales made in emerging countries. o It maintains 50% or more of its assets in one or more emerging countries. o It is organized under the laws of, or has a principal office in, an emerging country. Foreign Currency Hedging -- Use of Forward Foreign Exchange Contracts. The International Equity Portfolio may purchase or sell forward foreign currency exchange contracts ("forward contracts") for hedging purposes. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date. When the Sub-Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, the International Equity Portfolio may enter into a forward sale contract by selling an amount of that foreign currency up to 95% of the value of the Portfolio's securities denominated in such foreign currency. The International Equity Portfolio may enter into a forward contract for any of the following reasons: International Equity Portfolio 23 o To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). o To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). o To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against another foreign currency (cross hedge). Principal Risks You may lose money by investing in the International Equity Portfolio. The International Equity Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the International Equity Portfolio's net asset value, yield and/or total return: o The market value of portfolio securities may decline. o A particular strategy may not be executed effectively or otherwise generate the intended result. o A security's value will fluctuate in response to events affecting an issuer's profitability or viability. o Foreign securities may be more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, fluctuations in currency exchange rates, and the risks that a foreign government may confiscate assets, restrict the ability to exchange currency or restrict the delivery of securities. o The value of the International Equity Portfolio's investment in forward contracts may suffer from unanticipated changes in currency prices. o Foreign securities issued in emerging countries generally are more volatile than securities issued in established markets because the securities markets in these countries have comparatively less trading volume and fewer participants. o Inefficient settlement procedures in emerging countries may cause the International Equity Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. o Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. International Equity Portfolio 24 Who May Want to Invest in the International Equity Portfolio The International Equity Portfolio may be appropriate for investors who: o are investing for the long-term; o want to add an international equity component to their portfolio. The International Equity Portfolio may not be appropriate for investors who: o are not willing to accept the risks associated with foreign securities markets or currency fluctuation; o are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with foreign stocks or lose money on their investment. Performance Class Y shares of the International Equity Portfolio commenced operations in July 2001. The bar chart and table below illustrate the risks of investing in the International Equity Portfolio by showing the performance of its Class A shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The returns for Class A shares would have annual returns that are substantially similar to those of Class Y shares because both classes are invested in the same portfolio of securities. The returns for Class Y shares offered by this Prospectus will differ from the return for the Class A shares shown on the bar chart and table, depending on the expenses of the Class Y shares. The bar chart does not reflect any sales charges that are imposed on the purchase and sale of Class A shares. If sales charges were reflected, returns would be lower than those shown. International Equity Portfolio Annual Total Return (%)1 ----------------------- --------------- 1998 25.86 ----------------------- --------------- 1999 81.89 ----------------------- --------------- 2000 -21.27 ----------------------- --------------- 2001 ( ) ----------------------- --------------- Past performance is not necessarily an indication of future results. 1The International Equity Portfolio's year-to-date return as of June 30, 2002 was (________)%. During the period shown in the bar chart, the highest quarterly return was ______% (for the quarter ended _________________) and the lowest quarterly return was (______)% (for the quarter ended ____________). The table shows how the average annual total returns for Class A shares of the International Equity Portfolio for one year and since the date of inception compared to the Morgan Stanley Capital International Europe, Australasia, Far East Index (the "MSCI EAFE Index"), a broad-based unmanaged index that represents the general performance of common stocks of issuers located in developed countries in Europe and the Pacific Basin, weighted by each component country's market capitalization. The figures shown in the table do not reflect sales charges applicable to Class A shares.
Average Annual Total Returns 1 Year Since Inception* (for the periods ended December 31, 2001) ------------------------------------------------------------------------------------------------- International Equity Portfolio--Class A ------------------------------------------------------------------------------------------------ Return before taxes ------------------------------------------------------------------------------------------------ Return after taxes on distriubtions ------------------------------------------------------------------------------------------------ Return after taxes on distributions and on sale of Portfolio Shares ------------------------------------------------------------------------------------------------ International Equity Portfolio 25 Average Annual Total Returns 1 Year Since Inception* (for the periods ended December 31, 2001) ------------------------------------------------------------------------------------------------- MSCI EAFE Index (reflects no deduction for fees expenses or taxes) ------------------------------------------------------------------------------------------------- MSCI EAFE Index -------------------------------------------------------------------------------------------------
* This table does not reflect any performance information for the initial period of December 29, 1997 through December 31, 1997. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the International Equity Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y - --------------------------------------------------------------------------------- ------------ Maximum sales charge (load) imposed on purchases (as a percentage of None offering price) - --------------------------------------------------------------------------------- ------------ Maximum deferred sales charge (load) (as a percentage of the None lower of purchase or sale price) - --------------------------------------------------------------------------------- ------------ Sales charge imposed on reinvested dividends None - --------------------------------------------------------------------------------- ------------ Redemption fees** 1.00% (as a percentage of total redemption proceeds) - --------------------------------------------------------------------------------- ------------ Exchange fees None - --------------------------------------------------------------------------------- ------------ Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) - --------------------------------------------------------------------------------- ------------ Management Fees 1.00% - --------------------------------------------------------------------------------- ------------ Distribution (12b-1) Fees 0.00% - --------------------------------------------------------------------------------- ------------ Other Expenses 0.78% - --------------------------------------------------------------------------------- ------------ Total Annual Portfolio Operating Expenses 1.78% - --------------------------------------------------------------------------------- ------------ Fee Waiver and Expense Reimbursement (0.53)% - --------------------------------------------------------------------------------- ------------ Net Expenses1 1.25% - --------------------------------------------------------------------------------- ------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** The redemption fee will apply to shares you purchase on or after June 1, 2001 and hold for 60 days or less. See the section entitled "Additional Information About Redemptions" for more information on when this fee will apply. Also, there is a transaction fee of $7.50 for wiring redemption proceeds. 1 The expenses shown are based on estimated expenses of the International Equity Portfolio for the fiscal year ending March 31, 2003. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the International Equity Portfolio's net expenses do not exceed the amount indicated above. International Equity Portfolio 26 Example This Example illustrates the cost of investing in the International Equity Portfolio over various time periods. It is intended to help you compare the cost of investing in the International Equity Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the International Equity Portfolio; o your investment returns 5% each year; o the International Equity Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------- Class Y $127 $509 $915 $2,051 ---------------------------------------------------------------------------- * This Example assumes that net portfolio operating expenses will equal 1.25% until July 31, 2003, and thereafter will equal 1.78%. International Equity Portfolio 27 INVESTMENTS Principal Investment Strategies -- Additional Information S&P STARS Portfolio S&P introduced STARS in January 1987. Since 1993, on average, each STARS category has consisted of approximately the number of stocks shown below. Rankings may change frequently as S&P analysts evaluate developments affecting individual securities and the markets. STARS Category Number of Stocks ------------------------------------------------------------------ Five-stars 93 ------------------------------------------------------------------ Four-stars 353 ------------------------------------------------------------------ Three-stars 528 ------------------------------------------------------------------ Two-stars 90 ------------------------------------------------------------------ One-star 15 ------------------------------------------------------------------ To evaluate the performance of stocks in the various categories, and thus the performance of its analysts, STARS initially gives equal weight by dollar amount to each stock, does not rebalance the portfolio based on changes in values or rankings and does not reflect dividends or transaction costs. While the performance of S&P STARS categories cannot be used to predict actual results, S&P believes it is useful in evaluating its analysts. The pool of S&P analysts changes and their past performance does not necessarily predict future results either of the S&P STARS-ranked stocks or of the S&P STARS Portfolio. From January 1, 1987 through April 30, 2002: o The S&P 500 Index (measured on a total return basis, without dividend reinvestment) increased by ______%. During this period, the average dividend yield of securities included in the S&P 500 Index was ____% and the average dividend yield of five-STARS stocks was ____%. o The ranked stocks experienced the following changes in value: STARS Category Percentage change in value ------------------------------------------------------------------- Five-stars 1157.19 ----------------------------------------------------------------- Four-stars 543.79 ----------------------------------------------------------------- Three-stars 340.13 ----------------------------------------------------------------- Two-stars 208.24 ----------------------------------------------------------------- One-star 16.88 ----------------------------------------------------------------- The Adviser believes that this information means only that, historically, five-starS stocks have significantly outperformed lower-ranked stocks and that one-star stocks have significantly underperformed the higher-ranked stocks. You should not use this information to predict whether past results will occur in the future or the actual performance of a particular category. STARS' performance has been more volatile than that of conventional indices such as the Dow Jones Industrial Average and the S&P 500 Index. In addition, the performance of five-starS and one-star stocks has not borne a consistent relationship to each other or to the performance of the S&P 500 Index, as shown below. The S&P STARS Portfolio is managed actively. Its performance will depend primarily on the Adviser's investment decisions. The S&P STARS Portfolio will incur transaction and other costs, including management and distribution fees, that are not reflected in the information shown below. Relative Performance Rankings (1 = highest performance)
1995 1996 1997 1998 1999 2000 2001 --------------------------------------------------------------------------------------------------------------------------- 1 S&P 500 Index Five-stars Five-stars Five-stars Five-stars Five-Stars One-STAR stocks stocks stocks stocks stocks stocks --------------------------------------------------------------------------------------------------------------------------- 2 Five-starS stocks S&P 500 Index S&P 500 Index S&P 500 Index S&P 500 Index S&P 500 Five-STARS Index stocks --------------------------------------------------------------------------------------------------------------------------- 3 One-star stocks One-star stocks One-star stocks One-star stocks One-star One-STAR S&P 500 Index stocks stocks ---------------------------------------------------------------------------------------------------------------------------
The S&P STARS Portfolio need not sell a security whose STARS ranking has been downgraded. Also, the S&P STARS Portfolio need not terminate a "short" position if a one star security's STARS ranking has been upgraded. In addition, if S&P downgrades a security held by the S&P STARS Portfolio to four-starS from five-starS, the Portfolio may purchase additional shares of that security without limitation, as if that security were ranked five- 28 stars. Similarly, if S&P upgrades a shorted security from one-star to two-stars, the Portfolio may sell short additional shares of that security without limitation, as if that security were ranked one-star. For purposes of calculating the 85% of total assets that the S&P STARS Portfolio will invest pursuant to its principal investment strategy, "total assets" will not include the Portfolio's investment in money market instruments to maintain liquidity. "Standard & Poor's(R)", "S&P(R) and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co. Inc. The S&P STARS Portfolio is not sponsored, managed, advised, sold or promoted by S&P. S&P STARS Opportunities Portfolio The S&P STARS Opportunities Portfolio need not sell a security whose S&P ranking has been downgraded or whose market capitalization increases beyond the initial market capitalization criteria considered when first investing in a security. The S&P STARS Opportunities Portfolio need not terminate a "short" position if a one-STAR security's STARS ranking has been upgraded. If S&P downgrades a security held by the S&P STARS Opportunities Portfolio to four-STARS from five-STARS, the S&P STARS Opportunities Portfolio may purchase additional shares of that security without limitation, as if the security were ranked five-STARS. Similarly, if S&P upgrades a shorted security from one-STAR to two-STARS, the S&P STARS Opportunities Portfolio may sell short additional shares of that security without limitation, as if the security were ranked one-STAR. For purposes of calculating the 75% of total assets that the S&P STARS Opportunities Portfolio will invest pursuant to its principal investment strategy, "total assets" will not include the Portfolio's investment in money market instruments to maintain liquidity. "Standard & Poor's(R)", "S&P(R) and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co. Inc. The S&P STARS Opportunities Portfolio is not sponsored, managed, advised, sold or promoted by S&P. The Insiders Select Fund The Adviser believes that collecting, classifying and analyzing legally required reports of corporate insider transactions provides valuable investment management information, because these insiders are in the best position to understand their companies' near-term prospects. Corporate insiders trade their company's stock for various reasons. Some transactions are unrelated to the future of the company, such as the sale of stock to buy a home or finance a child's college education, tax planning or token purchases to signal confidence in the company. Other transactions, however, are related directly to the insider's beliefs about the near-term price expectations for the company's stock. An insider who exercises long-term options early for small profits may believe that the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells may indicate broad agreement within a firm as to the direction of the stock's price. Financial analysts employ a number of research tools to learn more about the companies they follow, including visits to the company and in-depth discussions with management. Successful analysts learn to interpret management's words and actions. Management may use discussions with certain analysts to signal its views to the market. The Adviser also believes that revisions in analysts' earnings and ratings predictions may indicate a stock's future returns. A company must routinely decide whether to maintain or change its dividend policy, buy its own stock in the open market or issue new securities. From time to time the company may decide that its stock is undervalued, providing an opportunity to buy back the stock in the open market. By contrast, a company's decision to sell securities may indicate that the company believes that its stock has reached a near-term high, a possible sell signal. Alpha Growth Portfolio About model investing. The Adviser employs a quantitative approach to selecting Portfolio securities by developing and historically testing growth models. 29 This approach differs from conventional portfolio management in that generally, the Adviser strictly adheres to underlying models in selecting portfolio securities. In unusual circumstances, the Adviser may deviate from the model. Strong price momentum: At the time of purchase, all Portfolio securities selected will usually have extremely high 6 month price appreciation. Generally this means that they will be in the upper decile of all securities in the universe when ranked by 6 month price appreciation. High 3-5 year earnings forecasts: At the time of purchase, many of the Portfolio securities selected will have high 3-5 year forecasted EPS growth rates. Generally this means they will be in the upper quartile of all securities in the universe when ranked by forecasted EPS growth rates. Compelling valuation metrics: At the time of purchase, all of the Portfolio securities selected will have price-to-sales ratios under 10 or PE ratios below 100. The Adviser generally exercises voting privileges with respect to those equity securities held by the Portfolio. The Adviser generally votes proxies with management, absent compelling circumstances that require a different result in an individual case. The Alpha Growth Portfolio may experience a turnover rate exceeding 100% annually. Portfolios with high turnover rates may incur higher transaction costs and are more likely to distribute capital gains. Investments and Techniques This table summarizes some of the principal investments and techniques, described below, that each Portfolio may use to achieve its investment objectives. The absence of a checkmark in the table does not preclude a Portfolio from engaging in the indicated transaction as part of a secondary investment strategy. In addition, a Portfolio may engage in transactions not described below as part of a principal or secondary investment strategy. For a more complete description of these and other investments and techniques, see the SAI.
S&P STARS S&P STARS Insiders Intrinsic Small Cap Alpha Growth International Portfolio Opportunities Select Portfolio Portfolio Portfolio Equity Portfolio Fund Portfolio - ------------------------------------------------------------------------------------------------------------------------------ ADRs |X| |X| |X| |X| |X| - ------------------------------------------------------------------------------------------------------------------------------ Asset-backed securities - ------------------------------------------------------------------------------------------------------------------------------ Convertible |X| |X| |X| |X| securities - ------------------------------------------------------------------------------------------------------------------------------ Debt securities - ------------------------------------------------------------------------------------------------------------------------------ Equity |X| |X| |X| |X| |X| securities - ------------------------------------------------------------------------------------------------------------------------------ Money market funds |X| |X| |X| |X| |X| |X| |X| - ------------------------------------------------------------------------------------------------------------------------------ Mortgage- related securities - ------------------------------------------------------------------------------------------------------------------------------ Real estate investment trusts ("REITs") - ------------------------------------------------------------------------------------------------------------------------------ Short sales |X| |X| - ------------------------------------------------------------------------------------------------------------------------------
[Alpha Growth to be provided] o ADRs are receipts for the foreign company shares held by a United States depositary institution, entitling the holder to all dividends and capital gains of the underlying shares. ADRs are quoted in U.S. dollars and are traded on U.S. exchanges. o Asset-backed securities have a structure that is similar to mortgage-related securities (see below). The collateral for these securities includes home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. 30 o Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for common stock. Convertible securities are characterized by higher yields than common stocks, but lower yields than comparable non-convertible securities, less price fluctuation than the underlying common stock since they have fixed income characteristics, and potential for capital appreciation if the market price of the underlying common stock increases. o Debt securities, including bills, bonds, and notes, represent money borrowed that must be repaid, usually having a fixed amount, a specific maturity date or dates, and a specific rate of interest (or formula for determining the interest rate) or an original purchase discount. o Equity securities include foreign and domestic common or preferred stocks, rights and warrants. o Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. o REITs are pooled investment vehicles that invest primarily in either real estate or real estate-related loans. The value of a REIT may increase or decrease based on changes in the value of the underlying properties or mortgage loans. o Short sales. In a short sale, a Portfolio sells a security it does not own anticipating that the price will decline. To complete a short sale, the Portfolio must borrow the security to make delivery and must then replace the security borrowed by buying it at the prevailing market price, which may be higher or lower than the price at which the Portfolio sold the security short. Short sales involve leverage, which may involve substantial gains or losses. Other Investment Strategies o Temporary defensive measures. From time to time, during unfavorable market conditions, the Adviser may invest "defensively." This means a Portfolio may make temporary investments that are not consistent with its investment objective and principal strategies. Engaging in temporary defensive measures may reduce the benefit from any upswing in the market and may cause a Portfolio to fail to meet its investment objective. For temporary defensive purposes, each Portfolio may hold cash (U.S. dollars) and may invest all of its assets in high-quality fixed-income securities, repurchase agreements or U.S. or foreign money market instruments. For temporary defensive purposes, the International Equity Portfolio may hold foreign currencies or multinational currency units. o Uninvested Cash and Cash Collateral. Each Portfolio may invest uninvested cash and cash collateral from securities lending transactions ("Uninvested Cash") in shares of the Prime Money Market Portfolio to the extent that a Portfolio's aggregate investment of Uninvested Cash in the Prime Money Market Portfolio does not exceed 25% of the Portfolio's total assets. Each Portfolio's acquisition of shares of the Prime Money Market Portfolio is subject to the following conditions: (a) the Prime Money Market Portfolio continues to operate as a money market fund in compliance with Rule 2a-7 under the Investment Company Act of 1940; and (b) the Prime Money Market Portfolio will invest only in high quality, U.S. dollar-denominated short-term liquid instruments, including: U.S. government obligations; commercial paper, notes, certificates of deposit, banker's acceptances; repurchase agreements; floating and variable rate securities; time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. o Portfolio Turnover. The Adviser (Sub-Adviser) may trade actively to achieve a Portfolio's goals. Emerging country markets are especially volatile and may result in more frequent trading. High portfolio turnover rates will generally result in higher transaction costs and higher levels of taxable realized gains to the Portfolio's shareholders. The SAI describes each Portfolio's investment strategies in more detail. 31 RISK FACTORS As with all mutual funds, investing in the Portfolios involves certain risks. There is no guarantee that a Portfolio will meet its investment objective. You can lose money by investing in a Portfolio if you sell your shares after it declines in value below your original cost. There is never any assurance that a Portfolio will perform as it has in the past. The Portfolios may use various investment techniques, some of which involve greater amounts of risk than others. You will find a detailed discussion of these investment techniques in the SAI. To reduce risk, the Portfolios are subject to certain limitations and restrictions on their investments, which are also described in the SAI. Each Portfolio is subject to the following principal risks, except as noted. General Risks o Market risk is the risk that the market value of a security may go up or down, sometimes rapidly. These fluctuations may cause the security to be worth less than it was at the time it was acquired. Market risk may involve a single security or a particular sector. o Management risk is the risk that the portfolio management team's investment strategy may not produce the intended results. Management risk also involves the possibility that the portfolio management team fails to execute an investment strategy effectively. Risks of Equity Securities o Equity risk is the risk that a security's value will fluctuate in response to events affecting an issuer's profitability or viability. Unlike debt securities, which have a superior claim to a company's assets in case of liquidation, equity securities benefit from a company's earnings and cash flow only after the company meets its other obligations. For example, a company must pay interest on its bonds before it pays stock dividends to shareholders, and bondholders have a superior claim to the company's assets in the event of bankruptcy. Risks of Hedging or Leverage Transactions o Correlation risk. Futures and options contracts and other derivative instruments can be used in an effort to hedge against risk. Generally, an effective hedge generates an offset to gains or losses of other investments made by a Portfolio. Correlation risk is the risk that a hedge using futures or options contracts (or any derivative, for that matter) does not, in fact, respond to economic or market conditions in the manner the portfolio manager expected. In such a case, the hedge may not generate gains sufficient to offset losses and may actually generate losses due to the cost of the hedge or otherwise. o Leverage risk is the risk associated with those techniques in which a relatively small amount of money invested puts a much larger amount of money at risk through borrowing or futures trading, for example. Selling short securities or using derivatives for hedging may involve leverage. If a portfolio manager does not execute the strategy properly, or the market does not move as anticipated, losses may substantially exceed the amount of the original investment. A Portfolio's use of derivatives for asset substitution may also involve leverage. Risks of Foreign Securities o Foreign issuer risk. Compared to U.S. companies, less information is generally available to the public about foreign companies. Foreign brokers and issuers may not be subject to the uniform accounting, auditing, and financial reporting standards and practices prevalent in the U.S. In addition, foreign stock exchanges and other securities markets may be more volatile and subject to less governmental supervision than their counterparts in the U.S. Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. 32 o Currency risk (International Equity Portfolio only). Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency-denominated investments and may widen any losses. Political and economic risks, along with other factors, could adversely affect the value of the International Equity Portfolio's securities. o Emerging markets risk (International Equity Portfolio only). Emerging country economies often compare unfavorably with the United States economy in growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain emerging countries have experienced and continue to experience high rates of inflation, sharply eroding the value of their financial assets. An emergency may arise where trading of emerging country securities may cease or may be severely limited or where an emerging country governmental or corporate issuer defaults on its obligations. The governments of certain emerging countries impose restrictions or controls that may limit or preclude the International Equity Portfolio's investment in certain securities. The International Equity Portfolio may need governmental approval for the repatriation of investment income, capital or sales proceeds. An emerging country government may also impose temporary restrictions on the disposition of portfolio securities. Risks of Debt Securities o Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. o Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. o Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments on a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. o Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch IBCA, Duff & Phelps or Moody's. o Below investment-grade securities ("junk bonds") may be less liquid, more susceptible to real or perceived adverse economic conditions and more difficult to evaluate than higher-rated securities. The market for these securities has relatively few participants, mostly institutional investors, and low trading volume at times, a Portfolio may have difficulty selling particular high yield securities at a fair price and obtaining accurate valuations in order to calculate its net asset value. Risks of Mortgage-Related and Asset-Backed Securities o Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the 33 risk that, because prepayments generally occur when interest rates are falling, a Portfolio may have to reinvest the proceeds from prepayments at lower interest rates. Asset-backed securities are also subject to prepayment risk, to the extent of the average life of the underlying receivables, which generally are shorter than those of mortgages. o Extension risk is the risk that the rate of anticipated prepayments of principal may not occur, typically because of a rise in interest rates, and the expected maturity of the security will increase. During periods of rapidly rising interest rates, the weighted average maturity of a security may be extended past what was anticipated. The market value of securities with longer maturities tends to be more volatile. Risks of Real Estate Securities o Real estate risk is the risk that the value of a security will fluctuate because of changes in, among other things, property values, rental property vacancies, overbuilding, changes in local laws, increased property taxes and operating expenses. o Regulatory risk. Certain REITs may fail to qualify for pass-through of income under federal tax law, or to maintain their exemption from federal securities laws registration requirements. Particular Risks of the S&P STARS and S&P STARS Opportunities Portfolios Only o S&P STARS rankings represent the subjective determination of S&P analysts. Past performance of securities included in the S&P STARS system does not necessarily predict the future performance of the S&P STARS and S&P STARS Opportunities Portfolios. MANAGEMENT OF THE PORTFOLIOS Investment Adviser BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the investment adviser of the Portfolios. The Adviser was established in 1985 and is located at 383 Madison Avenue, New York, NY 10179. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading United States investment banking, securities trading and brokerage firm serving U.S. and foreign corporations, governments and institutional and individual investors. The Adviser is a registered investment adviser and offers investment advisory and administrative services to open-end investment funds and other managed accounts with aggregate assets at June 30, 2002 of approximately $_____ billion. The Adviser supervises and assists in the overall management of the affairs of the Trust, subject to oversight by the Trust's Board of Trustees. 34 For the fiscal year ended March 31, 2002, the Adviser received management fees based on a percentage of the average daily net assets of each Portfolio, after waivers, as shown in the following table. S&P STARS Portfolio ------------------------------------------------------------------ S&P Stars Opportunities Portfolio ------------------------------------------------------------------ The Insiders Select Fund ------------------------------------------------------------------ Intrinsic Portfolio ------------------------------------------------------------------ Small Cap Portfolio ------------------------------------------------------------------ Alpha Growth Portfolio ------------------------------------------------------------------ International Equity Portfolio ------------------------------------------------------------------ The Adviser and/or an affiliate, at its own expense, and from its own resources and without reimbursement from the Portfolios, may compensate certain persons who provide certain shreholder services or services in connection with the sale or expected sale of shares of the Portfolios, subject to applicable laws and regulations. Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. A team usually consists of senior portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of each Portfolio. Investment Sub-Adviser -- International Equity Portfolio Marvin & Palmer Associates, Inc. (the "Sub-Adviser") serves as the investment sub-adviser to the International Equity Portfolio, pursuant to an agreement with the Adviser and subject to the overall supervision of the Adviser. The Sub-Adviser, a registered investment adviser, was founded in 1986 and specializes in global, non-U.S., emerging market and U.S. equity portfolio management for institutional accounts. As of June 30, 2002, the Sub-Adviser managed approximately $_____ billion in assets. The Sub-Adviser is located at 1201 North Market Street, Suite 2300, Wilmington, DE 19801. HOW THE PORTFOLIOS VALUE THEIR SHARES The net asset value ("NAV"), multiplied by the number of Portfolio shares you own, gives you the value of your investment. Each Portfolio calculates its share price, called its NAV, each business day as of the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m. Eastern time. You may buy, sell or exchange shares on any business day at a price that is based on the NAV that is calculated after you place your order. A business day is a day on which the NYSE is open for trading or any day in which enough trading has occurred in the securities held by a Portfolio to affect the NAV materially. Portfolio securities that are listed primarily on foreign exchanges may trade on weekends or on other days on which the Portfolios do not price their shares. In this case, the NAV of a Portfolio's shares may change on days when you are not able to buy or sell shares. The Portfolios value their investments based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by the Adviser pursuant to fair value procedures adopted by the Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant Portfolio's investments and other assets, subtracting its liabilities, and then dividing that figure by the number of outstanding shares of the class. 35 Total Assets Less Liabilities ----------------------------- NAV = Number of Shares Outstanding You can request each Portfolio's current NAV by calling 1-800- 447-1139 INVESTING IN THE PORTFOLIOS This section provides information to assist you in buying and selling shares of the Portfolios. Please read the entire Prospectus carefully before buying Class Y shares of a Portfolio. How to Buy Shares The minimum initial investment is $3,000,000; there is no minimum for subsequent investments. BSF reserves the right to waive the minimum investment for accounts managed by BSAM, and employees of BSAM and its affiliates, and for certain fiduciary trust accounts. You may buy Class Y shares of a Portfolio through your account representative at a broker-dealer with whom the Distributor has entered into a sales agreement (an "Authorized Dealer") or the Transfer Agent by wire only. To buy Class Y shares of a Portfolio by Federal Reserve wire, call the Transfer Agent at 1-800- 447-1139 or call your account representative. If you do not wire Federal Funds, you must have the wire converted into Federal Funds, which usually takes one business day after receipt of a bank wire. The Transfer Agent will not process your investment until it receives Federal Funds. The following procedure will help assure prompt receipt of your Federal Funds wire: Call the Transfer Agent at 1-800- 447-1139 and provide the following information: Your name Address Telephone number Taxpayer ID number The amount being wired The identity of the bank wiring funds The Transfer Agent will then provide you with a Portfolio account number. (If you already have an account, you must also notify the Portfolio before wiring funds.) Instruct your bank to wire the specified amount to the Portfolio as follows: PNC Bank, N.A. ABA #031000053 Credit Account Number: #85-5102-0143 From: Name of Investor Account Number: Your Portfolio account number For the purchase of: Name of Portfolio Amount: Amount to be invested You may open an account when placing an initial order by telephone, provided you then submit an Account Information Form by mail. The Transfer Agent will not process your investment until it receives a fully completed and signed Account Information Form. 36 The Trust and the Transfer Agent each reserve the right to reject any purchase order for any reason. On the day of the purchase, call the Transfer Agent at 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time), to give notice of the purchase and before wiring any funds. After contacting the Transfer Agent, contact your financial institution to wire Federal Funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed. How to Sell Shares o You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. o When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. o The Trust will send you payment proceeds generally within seven days after it receives your redemption request. Redemption Procedures Redemption Through the Distributor or Authorized Dealers Method of Redemption Instructions [Graphic] In person o Visit your account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [Graphic] By telephone o Call your account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [Graphic] By mail o Mail your redemption request to your account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [Graphic] By wire o Submit wiring instructions to your account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. Redemption Through the Transfer Agent Method of Redemption Instructions [Graphic] By mail o Mail your redemption request to: PFPC Inc. Attention: The Bear Stearns Funds [name of Portfolio] P.O. Box 8960 Wilmington, DE 19899-8960 [Graphic] By telephone o Call the Transfer Agent at 1-800- 447-1139. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 37 Additional Information About Redemptions o Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. o Signature guarantees. If your redemption proceeds exceed $100,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including: - a U.S. bank, trust company, credit union or savings association; - a foreign bank that has a U.S. correspondent bank; - a U.S. registered dealer or broker in securities, municipal securities or government securities; or - a U.S. national securities exchange, a registered securities association or a clearing agency. If you are signing on behalf of a corporation, partnership or other business or as a fiduciary, you must also include your title in the signature. o Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. o Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative or the Transfer Agent by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. o Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. To the extent allowed under applicable law, the Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a share of actual portfolio securities. Call the Transfer Agent for details. o Redemption Fees. The International Equity Portfolio will impose a redemption fee of 1.00% of the total redemption amount (calculated at market value) if you sell your shares 60 days or less after you purchase them. The Trust may waive this fee under certain circumstances. The redemption fee is paid directly to the International Equity Portfolio, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. For purposes of determining whether the redemption fee applies, the shares that you have held the longest will be redeemed first. The redemption fee will only apply to shares you purchase on or after June 1, 2001. The redemption fee may not apply in certain circumstances, such as redemptions on certain omnibus accounts, including 401(k) plans, and in the event of shareholder death or disability. Please see the SAI for details. 38 o Suspension of the Right of Redemption. A Portfolio may suspend your right to redeem your shares under any of the following circumstances: -- during non-routine closings of the NYSE; -- when the Securities and Exchange Commission ("SEC") determines either that trading on the NYSE is restricted or that an emergency prevents the sale or valuation of the Portfolio's securities; or -- when the SEC orders a suspension to protect the Portfolio's shareholders. Exchanges You may exchange Class Y shares of one Portfolio for Class Y shares of another Portfolio described in this Prospectus, Class Y shares of another Portfolio of the Trust, or shares of The Money Market Portfolio of The RBB Fund, Inc. (You may obtain more information about other Portfolios of the Trust by calling the Transfer Agent at 1-800- 447-1139.) The Trust does not currently charge a fee for exchanges, although it may change this policy in the future. Exchange procedures. To exchange your shares, you must give exchange instructions to your account representative or the Transfer Agent in writing or by telephone. Exchange policies. When exchanging your shares, please keep in mind: o An exchange of shares may create a tax liability for you. You may have a gain or loss on the transaction, since the shares you are exchanging will be treated like a sale. o When the market is very active, telephone exchanges may be difficult to complete. You may have to submit exchange requests to your account representative or the Transfer Agent in writing, which will cause a delay. o The shares you exchange must have a value of at least $250 (except in the case of certain retirement plans). If you are establishing a new account, you must exchange the minimum dollar amount needed to open that account. o Before you exchange your shares, you must review a copy of the current prospectus of the Portfolio that you would like to buy. o Your exchange request may not be accepted if the Trust determines that your exchange would be detrimental to the interests of a Portfolio's shareholders. The Trust specifically reserves the right to refuse your request if it is part of multiple purchase or exchange requests that the Trust, in its sole discretion, deems to involve excessive trading or to be part of a market timing strategy since these types of trading practices may require a Portfolio to sell securities at a disadvantageous time or price. In making its determination, the Trust may consider orders you have placed individually, orders placed in combination with a group of shareholders or commonly controlled accounts and orders placed by your securities dealer or service agent. The Trust may modify or terminate the exchange option at any time. DIVIDENDS, DISTRIBUTIONS AND TAXES If you buy shares of a Portfolio shortly before it declares a dividend or a distribution, a portion of your investment in the Portfolio may be returned to you in the form of a taxable distribution. Distributions The Portfolios pass along your share of their investment earnings in the form of dividends. Dividend distributions are the net dividends or interest earned on investments after expenses. As with any investment, you should consider the tax consequences of an investment in a Portfolio. Ordinarily, each Portfolio declares and pays dividends from its net investment income annually. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. 39 You can receive dividends or distributions in one of the following ways: o Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account Information Form, you will receive your distributions this way. o Cash. The Trust will send you a check no later than seven days after the payable date. o Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. o Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may not use this service to establish a new account. o Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account Information Form. If you would like to change the option you selected, please call your account executive or the Transfer Agent at 1-800- 447-1139. Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. Depending on the type of account in which the shares are held and the nature of the shareholder, a shareholder may be taxed on distributions received from a Portfolio. It is important for you to be aware of the following information about the tax treatment of your investment. o Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain (which may be taxable at different rates depending on the length of time a Portfolio holds its assets). o Dividends and distributions are treated in the same manner for federal income tax purposes whether you receive them in the form of cash or additional shares. They may also be subject to state and local taxes. o Dividends from the Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. o Certain dividends and distributions paid to you in January will be taxable as if they had been paid to you the previous December. o The Trust will mail you tax statements every January showing the amounts and tax status of distributions you received. o When you sell (redeem) or exchange shares of a Portfolio, you must recognize any gain or loss. o Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. o You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 40 ADDITIONAL INFORMATION Performance The Trust, the Distributor, the Adviser and certain financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These entities and publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, unless instructed to the contrary. Investors may request that the Trust send these documents to each shareholder individually by calling the Trust at 1-800-766-4111. 41 Financial Highlights -- S&P STARS Portfolio The financial highlights table is intended to help you understand the financial performance of the S&P STARS Portfolio over the past five years. This information reflects financial results for a single share of the S&P STARS Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the S&P STARS Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the S&P STARS Portfolio's financial statements, are included in the S&P STARS Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111. Class Y shares of the Alpha Growth Portfolio has not yet commenced operations. Class Y shares of the International Equity Portfolio commenced operations in July 2001.
Net Asset Net Realized Distributions Value, Net and Unrealized from Net Net Asset Beginning Investment Gain/(Loss) on Realized Value, of Year Loss*(1) Investments*(2) Capital Gains End of Year - ----------------------------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, 2002 $28.49 $(0.16) $(2.51) $- $25.82 - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 37.05 (0.14) (7.94) (0.48) 28.49 - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 24.68 (0.12) 12.78 (0.29) 37.05 - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 20.11 (0.05) 5.54 (0.92) 24.68 - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 16.23 (0.05) 6.74 (2.81) 20.11
- -------------- * Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 42
Financial Highlights -- S&P STARS Portfolio Total Net Ratio of Ratio of Net Increase/(Decrease) Investment Assets, Expenses Investment Reflected in Return(3) End of to Loss Expense and Period Average to Average Net Investment (000's Net Net Assets(1) Income/(Loss) Ratios omitted) Assets(1) Due to Waivers Portfolio And Related Turnover Reimbursements Rate - ------------------------------------------------------------------------------------------------------------------------------ Class Y (9.37)% $203,633 1.00% (0.65)% 0.08% 110.80% - ------------------------------------------------------------------------------------------------------------------------------ (21.95) 176,235 1.00 (0.47) 0.10 42.93 - ------------------------------------------------------------------------------------------------------------------------------ 51.61 154,015 1.00 (0.56) 0.18 54.67 - ------------------------------------------------------------------------------------------------------------------------------ 28.02 52,483 1.00 (0.23) 0.27 76.17 - ------------------------------------------------------------------------------------------------------------------------------ 44.22 35,652 1.00(4) (0.32)(4) 0.38 172.78(5)
- ------------------ 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 Includes S&P STARS' share of S&P STARS Master Series' expenses for the period prior to June 25, 1997. 5 Portfolio turnover rate is related to S&P STARS Master Series for the period prior to June 25, 1997. 43 Financial Highlights -- S&P STARS Opportunities Portfolio The financial highlights table is intended to help you understand the financial performance of the S&P STARS Opportunities Portfolio for the Class Y Shares since inception (October 1, 2001). This information reflects financial results for a single share of the S&P STARS Opportunities Portfolio. The total return in the table represents the rate that an investor would have gained on an investment in the S&P STARS Opportunities Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the S&P STARS Opportunities Portfolio's financial statements, are included in the S&P STARS Opportunities Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Value, Investment and Unrealized Net Asset Beginning Loss*(1) Gain/(Loss) on Value, of Year Investments*(2) End of Year - --------------------------------------------------------------------------------------------------------- Class Y For the period October 1, 2001* through $12.00 $(0.02) $2.32 $14.30 March 31, 2002 - -----------------------------------------------------------------------------------------------------------------------
- ------------------ * Commencement of operations. ** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. Net Realized gain/(loss) on investments include short sale transactions. 44
Financial Highlights -- S&P STARS Opportunities Portfolio Total Net Ratio of Ratio of Net Increase/(Decrease) Investment Assets, Expenses Investment Reflected in Return(3) End of to Loss Expense and Period Average to Average Net Investment (000's Net Net Assets(1) Income/(Loss) Ratios omitted) Assets(1) Due to Waivers Portfolio And Related Turnover Reimbursements Rate - ------------------------------------------------------------------------------------------------------------------------------ Class Y 19.17% $2.522 1.00% (0.40)%(4) 0.85%(4) 66.89% - ------------------------------------------------------------------------------------------------------------------------------
- -------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 4 Annualized. 45 Financial Highlights -- The Insiders Select Fund The financial highlights table is intended to help you understand the financial performance of The Insiders Select Fund over the past five years. This information reflects financial results for a single share of The Insiders Select Fund. The total returns in the table represent the rate that an investor would have gained on an investment in The Insiders Select Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with The Insiders Select Fund 's financial statements, are included in The Insiders Select Fund's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Dividends Distributions Value, Investment and Unrealized from Net from Net Net Asset Beginning Income*(1) Gain on Investment Realized Value, of Year Investments*(2) Income Capital Gains End of Year - ----------------------------------------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, 2002 $18.13 $0.07 $0.76 - $(1.69) $17.27 - ----------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 17.09 0.09 3.07 - (2.12) 18.13 - ----------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 17.33 - 0.13 (0.18) (0.19) 17.09 - ----------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 18.09 - 0.09 - (0.85) 17.33 - ----------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 14.66 0.07 6.36 - (3.00) 18.09
- ------------------- * Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 46 Financial Highlights -- The Insiders Select Fund
Total Ratio of Ratio of Net Increase/(Decrease) Portfolio Investment Net Assets, Expenses Investment Reflected in Turnover Return(3) End of to Income Expense Ratios and Rate Year Average to Average Net Investment (000's Net Net Assets(1) Income Due omitted) Assets(1) to Waivers and Reimbursements - ----------------------------------------------------------------------------------------------------------------------------- Class Y (11.53)% $701 1.15% 0.43% 0.80% 20.75% - ----------------------------------------------------------------------------------------------------------------------------- 18.30 805 1.15 0.58 1.14 99.36 - ----------------------------------------------------------------------------------------------------------------------------- 0.72 796 1.15 0.60 0.81 76.06 - ----------------------------------------------------------------------------------------------------------------------------- 0.85 914 1.15 0.02 0.81 99.71 - ----------------------------------------------------------------------------------------------------------------------------- 46.68 1,265 1.15 0.55 1.07 115.64
- -------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 47 Financial Highlights -- Intrinsic Portfolio (formerly known as Large Cap Value Portfolio) The financial highlights table is intended to help you understand the financial performance of the Intrinsic Portfolio over the past five years. This information reflects financial results for a single share of the Intrinsic Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Intrinsic Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Intrinsic Portfolio's financial statements, are included in the Intrinsic Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Dividends Distributions Value, Investment and Unrealized from Net From Net Net Asset Beginning Income*(1) Gain/(Loss) on Investment Realized Value, of Year Investments*(2) Income Capital Gains End of Year - --------------------------------------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, $19.67 $0.11 $0.91 $(0.03) $(0.49) $20.17 2002 - --------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 16.73 0.26 3.80 (0.21) (0.91) 19.67 2001 - --------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 19.78 0.22 (0.97) (0.20) (2.10) 16.73 2000 - --------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 20.84 0.17 0.65 (0.20) (1.68) 19.78 1999 - --------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 17.18 0.26 7.05 (0.13) (3.52) 20.84 1998
- -------------- * Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 48 Financial Highlights --Intrinsic Portfolio (formerly known as Large Cap Value Portfolio)
Total Net Ratio of Ratio of Net Increase/(Decrease) Investment Assets, Expenses Investment Reflected in Return(3) End of to Income/(Loss) to Expense Year Average Average Net Ratios and Net (000's Net Assets(1) Investment omitted) Assets(1) Income/(Loss) Due to Portfolio Waivers and Turnover Reimbursements Rate - --------------------------------------------------------------------------------------------------------------- Class Y 5.28% $22,341 1.00% 0.92% 0.75% 20.60% - --------------------------------------------------------------------------------------------------------------- 24.38 7,038 1.00 1.65 1.50 60.46 - --------------------------------------------------------------------------------------------------------------- (4.29) 3,438 1.00 0.98 1.77 55.66 - --------------------------------------------------------------------------------------------------------------- 4.51 4,741 1.00 1.08 1.46 38.27 - --------------------------------------------------------------------------------------------------------------- 45.27 7,263 1.00 0.83 1.76 61.75
- -------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 49 Financial Highlights -- Small Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Small Cap Portfolio over the past five years. This information reflects financial results for a single share of the Small Cap Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Small Cap Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Small Cap Portfolio's financial statements, are included in the Small Cap Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Distributions Value, Investment and Unrealized from Net Net Asset Beginning Income/ Gain/(Loss) on Realized Value, of Year Loss*(1) Investments*(2) Capital Gains End of Year - -------------------------------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, $18.34 $0.05 $3.35 $1.00 $20.73 2002 - -------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 23.23 (0.03) (2.64) (2.22) 18.34 2001 - -------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 18.03 (0.05) 6.72 (1.47) 23.23 2000 - -------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 23.65 (0.02) (4.66) (0.94) 18.03 1999 - -------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 17.47 (0.04) 8.06 (1.84) 23.65 1998
- -------------- * Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 50 Financial Highlights -- Small Cap Portfolio
Total Net Ratio of Ratio of Net Increase/(Decrease) Investment Assets, Expenses Investment Reflected in Return(3) End of to Income/(Loss) Expense Ratios and Year Average to Average Net Investment (000's Net Net Assets(1) (Loss) Due Portfolio omitted) Assets(1) to Waivers and Turnover Reimbursements Rate - --------------------------------------------------------------------------------------------------------------- Class Y 19.02% $34,834 1.00% 0.26% 0.53% 75.76% - --------------------------------------------------------------------------------------------------------------- (11.22) 33,449 1.00 (0.13) 1.02 65.32 38.86 31,091 1.00 (0.24) 0.65 65.85 - --------------------------------------------------------------------------------------------------------------- (19.84) 24,087 1.00 (0.10) 0.65 84.12 - --------------------------------------------------------------------------------------------------------------- 47.54 31,141 1.00 (0.21) 0.77 90.39
- -------------- 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. 51 Financial Highlights -- International Equity Portfolio The financial highlights table is intended to help you understand the financial performance of the International Equity Portfolio for the Class Y Shares since inception (July 5, 2001). This information reflects financial results for a single share of the International Equity Portfolio. The total return in the table represents the rate that an investor would have gained on an investment in the International Equity Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the International Equity Portfolio's financial statements, are included in the International Equity Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Distributions Value, Investment and Unrealized from Net Net Asset Beginning Income**(1) Gain/(Loss) on Realized Value, of Year Investments*** (Capital Gains End of Year - ------------------------------------------------------------------------------------------------------------------------ Class Y For the period July 5, 2001** through $16.75 $0.06 $(2.12) - $14.69 March 31, 2002
- -------------- * Commencement of operations. ** Commencement of initial public offering. *** Calculated based on the shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 52
Financial Highlights -- International Equity Portfolio Total Net Ratio of Ratio of Net Investment Assets, Expenses Investment Increase/(Decrease) Return(3) End of to Loss Reflected in Period Average to Average Expense and (000's Net Net Assets(1) Net Investment omitted) Assets(1) Income/(Loss) Ratios Due to Waivers Portfolio And Related Turnover Reimbursements Rate - -------------------------------------------------------------------------------------------------------------- Class Y - $21,614 1.25% (0.55)%(4) 0.51%(4) 168.32% - --------------------------------------------------------------------------------------------------------------
__________ 3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total Investment return is calculated assuming a purchase of shares on the first day and sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions. 4 Annualized. 53 The Bear Stearns Funds 383 Madison Avenue New York, NY 10179 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 383 Madison Avenue PFPC Inc. New York, NY 10179 Bellevue Corporate Center 400 Bellevue Parkway INVESTMENT ADVISER Wilmington, DE 19809 Bear Stearns Asset Management Inc. 383 Madison Avenue New York, NY 10179 COUNSEL Kramer Levin Naftalis & Frankel INVESTMENT SUB-ADVISER LLP (INTERNATIONAL EQUITY PORTFOLIO) 919 Third Avenue Marvin & Palmer Associates, Inc. New York, NY 10022 1201 North Market Street, Suite 2300 Wilmington, DE 19801 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center ADMINISTRATOR New York, NY 10281 Bear Stearns Funds Management Inc. 383 Madison Avenue New York, NY 10179 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 54 Statement of Additional Information. The Statement of Additional Information ("SAI") provides a more complete discussion of several of the matters contained in this Prospectus and is incorporated by reference, which means that it is legally a part of this Prospectus as if it were included here. Annual and Semi-Annual Reports. The annual and semi-annual reports to shareholders contain additional information about each Portfolio's investments, including a discussion of the market conditions and investment strategies that significantly affected a Portfolio's performance during its last fiscal year. o To obtain a free copy of the SAI and the current annual or semi-annual reports or to make any other inquiries about a Portfolio, you may call or write: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 Telephone: 1-800- 447-1139 or 1-800-766-4111 o You may obtain copies of the SAI or financial reports o for free by calling or writing broker-dealers or other financial intermediaries that sell a Portfolio's shares; o upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102; or o for free by visiting the SEC's Worldwide Web site at http://www.sec.gov. o You may review and copy information about the Portfolios (including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 to obtain information on the operation of the SEC's Public Reference Room. Investment Company Act File No. 811-8798 [BSF-P-017-04] 55 The Bear Stearns Funds Prospectus Dated August 1, 2002 Fixed Income Funds o Income Portfolio o High Yield Total Return Portfolio Class A, B and C Shares This Prospectus provides important information about each Portfolio that you should know before investing. Please read it carefully and keep it for future reference. The Securities and Exchange Commission has not approved any Portfolio's shares or determined whether this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. The Bear Stearns Funds o 383 Madison Avenue, New York, NY 10179 1-800-447-1139 Table of Contents Risk/Return Summaries ................................................................... Income Portfolio High Yield Total Return Portfolio Investments ................................................................... Risk Factors ................................................................... Management of the Portfolios ................................................................... Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares ................................................................... Investing in the Portfolios ................................................................... Investment Requirements Choosing a Class of Shares How the Trust Calculates Sales Charges Sales Charge Reductions and Waivers Distribution Fees and Shareholder Servicing Fees How to Buy Shares How to Sell Shares Exchanges Shareholder Services ................................................................... Dividends, Distributions and Taxes ................................................................... Additional Information ................................................................... Financial Highlights ................................................................... Each Portfolio described in this Prospectus is a series of The Bear Stearns Funds, a registered open-end management investment company (the "Trust"). It is important to keep in mind that mutual fund shares are: o not deposits or obligations of any bank; o not insured by the Federal Deposit Insurance Corporation; o subject to investment risk, including possible loss of the money invested. Income Portfolio RISK/RETURN SUMMARY Investment Objective High current income consistent with preservation of capital. Principal Strategies Under normal circumstances, the Income Portfolio will invest at least 80% of its net assets in investment-grade, U.S. dollar-denominated fixed income securities issued by U.S. companies and the U.S. government or its political subdivisions, agencies and instrumentalities. The Income Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. The Income Portfolio may invest in: Bonds, debentures and notes; Mortgage-related securities (including interest-only and principal-only stripped securities); Asset-backed securities; Convertible debt obligations; and Money market instruments (including bank obligations, commercial paper, other short-term corporate debt, and repurchase agreements). The Income Portfolio seeks to equal or exceed the performance of the Lehman Intermediate Government/Credit Index (the "Lehman Index"), a market-capitalization weighted index that includes U.S. Treasury, government-sponsored, and investment grade corporate fixed income securities maturing between one and ten years issued by entities having a minimum of $150 million par amount outstanding . This index has been in existence since 1973. Under normal circumstances, the Income Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from two to seven years and a duration between two and five years. Duration is a measure of the expected price volatility of a debt security or portfolio of debt securities. Duration and interest rates are inversely related. For example, if a bond has an effective duration of three years, you can expect a 1% increase in general interest rates to cause the bond's value to decrease about 3%. The Income Portfolio may invest up to 5% of its total assets in debt obligations of issuers in emerging countries. "Emerging countries" include any country that is generally considered to be an emerging or developing country by the World Bank, the International Finance Corporation or the United Nations and its authorities. An issuer is considered to be located in an emerging country if it: derives 50% or more of its total revenues from either goods produced, sales made or services performed in emerging countries, or is organized under the laws of, and with a principal office in, an emerging country. Emerging countries generally include countries in Asia (other than Japan), Eastern Europe, Latin America and Africa. Quality. The Income Portfolio must invest at least 80% of its net assets in investment-grade securities, that is, securities rated no lower than "Baa" by Moody's Investors Service ("Moody's"), "BBB" by Standard & Poor's ("S&P"), the equivalent rating by other nationally recognized statistical rating organizations ("NRSROs"), or, if unrated, deemed to be of comparable quality by Bear Stearns Asset Management Inc., the investment adviser for each Portfolio ("BSAM" or the "Adviser"). The Income Portfolio may invest up to 20% of its net assets in securities that are rated below investment-grade ("junk bonds") but no lower than "B" by Moody's or S&P, the equivalent rating by any other NRSRO, or, if unrated, deemed to be of comparable quality by the Adviser. The Income Portfolio may invest in short-term fixed income obligations that are rated in the two highest rating categories by Moody's, S&P or Fitch IBCA, Duff & Phelps ("Fitch"), or, if unrated, deemed to be of comparable quality by the Advisor. For a discussion of the ratings categories of various NRSROs, see the Appendix to the Statement of Additional Information ("SAI"). Principal Risks You may lose money by investing in the Income Portfolio. The Income Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Income Portfolio's net asset value, yield and/or total return: The rate of inflation may increase, resulting in higher interest rates, causing the Income Portfolio's securities to decline in value. The value of a longer-term fixed income security is usually more sensitive to rising interest rates than that of short-term fixed income securities. A particular strategy may not be executed effectively or otherwise generate the intended result. An issuer's credit quality may be downgraded. Below-investment-grade securities are riskier than investment-grade securities and are more likely to decline in value than investment-grade securities due to defaults or bankruptcies. The Income Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. This may occur, for example, when the average life of a mortgage-related security is shortened through prepayment. The Income Portfolio may not fully recoup its investment in interest-only stripped mortgage-related securities if the underlying mortgages are prepaid faster than anticipated. The yield on principal-only stripped mortgage-related securities could decline if the underlying mortgages experience less-than-anticipated prepayments of principal. Securities issued in emerging countries may be more volatile than securities issued in established markets due to less developed securities markets or political instability. Inefficient settlement procedures in emerging countries may lead the Income Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. In addition, issuers in emerging countries typically are subject to less-stringent government regulation and accounting standards than their counterparts in the United States. Who May Want to Invest in the Income Portfolio The Income Portfolio may be appropriate for investors who: 2 seek high current income; want to diversify their portfolio. The Income Portfolio may not be appropriate for investors who: are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the Income Portfolio by showing changes in its performance for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The performance information presented below partly reflects management of the Income Portfolio's investments to maximize total return, rather than to generate high current income, the Income Portfolio's present investment objective, adopted on October 16, 1998. The performance information presented below may have been different if the Income Portfolio's investments had been managed to realize high current income for the entire period. The bar chart shows returns for Class A shares of the Income Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. Income Portfolio Annual Total Return (%)1 ---------------- ------------ 1996 2.74 ---------------- ------------ 1997 7.58 ---------------- ------------ 1998 7.29 ---------------- ------------ 1999 (1.24) ---------------- ------------ 2000 9.72 ---------------- ------------ 2001 ( ) ---------------- ------------ Past performance is not necessarily an indication of future results. 1The Income Portfolio's year-to-date return as of June 30, 2002, was _______%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended ___________________) and the lowest quarterly return was (_____)% (for the quarter ended ______________________). The table below shows how average annual total returns for Class A, B and C shares of the Income Portfolio for one year, five years and since the date of inception compared to the Lehman Index, a broad-based unmanaged index that represents the general performance of fixed income securities, and the Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG Index"). While the Salomon BIG Index is a common default benchmark for fixed income portfolios, the Adviser believes that the Lehman Index is more closely aligned with the investment objective of the Income Portfolio. Accordingly, on ________ 2002, the Income Portfolio discontinued using the Salomon BIG Index as a benchmark for its performance and began using the Lehman Index. The table also compares the Income Fund's performance to that of the Lipper A Rated Broad Fund Index, a measure of the performance of investment-grade fixed income mutual funds. After-tax returns are calculated using the historical highest individual federal marginal income tax rate (__%) and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Portfolio shares through tax-deferred arrangements, such as 401(k) 3 plans or individual retirement accounts (IRAs). After-tax returns are shown for only Class A shares; after-tax returns for other classes will vary. The figures shown in the table reflect all applicable sales charges. 4
----------------------------------------- ---------- ------------ ----------------- Average Annual Total Returns (for the One Five Years Since periods ended December 31, 2001 Year Inception* ----------------------------------------- ---------- ------------ ----------------- Class A * ----------------------------------------- ---------- ------------ ----------------- Return before taxes ----------------------------------------- ---------- ------------ ----------------- Return after taxes on distributions ----------------------------------------- ---------- ------------ ----------------- Return after taxes on distributions and sale of Portfolio shares ----------------------------------------- ---------- ------------ ----------------- Lehman Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ ----------------- Salomon BIG Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ ----------------- Lipper A Rated Bond Fund Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ ----------------- Class B ----------------------------------------- ---------- ------------ ----------------- Return before taxes ----------------------------------------- ---------- ------------ ----------------- Class C ----------------------------------------- ---------- ------------ ----------------- Return before taxes ----------------------------------------- ---------- ------------ ----------------- Lehman Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ ----------------- Salomon BIG Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ ----------------- Lipper A Rated Bond Fund Index (reflects no deduction for fees, expenses or taxes) ----------------------------------------- ---------- ------------ -----------------
* Total return figures for Class A shares reflect the current maximum sales load of 4.50%. Prior to December 24, 1997, the maximum sales load was 3.75%. ** Class B shares commenced operations on February 2, 1998. The average annual total return for Class B shares of the Income Portfolio for the period from February 2, 1998 to December 31, 2001 was ______%. The comparable returns for the same period for the Lehman Index, the Salomon BIG Index and the Lipper A Rated Bond Fund Index were ______%, _____and ____%, respectively. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Income Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C --------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a 4.50% None None percentage of offering price) --------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage None** 5.00%1 1.00% of the lower of purchase or sale price) --------------------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None None None --------------------------------------------------------------------------------------------- Redemption fees*** None None None --------------------------------------------------------------------------------------------- Exchange fees None None None --------------------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) --------------------------------------------------------------------------------------------- Management Fees 0.45% 0.45% 0.45% --------------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.10% 0.75% 0.75% --------------------------------------------------------------------------------------------- Other Expenses 1.45% 1.45% 1.45% --------------------------------------------------------------------------------------------- Shareholder Servicing Fee 0.25% 0.25% 0.25% --------------------------------------------------------------------------------------------- Total Other Expenses 1.70% 1.70% 1.70% 5 --------------------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.25% 2.90% 2.90% --------------------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.45)% (1.45)% (1.45)% --------------------------------------------------------------------------------------------- Net Expenses2 0.80% 1.45% 1.45% - ---- ---- ---- ---------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a contingent deferred sales charge ("CDSC") of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges-- Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Income Portfolio's net expenses do not exceed the amounts indicated above. Example This Example illustrates the cost of investing in the Income Portfolio over various time periods. It is intended to help you compare the cost of investing in the Income Portfolio with the cost of investing in other mutual funds. The Example assumes that: you invest $10,000 in the Income Portfolio; your investment returns 5% each year; the Income Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period-- 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------- Class A $ $ $ $ - -------------------------------------------------------------------------- Class B $ $ $ $** - -------------------------------------------------------------------------- Class C $ $ $ $ - -------------------------------------------------------------------------- If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------- Class B $ $ $ $** ---------------------------------------------------------------------------- Class C $ $ $ $ ---------------------------------------------------------------------------- * This Example assumes that net portfolio operating expenses will equal 0.80% for Class A and 1.45% for both Class B and C shares until July 31, 2003 and thereafter will equal 3.28% for Class A and 3.93% for both Class B and C shares. 6 ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." 7 High Yield Total Return Portfolio RISK/RETURN SUMMARY Investment Objective Total return through high current income and capital appreciation. Principal Strategies Under normal circumstances, the High Yield Total Return Portfolio (the "High Yield Portfolio") will invest at least 80% of its net assets in high yield fixed income securities (as defined below), including domestic and foreign debt securities, convertible securities and preferred stocks. The High Yield Portfolio will not change this policy unless it notifies shareholders at least 60 day in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. Within this 80% category, the High Yield Portfolio may invest in the following securities (up to the stated percentage of its total assets): 25% in foreign securities; 25% in zero-coupon securities, pay-in-kind bonds or discount obligations; 20% in distressed securities; 20% in mortgage-related securities; 15% in loans and participations; and 10% in convertible securities. Generally, the High Yield Portfolio's average weighted maturity will range from three to twelve years. The High Yield Portfolio invests in high yield securities of issuers that the Adviser believes to be positioned for gradual or substantial credit improvement through a process that: uses Bear Stearns' "High Yield Query System" to screen more than 2,000 issuers to select companies that meet initial investment criteria; identifies positive catalysts affecting the issuer's financial condition that may lead to price appreciation; includes communicating with senior management to assess its commitment to improving credit quality; and identifies securities whose issuers have above-average prospects for superior returns. Quality. High yield fixed income securities ("junk bonds") are those securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P, comparably rated by any other NRSRO or unrated securities that the Adviser determines to be of comparable quality. 8 The High Yield Portfolio may invest up to 10%, and will normally hold no more than 25% (as a result of market movements or downgrades), of its assets in bonds rated below "Caa" by Moody's or "CCC" by S&P and comparable unrated bonds. For a discussion of the ratings categories of various NRSROs, see the Appendix to the SAI. The High Yield Portfolio may "sell short" securities. In a short sale, the Portfolio sells a security it does not own but has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will purchase the security at a lower price to return to the lender and realize a gain for the High Yield Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the High Yield Portfolio. The High Yield Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the High Yield Portfolio's net asset value, yield and/or total return: High yield securities are riskier than investment-grade securities and are more likely to decline in value than investment-grade securities due to defaults or bankruptcies. Portfolio investments that are already in default when acquired may experience further market value declines or become worthless. The rate of inflation may increase, resulting in higher interest rates, causing the High Yield Portfolio's securities to decline in value. The value of a longer-term fixed income security is usually more sensitive to rising interest rates than that of short-term fixed income securities. A particular strategy may not be executed effectively or otherwise generate the intended result. An issuer's credit quality may be downgraded. The High Yield Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. This may occur, for example, when the average life of a mortgage-related security is shortened. A financial intermediary involved in a loan participation may become insolvent or the High Yield Portfolio, as holder of the loan, may be compelled to participate in restructuring the underlying loan. Foreign securities are more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. Securities issued in emerging countries may be more volatile than securities issued in established markets due to less developed securities markets or political instability, Inefficient settlement procedures in emerging countries may lead the High Yield Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. In addition, issuers in emerging countries typically are subject to less-stringent government regulation and accounting standards than their counterparts in the United States. Short sales may involve substantial risk and may involve leverage, which may increase potential losses. Who May Want to Invest in the High Yield Portfolio 9 The High Yield Portfolio may be appropriate for investors who: seek high current income coupled with asset growth potential. The High Yield Portfolio may not be appropriate for investors who: are not willing to accept the greater risks associated with high yield issues when compared to higher-rated corporate and U.S. government bonds; are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the High Yield Portfolio by showing changes in its performance for various periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The bar chart shows returns of Class A shares of the High Yield Portfolio. The bar chart does not reflect any sales charges that you may be required to pay when you buy or sell your shares. If sales charges were reflected, returns would be lower than those shown. High Yield Portfolio Annual Total Return (%) 1 ---------------- ------------ 1998 4.28 ---------------- ------------ 1999 0.07 ---------------- ------------ 2000 (8.81) ---------------- ------------ 2001 ( ) ---------------- ------------ Past performance is not necessarily an indication of future results. 1The High Yield Portfolio's year-to-date return as of June 30, 2002, was ________%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended _______________) and the lowest quarterly return was (______)% (for the quarter ended ________________________). The table below shows how average annual total returns for Class A, B and C shares of the High Yield Portfolio for one year and since the date of inception compared to the Credit Suisse First Boston High Yield Index (formerly, the Credit Suisse First Boston Global High Yield Index) ("CSFB High Yield Index") and the Credit Suisse First Boston High Yield Index, Developed Countries Only (formerly, the Credit Suisse First Boston Domestic Plus High Yield Bond Index) ("CSFB High Yield Index, DCO"). The CSFB High Yield Index is a broad-based unmanaged index that represents the general performance of high yield fixed income securities. The CSFB High Yield Index, DCO, is a broad-based unmanaged index that represents only the issues of issuers from developed countries in the CSFB High Yield Index. The table also compares the High Yield Portfolio's performance to that of the Lipper High Yield Bond Fund Index, a measure of the performance of high yield fixed income mutual funds. The figures shown in the table reflect all applicable sales charges. ---------------------------------------- ------------ ----------------- Average Annual Total Returns (for the One Year Since periods ended December 31, 2001 Inception* ---------------------------------------- ------------ ----------------- Class A ---------------------------------------- ------------ ----------------- 10 ---------------------------------------- ------------ ----------------- Return before taxes ---------------------------------------- ------------ ----------------- Return after taxes on distributions ---------------------------------------- ------------ ----------------- Return after taxes on distributions and sale of Portfolio shares ---------------------------------------- ------------ ----------------- CSFB High Yield Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- CSFB High Yield Index, DCO# (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- Lipper High Yield Bond Fund Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- Class B ---------------------------------------- ------------ ----------------- Return before taxes ---------------------------------------- ------------ ----------------- CSFB High Yield Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- CSFB High Yield Index, DCO# (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- Lipper High Yield Bond Fund Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- Class C ---------------------------------------- ------------ ----------------- Return before taxes ---------------------------------------- ------------ ----------------- CSFB High Yield Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- CSFB High Yield Index, DCO# (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- Lipper High Yield Bond Fund Index (reflects no deduction for fees, expenses or taxes) ---------------------------------------- ------------ ----------------- ------------- # Although both the CSFB High Yield Index and the CSFB High Yield Index, DCO, are shown in this table, the Adviser has determined that the CSFB High Yield Index, DCO, more closely resembles the High Yield Portfolio's investment philosophy and the universe of securities in which it currently invests. Accordingly, on April 1, 2001, the High Yield Portfolio discontinued using the CSFB High Yield Index as a benchmark for its performance and began using the CSFB High Yield Index, DCO. ## The CSFB High Yield Index, DCO, was created on January 1, 1999. Prior to January 1, 1999, the CSFB High Yield Index was used. The return shown above is a blended return. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the High Yield Portfolio.
Shareholder Fees (paid directly from your investment)* Class A Class B Class C ----------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases 4.50% None None (as a percentage of offering price) ----------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) None** 5.00%1 1.00% (as a percentage of the lower of purchase or sale price) ----------------------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None None None ----------------------------------------------------------------------------------------------- Redemption fees*** None None None ----------------------------------------------------------------------------------------------- Exchange fees None None None ----------------------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ----------------------------------------------------------------------------------------------- Management Fees 0.60% 0.60% 0.60% ----------------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.10% 0.75% 0.75% ----------------------------------------------------------------------------------------------- Other Expenses 0.69% 0.69% 0.69% ----------------------------------------------------------------------------------------------- 11 Shareholder Servicing Fee 0.25% 0.25% 0.25% ----------------------------------------------------------------------------------------------- Total Other Expenses 0.94% 0.94% 0.94% ----------------------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.64% 2.29% 2.29% ----------------------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.64)% (0.64)% (0.64)% ------- ------- ------- ----------------------------------------------------------------------------------------------- Net Expenses2 1.00% 1.65% 1.65% ===== ===== ===== -----------------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Class B deferred sales charge declines over time. See "How the Trust Calculates Sales Charges-- Class B Shares." 2 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the High Yield Portfolio's net expenses do not exceed the amounts indicated above. Example This Example illustrates the cost of investing in the High Yield Portfolio over various time periods. It is intended to help you compare the cost of investing in the High Yield Portfolio with the cost of investing in other mutual funds. The Example assumes that: you invest $10,000 in the High Yield Portfolio; your investment returns 5% each year; the High Yield Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period-- 12
1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------ Class A $547 $884 $1,244 $2,255 ------------------------------------------------------------------------------------ Class B $668 $954 $1,367 $2,412** ------------------------------------------------------------------------------------ Class C $268 $654 $1,167 $2,576 ------------------------------------------------------------------------------------ If you do not sell your shares at the end of each period--*** 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------------ Class B $168 $654 $1,167 $2,412** ------------------------------------------------------------------------------------ Class C $168 $654 $1,167 $2,576 ===== ------------------------------------------------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.00% for Class A and 1.65% for both Class B and C shares until July 31, 2003, and thereafter will equal 1.64% for Class A and 2.29% for both Class B and C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** Class A shares are not shown in this table because generally no CDSC applies to investments of $10,000 in Class A shares. See "How the Trust Calculates Sales Charges" and "Sales Charge Reductions and Waivers." 13 I N V E S T M E N T S Principal Investment Strategies -- Additional Information Income Portfolio The Income Portfolio seeks to identify and respond to phases in the business cycle -- expansion, topping out, recession and downturn -- and to shift among market sectors, maturities and relative credit quality to achieve its objective, taking into account the volatility and risk associated with investing in intermediate term fixed income securities and, to a lesser extent, with investing in below investment-grade securities. The Income Portfolio evaluates a security's duration and maturity. Duration measures a security's sensitivity to interest rate changes and takes into account its cash flows over time, including the effect of prepayments and interest rate changes. Maturity measures only the time until final payment is due. The Adviser may, for example, increase the average duration of the Income Portfolio's holdings when interest rates are declining and decrease the average duration when interest rates are increasing. The Income Portfolio seeks to equal or exceed the performance of the Lehman Index. As of March 31, 2002, the weighted average maturity of securities in the Lehman Index was approximately ____ years with an average duration of approximately ____ years. High Yield Portfolio Securities offering high current yield are generally issued by rapidly growing companies incurring debt to fund plant expansion or pay for acquisitions and large, well-known, highly leveraged companies. These securities are also generally rated in the medium-to-lower quality categories by the NRSROs. The Adviser evaluates an issuer's financial history and condition, prospects and management and will not rely principally on the ratings assigned by NRSROs, although the Adviser does consider such ratings. The High Yield Portfolio seeks capital appreciation by investing in securities that it expects will benefit from improvements in an issuer's business or prospects. Investments and Techniques This table summarizes some of the principal investments and techniques, described below, that each Portfolio may use to achieve its investment objectives. The absence of a checkmark in the table does not preclude a Portfolio from engaging in the indicated transaction as part of a secondary investment strategy. In addition, a Portfolio may engage in transactions not described below as part of a principal or secondary investment strategy. For a more complete description of these and other investments and techniques, see the SAI. 14 Income Portfolio Portfolio -------------------------------------------------------------------- Asset-backed securities |X| -------------------------------------------------------------------- Brady bonds -------------------------------------------------------------------- Convertible securities |X| -------------------------------------------------------------------- Discount securities |X| |X| -------------------------------------------------------------------- Distressed securities |X| |X| -------------------------------------------------------------------- Eurobonds and global bonds |X| |X| -------------------------------------------------------------------- Indexed securities |X| -------------------------------------------------------------------- Loans |X| -------------------------------------------------------------------- Money market funds |X| |X| -------------------------------------------------------------------- Mortgage-related securities |X| |X| -------------------------------------------------------------------- Short Sales |X| -------------------------------------------------------------------- Asset-backed securities have a structure that is similar to mortgage-related securities (see below). The collateral for these securities includes home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. Brady bonds are debt securities issued in exchange for outstanding commercial bank loans to public and private entities in emerging countries in connection with sovereign debt restructurings, under a plan introduced by former U.S. Treasury Secretary Nicholas Brady. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for common stock. Convertible securities are characterized by higher yields than common stocks, but lower yields than comparable non-convertible securities, less price fluctuation than the underlying common stock since they have fixed income characteristics, and potential for capital appreciation if the market price of the underlying common stock increases. Discount securities. Zero-coupon securities, which pay no cash income, are fixed income securities that are sold at substantial discounts from their face value. They include pay-in-kind bonds, which pay all or a portion of their interest in the form of debt or equity securities. Zero-coupon securities, pay-in-kind bonds and debt securities acquired at a discount are subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. Distressed securities are debt or equity securities of financially troubled or bankrupt companies that the Adviser believes to be undervalued relative to their long-term potential for growth. Eurobonds are issued and traded outside the country in whose currency they are denominated, and outside the regulations of a single country. Global bonds are designed so as to qualify for immediate trading in any domestic capital market and in the Euromarket. Indexed securities are investments whose value is indexed to that of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Indexed securities typically are debt securities or deposits whose face value or coupon rate is determined by reference to a specific instrument or statistic. Loans are arranged through private negotiations between a foreign entity and one or more financial institutions. A Portfolio will usually invest in loans through participations, in which the lending institution sells its right to receive principal and interest payments that it receives from the borrower. Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. 15 Short Sales. In a short sale, a portfolio sells a security it does not own anticipating that the price will decline. To complete a short sale, the Portfolio must borrow the security to make delivery and must then replace the security borrowed by buying it at the prevailing market price, which may be higher or lower than the price at which the Portfolio sold the security short. Short sales involve leverage, which may involve substantial gains or losses. Other Investment Strategies Temporary defensive measures. From time to time, during unfavorable market conditions, the Adviser may invest "defensively." This means a Portfolio may make temporary investments that are not consistent with its investment objective and principal strategies. Engaging in temporary defensive measures may reduce the benefit from any upswing in the market and may cause a Portfolio to fail to meet its investment objective. For temporary defensive purposes, each Portfolio may hold cash (U.S. dollars) and may invest all of its assets in high-quality fixed-income securities, repurchase agreements or U.S. or foreign money market instruments. Uninvested Cash and Cash Collateral. Each Portfolio may invest uninvested cash and cash collateral from securities lending transactions ("Uninvested Cash") in shares of the Prime Money Market Portfolio to the extent that a Portfolio's aggregate investment of Uninvested Cash in the Prime Money Market Portfolio does not exceed 25% of the Portfolio's total assets. Each Portfolio's acquisition of shares of the Prime Money Market Portfolio is subject to the following conditions: (a) the Prime Money Market Portfolio continues to operate as a money market fund in compliance with Rule 2a-7 under the Investment Company Act of 1940; and (b) the Prime Money Market Portfolio will invest only in high quality, U.S. dollar-denominated short-term liquid instruments, including: U.S. government obligations; commercial paper, notes, certificates of deposit, banker's acceptances; repurchase agreements; floating and variable rate securities; time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. High yield and emerging country markets are especially volatile and may result in more frequent trading. High portfolio turnover rates will generally result in higher transaction costs and higher levels of taxable realized gains to a Portfolio's shareholders. The SAI describes each Portfolio's investment strategies in more detail. R I S K F A C T O R S As with all mutual funds, investing in the Portfolios involves certain risks. There is no guarantee that a Portfolio will meet its investment objective. You can lose money by investing in a Portfolio if you sell your shares after it declines in value below your original cost. There is never any assurance that a Portfolio will perform as it has in the past. The Portfolios may use various investment techniques, some of which involve greater amounts of risk than others. You will find a detailed discussion of these investment techniques in the SAI. To reduce risk, the Portfolios are subject to certain limitations and restrictions on their investments, which are also described in the SAI. Each Portfolio is subject to the following principal risks, except as noted. 16 General Risks Market risk is the risk that the market value of a security may go up or down, sometimes rapidly. These fluctuations may cause the security to be worth less than it was at the time it was acquired. Market risk may involve a single security or a particular sector. Management risk is the risk that the portfolio management team's investment strategy may not produce the intended results. Management risk also involves the possibility that the portfolio management team fails to execute an investment strategy effectively. Risks of Debt Securities Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments from a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch or Moody's. Below investment-grade securities ("junk bonds") may be less liquid, more susceptible to real or perceived adverse economic conditions and more difficult to evaluate than higher-rated securities. The market for these securities has relatively few participants, mostly institutional investors, and low trading volume. At times, a Portfolio may have difficulty selling particular high yield securities at a fair price and obtaining accurate valuations in order to calculate its net asset value. Securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P or comparably rated by any other NRSRO, or unrated securities that the Adviser determines to be of comparable quality may be considered speculative and subject to higher risk of default than investment-grade securities. High yield securities rated below "Caa" by Moody's or "CCC" by S&P and comparable unrated bonds are highly speculative and may be in default of principal and/or interest payments at the time of purchase. Risks of Foreign Securities Foreign issuer risk. Compared to U.S. companies, less information is generally available to the public about foreign companies. Foreign brokers and issuers may not be subject to the uniform accounting, auditing, and financial reporting standards and practices prevalent in the U.S. In addition, foreign stock exchanges and other securities markets may be more volatile and subject to less governmental supervision than their counterparts in the U.S. Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. 17 Currency risk. Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency-denominated investments and may widen any losses. Political and economic risks, along with other factors, could adversely affect the value of a Portfolio's securities. Emerging markets risk. Emerging country economies often compare unfavorably with the United States economy in growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain emerging countries have experienced and continue to experience high rates of inflation, sharply eroding the value of their financial assets. An emergency may arise where trading of emerging country securities may cease or may be severely limited or where an emerging country governmental or corporate issuer defaults on its obligations. The governments of certain emerging countries impose restrictions or controls that may limit or preclude a Portfolio's investment in certain securities. A Portfolio may need governmental approval for the repatriation of investment income, capital or sales proceeds. An emerging country government may also impose temporary restrictions on the disposition of portfolio securities. Risks of Mortgage-Related and Asset-Backed Securities Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the risk that, because prepayments generally occur when interest rates are falling, a Portfolio may have to reinvest the proceeds from prepayments at lower interest rates. Asset-backed securities are also subject to prepayment risk, to the extent of the average life of the underlying receivables, which generally are shorter than those of mortgages. Extension risk is the risk that the rate of anticipated prepayments of principal may not occur, typically because of a rise in interest rates, and the expected maturity of the security will increase. During periods of rapidly rising interest rates, the weighted average maturity of a security may be extended past what was anticipated. The market value of securities with longer maturities tends to be more volatile. Risks of Distressed Securities Distressed securities include securities of companies involved in bankruptcy proceedings, reorganizations and financial restructurings. Securities of financially troubled issuers are less liquid and more volatile than securities of companies not experiencing financial difficulties. A Portfolio may own a significant portion of a company's distressed securities. As a result, the Portfolio may participate actively in the affairs of the company, which may subject the Portfolio to litigation risks or prevent the Portfolio from selling the securities. 18 MANAGEMENT OF THE PORTFOLIOS Investment Adviser BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the investment adviser of the Portfolios. The Adviser was established in 1985 and is located at 383 Madison Avenue, New York, NY 10179. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading U.S. investment banking, securities trading and brokerage firm serving U.S. and foreign corporations, governments and institutional and individual investors. The Adviser is a registered investment adviser and offers investment advisory and administrative services to open-end investment funds and other managed accounts with aggregate assets at June 30, 2002 of approximately $_____ billion. The Adviser supervises and assists in the overall management of the affairs of the Trust, subject to oversight by the Trust's Board of Trustees. For the fiscal year ended March 31, 2002, the Adviser received management fees based on a percentage of the average daily net assets of each Portfolio, after waivers, as shown in the following table. Income Portfolio --------------------------------------------- High Yield Portfolio The Adviser and/or an affiliate, at its own expense, and from its own resources and without reimbursement from the Portfolios, may compensate certain persons who provide certain shareholder services or services in connection with the sale or expected sale of shares of the Portfolios, subject to applicable laws and regulations. Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. A team usually consists of senior portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of each Portfolio. HOW THE PORTFOLIOS VALUE THEIR SHARES The net asset value ("NAV"), multiplied by the number of Portfolio shares you own, gives you the value of your investment. Each Portfolio calculates its share price, called its NAV, each business day as of the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m. Eastern time. You may buy, sell or exchange shares on any business day at a price that is based on the NAV that is calculated after you place your order. A business day is a day on which the NYSE is open for trading or any day in which enough trading has occurred in the securities held by a Portfolio to affect the NAV materially. Portfolio securities that are listed primarily on foreign exchanges may trade on weekends or on other days on which the Portfolios do not price their shares. In this case, the NAV of a Portfolio's shares may change on days when you are not able to buy or sell shares. The Portfolios value their investments based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by the Adviser pursuant to fair valuation procedures adopted by the Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant Portfolio's investments and other assets, subtracting its liabilities, and then dividing that figure by the number of outstanding shares of the class. 19 NAV = Total Assets Less Liabilities ---------------------------- Number of Shares Outstanding You can request each Portfolio's current NAV by calling 1-800- 447-1139. INVESTING IN THE PORTFOLIOS This section provides information to assist you in purchasing shares of the Portfolios. It describes the minimum investment requirements for the Portfolios, the expenses and sales charges applicable to each Class of shares and the procedures to follow if you decide to buy shares. Please read the entire Prospectus carefully before buying shares of a Portfolio. Investment Requirements Minimum Initial Investment: Non-Retirement Account: $1,000 Retirement Account: $250 Minimum Subsequent Investment: Non-Retirement Account: $50 Retirement Account: $25 Choosing a Class of Shares Once you decide to buy shares of a Portfolio, you must determine which class of shares to buy. Each Portfolio offers Class A, B and C shares. Each class has its own cost structure and features that will affect the results of your investment over time in different ways. Your financial adviser or account representative can help you choose the class of shares that best suits your investment needs. Class A shares have a front-end sales charge, which is added to the Class A NAV to determine the offering price per share. Class B and C shares do not have a front-end sales charge, which means that your entire investment is available to work for you right away. However, Class B and C shares have a contingent deferred sales charge ("CDSC") that you must pay if you sell your shares within a specified period of time. In addition, the annual expenses of Class B and C shares are higher than the annual expenses of Class A shares. In deciding which class is best, you may consider, among other things: how much you intend to invest; the length of time you expect to hold your investment. 20 Relative Advantages of Each Share Class
Investor Characteristics Advantages ------------------------------------------------------------------------------------------------ Class A Long-term investment horizon and/or Lower expense structure and the qualify for waiver or reduction of amount of the initial sales charge sales charge decreases as you invest more money ------------------------------------------------------------------------------------------------ Class B Long-term investment horizon No front-end sales charge so the full amount of your investment is put to work right away; converts to Class A shares after eight years ------------------------------------------------------------------------------------------------ Class C Short-term investment horizon No front-end sales charge so the full amount of your investment is put to work right away and the CDSC is lower than that of Class B shares, declining to zero after one year ------------------------------------------------------------------------------------------------
You should consult your financial adviser or account representative before investing in a Portfolio. You may be eligible to use the Right of Accumulation or Letter of Intent privileges to reduce your Class A sales charges. See "Reduction of Class A Sales Charges" below. The following table summarizes the differences in the expense structures of the three classes of shares:
Class A Class B Class C --------------------------------------------------------------------------------------------- Front End 4.50% None None Sales Charge* --------------------------------------------------------------------------------------------- CDSC None** 5% to 0%, declining the 1%, if you sell shares longer you hold your within one year of shares purchase --------------------------------------------------------------------------------------------- Annual Lower than Class Higher than Class A shares Higher than Class A Expenses B and C shares (Note: Class B shares shares; same as Class convert to Class A B shares shares 8 years after purchase)*** ---------------------------------------------------------------------------------------------
* There are several ways that you can reduce these charges, as described under "Sales Charge Reductions and Waivers." ** You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. *** Class B shares will not convert to Class A shares if the Adviser believes that the Internal Revenue Service will consider the conversion to be a taxable event. If Class B shares do not convert to Class A shares, they will continue to be subject to higher expenses than Class A shares indefinitely. 21 How the Trust Calculates Sales Charges Class A Shares The public offering price for Class A shares is the NAV that the Trust calculates after you place your order plus the applicable sales load, as determined in the following table.
Total Sales Load Amount As a % of As a % of NAV of Investment offering price per share ----------------------------------------------------------------------------------- Less than $50,000 4.50 4.71 $50,000 or more but less than $100,000 4.25 4.44 $100,000 or more but less than $250,000 3.25 3.36 $250,000 or more but less than $500,000 2.50 2.56 $500,000 or more but less than $1,000,000 2.00 2.04 $1,000,000 and above 0.00* 0.00 -----------------------------------------------------------------------------------
* You will pay a CDSC of 1% of the lesser of purchase or sale price of your Class A shares if you sell them up to one year after the date of purchase if you purchased them at net asset value because you purchased $1 million or more of Class A shares. Class B Shares The public offering price for Class B shares is the NAV that the Trust calculates after you place your order. You pay no initial sales charge on Class B shares, but you will pay a CDSC if you sell your shares up to six years after the date of purchase. The amount of the CDSC, if any, will vary depending on the number of years from the time you buy until the time you sell your Class B shares. Class B shares have higher annual expenses than Class A shares. For the purpose of determining the number of years from the time of any purchase, the Trust will aggregate all payments during a month and consider them made on the first day of that month. Year Since Purchase CDSC as a % of Dollar Amount Subject to CDSC ---------------------------------------------------------------- First 5% Second 4% Third 3% Fourth 3% Fifth 2% Sixth 1% Seventh 0% Eighth* 0% ---------------------------------------------------------------- * Class B shares of a Portfolio will automatically convert into Class A shares of the same Portfolio at the end of the calendar quarter that is eight years after the initial purchase of the Class B shares. Class B shares acquired by exchange will convert into Class A shares of the new Portfolio based on the date of the initial purchase of the shares of the exchanged Portfolio. Class B shares acquired through reinvestment of distributions will convert into Class A shares based on the date of the initial purchase of the underlying shares, on a pro rata basis. The Trust does not consider conversion to Class A shares to be a purchase or sale for federal income tax purposes. You should consult with your own tax adviser. 22 Class C Shares The public offering price for Class C shares is the NAV that the Trust calculates after you place your order. You pay no initial sales charge at the time of purchase. You will pay a CDSC of 1%, however, if you sell Class C shares up to one year after the date of purchase. The Trust will calculate the CDSC on Class B and C shares in a manner that results in the lowest possible charge. The Portfolios will apply the CDSC to the lower of the purchase price of the shares, or the current market value of the shares being sold. You will pay no CDSC when you sell shares you have acquired through reinvestment of dividends or capital gain distributions. Sales Charge Reductions and Waivers Waiver of Class A Sales Charges The following categories of investors may buy Class A shares without a front-end sales charge: Bear Stearns, its affiliates and their officers, directors or employees (including retired employees); any partnership of which Bear Stearns is a general partner, any Trustee or officer of the Trust and certain family members of any of the these individuals. Employees or registered representatives of any broker-dealers with whom the Distributor has entered into sales agreements ("Authorized Dealers") and their spouses and minor children. Qualified retirement plans of Bear Stearns. Trustees or directors of investment companies for which BSAM or an affiliate acts as sponsor. Any state, county or city, or any instrumentality, department, authority or agency that is prohibited by law from paying a sales load or commission in connection with the purchase of shares of a Portfolio. Institutional investment clients, including corporate-sponsored pension and profit-sharing plans, other benefit plans and insurance companies. Pension funds, state and municipal governments or funds, Taft-Hartley plans and qualified non-profit organizations, foundations and endowments. Trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients. Service providers to the Portfolios. Accounts for which an Authorized Dealer or investment adviser charges an asset management fee (including "wrap" fees). To take advantage of the sales charge waiver, you must indicate your eligibility on your Account Information Form. If you think you may be eligible for a sales charge waiver, please contact your account representative or call PFPC Inc., the Portfolios' Transfer Agent, at 1-800- 447-1139. 23 Reduction of Class A Sales Charges You may reduce your Class A sales charge by taking advantage of the following privileges: Right of Accumulation. Lets you add the value of all Class A shares of the Portfolios that you currently own for purposes of calculating the sales charge on future purchases of Class A shares. You may count share purchases made by the following investors to calculate the reduced sales charge: you, your spouse and your children under the age of 21 (including shares in certain retirement accounts), and a company that you, your spouse or your children control; a trustee or other fiduciary account (including an employee benefit plan); a trustee or other fiduciary that buys shares concurrently for two or more employee benefit plans of a single employer or of affiliated employers. Letter of Intent. Lets you buy Class A shares of any Portfolio over a 13-month period at the same sales charge as if all shares had been bought at once. You are not obligated to buy the full amount of the shares. However, you must complete the intended purchase to obtain the reduced sales load. To qualify for this plan, check the "Letter of Intent" box on the Account Information Form at the time you buy shares of any Portfolio. Waiver of CDSC The Trust will waive the CDSC of Class A, B and C shares under the following circumstances: redemptions made within one year after the death or disability of a shareholder; redemptions by employees participating in eligible benefit plans, including separation of service; redemptions as a result of a combination of any investment company with a Portfolio by merger, acquisition of assets or otherwise; a mandatory distribution under a tax-deferred retirement plan; redemptions made through the Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder account based on the value of the account, at the time you establish the automatic withdrawal feature. If you believe you may qualify for a waiver of the CDSC, please contact your account representative or the Transfer Agent. Distribution Fees and Shareholder Servicing Fees Distribution Fees. The Trust has adopted a distribution plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended, for each Portfolio's Class A, B and C shares. Under the distribution plan, each Portfolio pays the Distributor a fee for the sale and distribution of its shares. The plan provides that each Portfolio's Class A shares pays 0.10% of its average daily net assets and each Portfolio's Class B and C shares each pay 0.75% of its average daily net assets. Keep in mind that: Each Portfolio pays distribution fees on an ongoing basis. Over time, these fees will increase the cost of your investment and may cost you more than paying higher front-end or back-end sales charges. The Distributor will waive its distribution fees to the extent that a Portfolio would exceed the limitations imposed by the National Association of Securities Dealers on asset-based sales charges. 24 Shareholder Servicing Fees. The Trust has adopted a shareholder servicing plan for the Class A, B and C shares of each Portfolio. The shareholder servicing plan allows the Portfolios or the Distributor to pay shareholder servicing agents an annual fee of up to 0.25% of the average daily net assets of each of these classes of shares for personal shareholder services and for maintaining shareholder accounts. Shareholder servicing agents may include Authorized Dealers, fiduciaries, and financial institutions that sponsor "mutual fund supermarkets," "no-transaction fee" programs or similar programs. How to Buy Shares You may buy shares of the Portfolios through your account representative by check or by wire or through the Transfer Agent. If you place your order before the close of regular trading on the NYSE (usually 4:00 p.m., Eastern time), you will receive the NAV that the Trust calculates that day. Orders placed after the close of trading on the NYSE will be priced at the next business day's NAV. When you buy shares, you must specify the class of shares. Otherwise, the Trust will assume that you wish to buy Class A shares. Purchase Procedures Purchase through the Distributor or Authorized Dealers
Method of Purchase Instructions [Graphic] In person/ o Contact your account representative. [Graphic] By mail o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o For a new account, your account representative will help you to complete the application. o Mail your application or additional purchase to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 o Send overnight mail to: PFPC Inc. Attention: The Bear Stearns Funds 400 Bellevue Parkway Wilmington, DE 19899 [Graphic] By telephone o Contact your account representative. [Graphic] wire o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o On the day of purchase, call the Transfer Agent at 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time) to give notice of the purchase and before wiring any funds. o Wire funds to: PNC Bank, N.A. ABA#: 031000053 Credit Account # 85-5102-0143 From: Name of Investor For the purchase of: Name of Portfolio Amount: Amount to be invested o After calling the Transfer Agent, contact your financial institution to wire funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed. Additional Purchases Through the Transfer Agent 25 Method of Purchase Instructions [Graphic] By mail o Mail your application or additional purchase to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 [Graphic] By telephone/ o On the day of purchase, call the Transfer Agent at [Graphic] wire 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time) to give notice of the purchase and before wiring any funds. o When you call the Transfer Agent: 1. Obtain wire instructions for Bear Stearns. 2. Place your trade by specifying the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. o After calling the Transfer Agent, contact your financial institution to wire funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed.
How to Sell Shares You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. Please refer to the instructions under "How to Buy Shares" for information on selling your shares in person, by telephone, by mail or by wire. When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. The Trust will send you payment proceeds generally within seven days after it receives your redemption request. Additional Information About Redemptions Waiting period. If you buy shares by check, the Trust will wait for your check to clear (up to 15 days) before it sends the proceeds of redemption. Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. Signature guarantees. If your redemption proceeds exceed $100,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible 26 guarantor institution. The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including: -- a U.S. bank, trust company, credit union or savings association; -- a foreign bank that has a U.S. correspondent bank; -- a U.S. registered dealer or broker in securities, municipal securities or government securities; or -- a U.S. national securities exchange, a registered securities association or a clearing agency. If you are signing on behalf of a corporation, partnership or other business or as a fiduciary, you must also include your title in the signature. Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative or the Transfer Agent by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. To the extent allowed under applicable law, the Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a share of actual portfolio securities. Call the Transfer Agent for details. Suspension of the Right of Redemption. A Portfolio may suspend your right to redeem your shares under any of the following circumstances: -- during non-routine closings of the NYSE; -- when the Securities and Exchange Commission ("SEC") determines either that trading on the NYSE is restricted or that an emergency prevents the sale or valuation of the Portfolio's securities; or -- when the SEC orders a suspension to protect the Portfolio's shareholders. Exchanges You may exchange shares of one Portfolio for shares of the same class of another Portfolio described in this Prospectus or the same class of another Portfolio of the Trust, usually without paying any additional sales charges. (You may obtain more information about other Portfolios of the Trust by calling the Transfer Agent at 1-800- 447-1139.) You may pay a sales charge if the Portfolio you are exchanging did not impose an initial sales charge. You will not have to pay an additional sales charge if the Portfolio you are exchanging was acquired in any of the following ways: by a previous exchange from shares bought with a sales charge; 27 through reinvestment of dividends and distributions paid with respect to these shares. The Trust does not currently charge a fee for exchanges, although it may change this policy in the future. Exchange procedures. To exchange your shares, you must give exchange instructions to your account representative or the Transfer Agent in writing or by telephone. Exchange policies. When exchanging your shares, please keep in mind: An exchange of shares may create a tax liability for you. You may have a gain or loss on the transaction, since the shares you are exchanging will be treated like a sale. When the market is very active, telephone exchanges may be difficult to complete. You may have to submit exchange requests to your account representative or the Transfer Agent in writing, which will cause a delay. The shares you exchange must have a value of at least $250 (except in the case of certain retirement plans). If you are establishing a new account, you must exchange the minimum dollar amount needed to open that account. Before you exchange your shares, you must review a copy of the current prospectus of the Portfolio that you would like to buy. You may qualify for a reduced sales charge. See the SAI for details, or call your account representative. Your exchange request may not be accepted if the Trust determines that your exchange would be detrimental to the interests of a Portfolio's shareholders. The Trust specifically reserves the right to refuse your request if it is part of multiple purchase or exchange requests that the Trust, in its sole discretion, deems to involve excessive trading or to be part of a market timing strategy since these types of trading practices may require a Portfolio to sell securities at a disadvantageous time or price. In making its determination, the Trust may consider orders you have placed individually, orders placed in combination with a group of shareholders or commonly controlled accounts and orders placed by your securities dealer or service agent. The Trust may modify or terminate the exchange option at any time. S H A R E H O L D E R S E R V I C E S The Trust offers several additional shareholder services. If you would like to take advantage of any of these services, please call your account representative or the Transfer Agent at 1-800- 447-1139 to obtain the appropriate forms. These services may be changed or terminated at any time with 60 days' notice. o Automatic investment plan. You may buy shares of a Portfolio at regular intervals by direct transfer of funds from your bank. You may invest a set amount ($250 for the initial purchase; minimum subsequent investments of $50 or $25 for retirement accounts). o Directed distribution option. You may automatically reinvest your dividends and capital gain distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may buy Class A shares without a sales charge at the current NAV. However, if you buy Class B or C shares, they may be subject to a CDSC when you sell them. You may not use this service to establish a new account. o Systematic withdrawal plan. You may withdraw a set amount ($25 minimum) as long as you have a beginning account balance of at least $5,000. You or the Transfer Agent may terminate the arrangement at any time. If you plan to buy new shares when you participate in a systematic plan, you may have to pay an additional sales charge. o Reinstatement privilege. If you sell some or all of your Class A or B shares of a Portfolio, you have up to 90 days to reinvest all or part of the 28 redemption proceeds in Class A shares of the Portfolio or other Portfolios of the Trust without paying a sales charge. This privilege applies only to the Class A shares that you purchased subject to the initial sales charge and to Class A and B shares on which you paid a CDSC when you sold them. This privilege does not apply to Class C shares. If you believe you may qualify for this privilege, you must notify your account representative or the Transfer Agent when you send your payment. D I V I D E N D S, D I S T R I B U T I O N S A N D T A X E S If you buy shares of a Portfolio shortly before it declares a dividend or a distribution, a portion of your investment in the Portfolio may be returned to you in the form of a taxable distribution. Distributions The Portfolios pass along your share of their investment earnings in the form of dividends. Dividend distributions are the net dividends or interest earned on investments after expenses. As with any investment, you should consider the tax consequences of an investment in a Portfolio. Ordinarily, each Portfolio declares dividends from its net investment income daily and pays them monthly. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: o Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account Information Form, you will receive your distributions this way. o Cash. The Trust will send you a check no later than seven days after the payable date. o Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. o Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio. See the description of this option in the "Shareholder Services" section above. o Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account Information Form. If you would like to change the option you selected, please call your account executive or the Transfer Agent at 1-800- 447-1139. Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. Depending on the type of account in which the shares are held and the nature of the shareholder, a shareholder may be taxed 29 on distributions received from a Portfolio. It is important for you to be aware of the following information about the tax treatment of your investment. o Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain (which may be taxable at different rates depending on the length of time a Portfolio holds its assets). o Dividends and distributions are treated in the same manner for federal income tax purposes whether you receive them in the form of cash or additional shares. They may also be subject to state and local taxes. o Dividends from the Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. o Certain dividends and distributions paid to you in January will be taxable as if they had been paid to you the previous December. o The Trust will mail you tax statements every January showing the amounts and tax status of distributions you received. o When you sell (redeem) or exchange shares of a Portfolio, you must recognize any gain or loss. o Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. o You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. A D D I T I O N A L I N F O R M A T I O N Performance The Trust, the Distributor, the Adviser and certain financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These entities and publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, unless instructed to the contrary. Investors may request that the Trust send these documents to each shareholder individually by calling the Trust at 1-800-766-4111. 30 Financial Highlights -- Income Portfolio The financial highlights table is intended to help you understand the financial performance of the Income Portfolio for the past five years for the Class A and C shares and since inception (February 2, 1998) for the Class B shares. This information reflects financial results for a single share of the Income Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Income Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Income Portfolio's financial statements, are included in the Income Portfolio's annual report, which is available by calling the Trust at 1-800-447-1139.
Net Realized and Net Asset Unrealized Dividends Distributions Value, Net Gain/(Loss) from Net from Net Beginning Investment on Investment Realized of Period Income*(1) Investments*(2) Income -------------------------------------------------------------------------------------------------------- Class A -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 $11.99 $0.60 $(0.15) $(0.60) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 11.53 0.73 0.46 (0.73) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 12.15 0.70 (0.62) (0.70) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.37 0.74 (0.03) (0.74) $ (0.19) -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 12.03 0.76 0.36 (0.76) (0.02) -------------------------------------------------------------------------------------------------------- Class B -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 11.99 0.52 (0.15) (0.52) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 11.53 0.65 0.46 (0.65) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 12.15 0.63 (0.62) (0.63) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.37 0.65 (0.03) (0.65) (0.19) -------------------------------------------------------------------------------------------------------- For the period February 2, 1998** 12.47 0.10 (0.10) (0.10) - through March 31, 1998 -------------------------------------------------------------------------------------------------------- Class C -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 11.99 0.52 (0.15) (0.52) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 11.53 0.65 0.46 (0.65) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 12.15 0.63 (0.62) (0.63) - -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.37 0.65 (0.03) (0.65) (0.19) -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 12.03 0.70 0.36 (0.70) (0.02) --------------------------------------------------------------------------------------------------------
* Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. ** Commencement of initial public offering. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 31 Financial Highlights -- Income Portfolio
Net Total Net Assets, Ratio of Ratio of Net Increase/(Decrease) Portfolio Asset Investment End of Expenses to Investment Reflected in Turnover Rate Value, Return(3) Period Average Net Income Expense End of (000's omitted) Assets(1) to Average and Net Period Net Assets(1) Investment Income Ratios Due to Waivers and Related Reimbursements ------------------------------------------------------------------------------------------------------- Class A ------------------------------------------------------------------------------------------------------- $11.84 3.86% $9,757 0.80% 4.99% 1.45% 240.84% ------------------------------------------------------------------------------------------------------- 11.99 10.68 8,316 0.80 6.22 2.48 174.46 ------------------------------------------------------------------------------------------------------- 11.53 0.77 5,071 0.80 5.99 3.13 158.47 ------------------------------------------------------------------------------------------------------- 12.15 5.77 4,775 0.80 5.83 2.98 107.21 ------------------------------------------------------------------------------------------------------- 12.37 9.43 2,926 0.80 6.13 1.86 244.78 ------------------------------------------------------------------------------------------------------- Class B ------------------------------------------------------------------------------------------------------- 11.84 3.19 6,773 1.45 4.27 1.45 240.84 ------------------------------------------------------------------------------------------------------- 11.99 9.96 4,861 1.45 5.55 2.48 174.46 ------------------------------------------------------------------------------------------------------- 11.53 0.12 2,027 1.45 5.34 3.13 158.47 ------------------------------------------------------------------------------------------------------- 12.15 5.09 1,121 1.45 5.16 2.81 107.21 ------------------------------------------------------------------------------------------------------- 12.37 (0.04)(4) 18 1.45(5) 5.22(4,5) 0.48(4,5) 244.78 ------------------------------------------------------------------------------------------------------- Class C ------------------------------------------------------------------------------------------------------- 11.84 3.19 6,066 1.45 4.27 1.45 240.84 ------------------------------------------------------------------------------------------------------- 11.99 9.96 3,339 1.45 5.55 2.48 174.46 ------------------------------------------------------------------------------------------------------- 11.53 0.12 1,971 1.45 5.33 3.13 158.47 ------------------------------------------------------------------------------------------------------- 12.15 5.08 2,067 1.45 5.28 3.18 107.21 ------------------------------------------------------------------------------------------------------- 12.37 8.92 1,403 1.28 5.60 1.80 244.78 ---------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment return is not annualized. 4 The total investment return and ratios for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to timing differences in the commencement of the initial public offerings. 5 Annualized. 32 Financial Highlights -- High Yield Portfolio The financial highlights table is intended to help you understand the financial performance of the High Yield Portfolio since its inception. This information reflects financial results for a single share of the High Yield Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the High Yield Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the High Yield Portfolio's financial statements, are included in the High Yield Portfolio's annual report, which is available by calling the Trust at 1-800-447-1139.
Net Asset Net Net Realized Dividends Distributions Value, Investment and Unrealized from Net from Net Beginning Income*(1) Gain/(Loss) on Investment Realized of Period Investments*(2) Income Capital Gains ----------------------------------------------------------------------------------------------------------------------- Class A ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 $8.74 $0.72 $(0.38) $(0.72) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 9.78 0.94 (1.04) (0.94) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 11.36 1.08 (1.58) (1.08) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.73 1.11 (1.32) (1.11) $(0.05) ----------------------------------------------------------------------------------------------------------------------- For the period January 2, 1998** 12.00 0.26 0.73 (0.26) - through March 31, 1998 ----------------------------------------------------------------------------------------------------------------------- Class B ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 8.74 0.67 (0.38) (0.67) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 9.78 0.88 (1.04) (0.88) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 11.36 1.01 (1.58) (1.01) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.73 1.04 (1.32) (1.04) (0.05) ----------------------------------------------------------------------------------------------------------------------- For the period January 2, 1998** 12.00 0.24 0.73 (0.24) - through March 31, 1998 ----------------------------------------------------------------------------------------------------------------------- Class C ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2002 8.74 0.67 (0.38) (0.67) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2001 9.78 0.88 (1.04) (0.88) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2000 11.36 1.01 (1.58) (1.01) - ----------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.73 1.04 (1.32) (1.04) (0.05) ----------------------------------------------------------------------------------------------------------------------- For the period January 2, 1998** 12.00 0.24 0.73 (0.24) - through March 31, 1998 -----------------------------------------------------------------------------------------------------------------------
* Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. **Commencement of investment operations. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. Net realized and unrealized gain/(loss) on investments include forward foreign currency exchange contracts and translation of foreign currency related transactions, if any. 33 Financial Highlights-- High Yield Portfolie, ========== Total Net Assets, Ratio of Ratio of Net Increase/(Decrease) Portfolio End of Investment End of Expenses to Investment Reflected in Turnover Period Return(3) Period Average Net Income Expense Rate (000's Assets(1) to Average and Net omitted) Net Assets(1) Investment Income Ratios Due to Waivers and Related Reimbursements ------------------------------------------------------------------------------------------------- Class A ------------------------------------------------------------------------------------------------- $8.36 4.16% $72,491 1.00% 8.51% 0.49% 212.94% ------------------------------------------------------------------------------------------------- 8.74 (1.07) 69,132 1.00 10.03 0.64 122.83 ------------------------------------------------------------------------------------------------- 9.78 (4.07) 44,991 1.00 10.14 0.58 70.61 ------------------------------------------------------------------------------------------------- 11.36 (1.57) 55,367 1.00 9.37 0.74 101.75 ------------------------------------------------------------------------------------------------- 12.73 8.30 18,301 1.00(4) 9.14(4) 1.67(4) 139.61 ------------------------------------------------------------------------------------------------- Class B ------------------------------------------------------------------------------------------------- 8.36 3.49 32,233 1.65 7.86 0.49 212.94 ------------------------------------------------------------------------------------------------- 8.74 (1.71) 26,336 1.65 9.45 0.64 122.83 ------------------------------------------------------------------------------------------------- 9.78 (5.29) 23,520 1.65 9.49 0.59 70.61 ------------------------------------------------------------------------------------------------- 11.36 (2.21) 23,395 1.65 8.76 0.73 101.75 ------------------------------------------------------------------------------------------------- 12.73 8.13 6,013 1.65(4) 8.46(4) 1.68(4) 139.61 ------------------------------------------------------------------------------------------------- Class C ------------------------------------------------------------------------------------------------- 8.36 3.49 29,535 1.65 7.84 0.49 212.94 ------------------------------------------------------------------------------------------------- 8.74 (1.71) 22,317 1.65 9.45 0.64 122.83 ------------------------------------------------------------------------------------------------- 9.78 (5.29) 18,707 1.65 9.49 0.59 70.61 ------------------------------------------------------------------------------------------------- 11.36 (2.21) 26,064 1.65 8.73 0.73 101.75 ------------------------------------------------------------------------------------------------- 12.73 8.13 11,298 1.65(4) 8.46(4) 1.67(4) 139.61 ------------------------------------------------------------------------------------------------- - -----------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment return is not annualized. 4 Annualized. 34 The Bear Stearns Funds 383 Madison Avenue New York, NY 10179 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 383 Madison Avenue PFPC Inc. New York, NY 10179 Bellevue Corporate Center 400 Bellevue Parkway INVESTMENT ADVISER Wilmington, DE 19809 Bear Stearns Asset Management Inc. 383 Madison Avenue COUNSEL New York, NY 10179 Kramer Levin Naftalis & Frankel LLP 919 Third Avenue ADMINISTRATOR New York, NY 10022 Bear Stearns Funds Management Inc. 383 Madison Avenue INDEPENDENT AUDITORS New York, NY 10179 Deloitte & Touche LLP Two World Financial Center CUSTODIAN New York, NY 10281 Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 35 Statement of Additional Information. The Statement of Additional Information ("SAI") provides a more complete discussion of several of the matters contained in this Prospectus and is incorporated by reference, which means that it is legally a part of this Prospectus as if it were included here. Annual and Semi-Annual Reports. The annual and semi-annual reports to shareholders contain additional information about each Portfolio's investments, including a discussion of the market conditions and investment strategies that significantly affected a Portfolio's performance during its last fiscal year. To obtain a free copy of the SAI and the current annual or semi-annual reports or to make any other inquiries about a Portfolio, you may call or write: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 Telephone: 1-800- 447-1139 or 1-800-766-4111 You may obtain copies of the SAI or financial reports for free by calling or writing broker-dealers or other financial intermediaries that sell a Portfolio's shares; upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102; or for free by visiting the SEC's Worldwide Web site at http://www.sec.gov. You may review and copy information about the Portfolios (including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 to obtain information on the operation of the SEC's Public Reference Room. Investment Company Act File No. 811-8798 BSF-P-016-05 The Bear Stearns Funds Prospectus Dated August 1, 2002 Fixed Income Funds o Income Portfolio o o High Yield Total Return Portfolio Class Y Shares This Prospectus provides important information about each Portfolio that you should know before investing. Please read it carefully and keep it for future reference. The Securities and Exchange Commission has not approved any Portfolio's shares or determined whether this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. The Bear Stearns Funds o 383 Madison Avenue, New York, NY 10179 1-800-447-1139 Table of Contents Risk/Return Summary Income Portfolio High Yield Total Return Portfolio Investments Risk Factors Management of the Portfolios Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares Investing in the Portfolios How to Buy Shares How to Sell Shares Exchanges Dividends, Distributions and Taxes Additional Information Financial Highlights Each Portfolio described in this Prospectus is a series of The Bear Stearns Funds, a registered open-end management investment company (the "Trust"). It is important to keep in mind that mutual fund shares are: o not deposits or obligations of any bank; o not insured by the Federal Deposit Insurance Corporation; o subject to investment risk, including possible loss of the money invested. Income Portfolio RISK/RETURN SUMMARY Investment Objective High current income consistent with preservation of capital. Principal Strategies Under normal circumstances, the Income Portfolio will invest at least 80% of its net assets in investment-grade, U.S. dollar-denominated fixed income securities issued by U.S. companies and the U.S. government or its political subdivisions, agencies or instrumentalities. The Income Portfolio will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. The Income Portfolio may invest in: o Bonds, debentures and notes; o Mortgage-related securities (including interest-only and principal-only stripped securities); o Asset-backed securities; o Convertible debt obligations; and o Money market instruments (including bank obligations, commercial paper, other short-term corporate debt, and repurchase agreements). The Income Portfolio seeks to equal or exceed the performance of the Lehman Intermediate Government/Credit Index (the "Lehman Index"), a market-capitalization weighted index that includes U.S. Treasury, government-sponsored, and investment grade corporate fixed income securities maturing between one and ten years issued by entities having a minimum of $150 million par amount outstanding . This index has been in existence 1973. Under normal circumstances, the Income Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from two to seven years and a duration between two and five years. Duration is a measure of the expected price volatility of a debt security or portfolio of debt securities. Duration and interest rates are inversely related. For example, if a bond has an effective duration of three years, you can expect a 1% increase in general interest rates to cause the bond's value to decrease about 3%. The Income Portfolio may invest up to 5% of its total assets in debt obligations of issuers in emerging countries. "Emerging countries" include any country that is generally considered to be an emerging or developing country by the World Bank, the International Finance Corporation or the United Nations and its authorities. An issuer is considered to be located in an emerging country if it: o derives 50% or more of its total revenues from either goods produced, sales made or services performed in emerging countries, or o is organized under the laws of, and with a principal office in, an emerging country. Income Portfolio 1 Emerging countries generally include countries in Asia (other than Japan), Eastern Europe, Latin America and Africa. Quality. The Income Portfolio must invest at least 80% of its net assets in investment-grade securities, that is, securities rated no lower than "Baa" by Moody's Investors Service ("Moody's"), "BBB" by Standard & Poor's ("S&P"), the equivalent rating by other nationally recognized statistical rating organizations ("NRSROs"), or, if unrated, deemed to be of comparable quality by Bear Stearns Asset Management Inc., the investment adviser for each Portfolio ("BSAM" or the "Adviser"). The Income Portfolio may invest up to 20% of its net assets in securities that are rated below investment-grade ("junk bonds") but no lower than "B" by Moody's or S&P, the equivalent rating by any other NRSRO, or, if unrated, deemed to be of comparable quality by the Adviser. The Income Portfolio may invest in short-term fixed income obligations that are rated in the two highest rating categories by Moody's, S&P or Fitch IBCA, Duff & Phelps ("Fitch"), or, if unrated, deemed to be of comparable quality by the Adviser. For a discussion of the rating categories of various NRSROs, see the Appendix to the Statement of Additional Information ("SAI"). Principal Risks You may lose money by investing in the Income Portfolio. The Income Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Income Portfolio's net asset value, yield and/or total return: o The rate of inflation may increase, resulting in higher interest rates, causing the Income Portfolio's securities to decline in value. The value of a longer-term fixed income security is usually more sensitive to rising interest rates than that of short-term fixed income securities. o A particular strategy may not be executed effectively or otherwise generate the intended result. o An issuer's credit quality may be downgraded. o Below-investment-grade securities are riskier than investment-grade securities and are more likely to decline in value than investment-grade securities due to defaults or bankruptcies. o The Income Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. This may occur, for example, when the average life of a mortgage-related security is shortened through prepayment. o The Income Portfolio may not fully recoup its investment in interest-only stripped mortgage-related securities if the underlying mortgages are prepaid faster than anticipated. o The yield on principal-only stripped mortgage-related securities could decline if the underlying mortgages experience less-than-anticipated prepayments of principal. o Securities issued in emerging countries may be more volatile than securities issued in established markets due to less developed securities markets or political instability. Inefficient settlement procedures in emerging countries may lead the Income Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. In addition, issuers in emerging countries typically are subject to less-stringent government regulation and accounting standards than their counterparts in the United States. Who May Want to Invest in the Income Portfolio The Income Portfolio may be appropriate for investors who: Income Portfolio 2 o seek high current income; o want to diversify their portfolio. The Income Portfolio may not be appropriate for investors who: o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Performance The bar chart and table below illustrate the risks of investing in the Income Portfolio by showing changes in the performance of its Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The performance information presented below partly reflects management of the Income Portfolio's investments to maximize total return, rather than to generate high current income, the Income Portfolio's present investment objective, adopted on October 16, 1998. The performance information presented below may have been different if the Income Income Portfolio Annual Total Return (%)(1) [bar chart omitted] ------------------------ 1996 3.10 ------------------------ 1997 7.95 ------------------------ 1998 7.66 ------------------------ 1999 0.90 ------------------------ 2000 10.10 ------------------------ 2001 ( ) ------------------------ Portfolio's investments had been managed to realize high current income for the entire period. Past performance is not necessarily an indication of future results. (1) The Income Portfolio's year-to-date return as of June 30, 2002, was _____%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended _____________________) and the lowest quarterly return was (_____)% (for the quarter ended ___________________). The table shows how the average annual total return for Class Y shares of the Income Portfolio for one year, five years and since the date of inception compared to the Lehman Index, a broad-based unmanaged index that represents the general performance of fixed income securities, and the Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG Index"). While the Salomon BIG Index is a common default benchmark for fixed income portfolios, the Adviser believes that the Lehman Index is more closely aligned with the investment objective of the Income Portfolio. Accordingly, on _______, 2002, the Income Portfolio discontinued using the Salomon BIG Index as a benchmark for its performance and began using the Lehman Index. The table also compares the Income Portfolio's performance to that of the Lipper A Rated Bond Fund Index, a measure of the performance of investment-grade fixed income mutual funds. Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December September 8, 31, 2001) 1995 ------------------------------------------------------------------------ Income Portfolio - Class Y ------------------------------------------------------------------------ Return before taxes ------------------------------------------------------------------------ Return after taxes on distributions ------------------------------------------------------------------------ Income Portfolio 3 Average Annual Total Returns 1 Year 5 Years Since Inception (for the periods ended December September 8, 31, 2001) 1995 ------------------------------------------------------------------------ Return after taxes on distributions and on sale of Portfolio shares ------------------------------------------------------------------------ Lehman Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------------ Salomon BIG Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------------ Lipper A Rated Bond Fund Index (reflects no deduction for fees, expenses or taxes) ------------------------------------------------------------------------ Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Income Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ------------------------------------------------------------------------------------ Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None ------------------------------------------------------------------------------------ Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None ------------------------------------------------------------------------------------ Sales charge imposed on reinvested dividends None ------------------------------------------------------------------------------------ Redemption fees None** ------------------------------------------------------------------------------------ Exchange fees None ------------------------------------------------------------------------------------ Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------------------------ Management Fees 0.45% ------------------------------------------------------------------------------------ Distribution (12b-1) Fees 0.00% ------------------------------------------------------------------------------------ Other Expenses 1.45% ------------------------------------------------------------------------------------ Total Annual Portfolio Operating Expenses 1.90% ------------------------------------------------------------------------------------ Fee Waiver and Expense Reimbursement (1.45)% ------------------------------------------------------------------------------------ Net Expenses(1) 0.45% ------------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Income Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Income Portfolio over various time periods. It is intended to help you compare the cost of investing in the Income Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the Income Portfolio; o your investment returns 5% each year; o the Income Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: Income Portfolio 4 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------- Class Y $ $ $ $ ----------------------------------------------------------------- * This Example assumes that net portfolio operating expenses will equal 0.45% until July 31, 2002 and thereafter will equal 2.93%. Income Portfolio 5 High Yield Total Return Portfolio RISK/RETURN SUMMARY Investment Objective Total return through high current income and capital appreciation. Principal Strategies Under normal circumstances, the High Yield Total Return Portfolio (the "High Yield Portfolio") will invest at least 80% of its net assets in high yield fixed income securities (as defined below), including domestic and foreign debt securities, convertible securities and preferred stocks. The High Yield Total Return Portfolio will not change this policy unless it notifies shareholders at least 60 day in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. Within this 80% category, the High Yield Portfolio may invest in the following securities (up to the stated percentage of its total assets): o 25% in foreign securities; o 25% in zero-coupon securities, pay-in-kind bonds or discount obligations; o 20% in distressed securities; o 20% in mortgage-related securities; o 15% in loans and participations; and o 10% in convertible securities. Generally, the High Yield Portfolio's average weighted maturity will range from three to twelve years. The High Yield Portfolio invests in high yield securities of issuers that the Adviser believes to be positioned for gradual or substantial credit improvement through a process that: o uses Bear Stearns' "High Yield Query System" to screen more than 2,000 issuers to select companies that meet initial investment criteria; o identifies positive catalysts affecting the issuer's financial condition that may lead to price appreciation; o includes communicating with senior management to assess its commitment to improving credit quality; and o identifies securities whose issuers have above-average prospects for superior returns. Quality. High yield fixed income securities ("junk bonds") are those securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P, comparably rated by any other NRSRO or unrated securities that the Adviser determines to be of comparable quality. The High Yield Portfolio may invest up to 10%, and will normally hold no more than 25% (as a result of market movements or downgrades), of its assets in bonds rated below "Caa" by Moody's or "CCC" by S&P and comparable unrated bonds. 6 High Yield Portfolio For a discussion of the ratings categories of various NRSROs, see the Appendix to the SAI. The High Yield Portfolio may "sell short" securities. In a short sale, the Portfolio sells a security it does not own but has borrowed, with the expectation that the security will decline in value. If the Adviser correctly predicts the decline in value, the Adviser will purchase the security at a lower price to return to the lender and realize a gain for the High Yield Portfolio. Short selling is considered "leverage" and may involve substantial risk. Principal Risks You may lose money by investing in the High Yield Portfolio. The High Yield Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the High Yield Portfolio's net asset value, yield and/or total return: o High yield securities are riskier than investment-grade securities and are more likely to decline in value than investment-grade securities due to defaults or bankruptcies. o Portfolio investments that are already in default when acquired may experience further market value declines or become worthless. o The rate of inflation may increase, resulting in higher interest rates, causing the High Yield Portfolio's securities to decline in value. The value of a longer-term fixed income security is usually more sensitive to rising interest rates than that of short-term fixed income securities. o A particular strategy may not be executed effectively or otherwise generate the intended result. o An issuer's credit quality may be downgraded. o The High Yield Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. This may occur, for example, when the average life of a mortgage-related security is shortened. o A financial intermediary involved in a loan participation may become insolvent or the High Yield Portfolio, as holder of the loan, may be compelled to participate in restructuring the underlying loan. o Foreign securities are more volatile than their domestic counterparts, in part because of comparatively higher political and economic risks, lack of reliable information, and the risks that a foreign government may confiscate assets. o Securities issued in emerging countries may be more volatile than securities issued in established markets due to less developed securities markets or political instability, Inefficient settlement procedures in emerging countries may lead the High Yield Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. In addition, issuers in emerging countries typically are subject to less-stringent government regulation and accounting standards than their counterparts in the United States. o Short sales may involve substantial risk and may involve leverage, which may increase potential losses. Who May Want to Invest in the High Yield Portfolio The High Yield Portfolio may be appropriate for investors who: o seek high current income coupled with asset growth potential. The High Yield Portfolio may not be appropriate for investors who: o are not willing to accept the greater risks associated with high yield issues when compared to higher-rated corporate and U.S. government bonds; o are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. High Yield Portfolio 7 Performance Class Y shares of the High Yield Portfolio have not yet commenced operations. The bar chart and table below illustrate the risks of investing in the High Yield Portfolio by showing changes in the performance of its Class A shares for various periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. The returns for Class A shares would have annual returns that are substantially similar to those of Class Y shares because both classes are invested in the same portfolio of securities. The returns for Class Y shares offered by this Prospectus will differ from the return for the Class A shares shown on the bar chart and table, depending on the expenses of the Class Y shares. The bar chart does not reflect any sales charges that are imposed on the purchase and sale of Class A shares. If sales charges were reflected, returns would be lower than those shown. High Yield Portfolio Annual Total Return (%) (1) [bar chart omitted] ------------------------ 1998 4.28 ------------------------ 1999 0.07 ------------------------ 2000 (8.81) ------------------------ 2001 ( ) ------------------------ Past performance is not necessarily an indication of future results. (1) The High Yield Portfolio's year-to-date return as of June 30, 2002, was ______%. During the period shown in the bar chart, the highest quarterly return was _____% (for the quarter ended ________________) and the lowest quarterly return was (_______)% (for the quarter ended ______________________). The table shows how the average annual total return for Class A shares of the High Yield Portfolio for one year and since the date of inception compared to the Credit Suisse First Boston High Yield Index (formerly, the Credit Suisse First Boston Global High Yield Index) ("CSFB High Yield Index") and the Credit Suisse First Boston High Yield Index, Developed Countries Only (formerly, the Credit Suisse First Boston Domestic Plus High Yield Bond Index) ("CSFB High Yield Index, DCO"). The CSFB High Yield Index is a broad-based unmanaged index that represents the general performance of high yield fixed income securities. The CSFB High Yield Index, DCO, is a broad-based unmanaged index that represents only the issues of issuers from developed countries in the CSFB High Yield Index. The table also compares the High Yield Portfolio's performance to that of the Lipper High Yield Bond Fund Index, a measure of the performance of high yield fixed income mutual funds. The figures shown in the table do not reflect sales charges applicable to Class A shares.
Average Annual Total Returns 1 Year Since Inception (for the periods ended December 31, 2001) January 2, 1998 ----------------------------------------------------------------------------------- High Yield Portfolio - Class A ----------------------------------------------------------------------------------- Return before taxes ----------------------------------------------------------------------------------- Return after taxes on distributions ----------------------------------------------------------------------------------- Return after taxes on distributions and on sale of Portfolio shares ----------------------------------------------------------------------------------- CSFB High Yield Index (reflects no deduction for fees, expense or taxes) ----------------------------------------------------------------------------------- CSFB High Yield Index, DCO# (reflects no ## deduction for fees, expense or taxes) ----------------------------------------------------------------------------------- Lipper High Yield Bond Fund Index (reflects no deduction for fees, expense or taxes) -----------------------------------------------------------------------------------
__________________ # Although both the CSFB High Yield Index and the CSFB High Yield Index, DCO, are shown in this table, the Adviser has determined that the CSFB High Yield Index, DCO, more closely resembles the High Yield Portfolio's investment philosophy and the universe of securities in which it currently invests. Accordingly, on April 1, 2001, the High Yield Portfolio discontinued using the CSFB High Yield Index as a benchmark for its performance and began using the CSFB High Yield Index, DCO. 8 High Yield Portfolio ## The CSFB High Yield Index, DCO, was created on January 1, 1999. Prior to January 1, 1999, the CSFB High Yield Index was used. The return shown above is a blended return. High Yield Portfolio 9 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the High Yield Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ----------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) None ----------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage of the lower of purchase or sale price) None ----------------------------------------------------------------------------------- Sales charge imposed on reinvested dividends None ----------------------------------------------------------------------------------- Redemption fees None** ----------------------------------------------------------------------------------- Exchange fees None ----------------------------------------------------------------------------------- Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ----------------------------------------------------------------------------------- Management Fees 0.60% ----------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% ----------------------------------------------------------------------------------- Other Expenses 0.69% ----------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.29% ----------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.64)% ----------------------------------------------------------------------------------- Net Expenses(1) 0.65% -----------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase, sale or exchange of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. (1) The expenses shown are based on estimated expenses of Class Y shares of the High Yield Portfolio for the fiscal year ending March 31, 2003. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the High Yield Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the High Yield Portfolio over various time periods. It is intended to help you compare the cost of investing in the High Yield Portfolio with the cost of investing in other mutual funds. The Example assumes that: o you invest $10,000 in the High Yield Portfolio; o your investment returns 5% each year; o the High Yield Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------- Class Y $ 66 $ 346 $ 646 $ 1,500 ---------------------------------------------------------------------- * This Example assumes that net portfolio operating expenses will equal 0.65% until July 31, 2003, and thereafter will equal 1.29%. 10 High Yield Portfolio I N V E S T M E N T S Principal Investment Strategies -- Additional Information Income Portfolio The Income Portfolio seeks to identify and respond to phases in the business cycle --expansion, topping out, recession and downturn -- and to shift among market sectors, maturities and relative credit quality to achieve its objective, taking into account the volatility and risk associated with investing in intermediate term fixed income securities and, to a lesser extent, with investing in below investment-grade securities. The Income Portfolio evaluates a security's duration and maturity. Duration measures a security's sensitivity to interest rate changes and takes into account its cash flows over time, including the effect of prepayments and interest rate changes. Maturity measures only the time until final payment is due. The Adviser may, for example, increase the average duration of the Income Portfolio's holdings when interest rates are declining and decrease the average duration when interest rates are increasing. The Income Portfolio seeks to equal or exceed the performance of the Lehman Index. As of March 31, 2002, the weighted average maturity of securities in the Lehman Index was approximately _____ years with an average duration of approximately _____ years. High Yield Portfolio Securities offering high current yield are generally issued by rapidly growing companies incurring debt to fund plant expansion or pay for acquisitions and large, well-known, highly leveraged companies. These securities are also generally rated in the medium-to-lower quality categories by the NRSROs. The Adviser evaluates an issuer's financial history and condition, prospects and management and will not rely principally on the ratings assigned by NRSROs, although the Adviser does consider such ratings. The High Yield Portfolio seeks capital appreciation by investing in securities that it expects will benefit from improvements in an issuer's business or prospects. 11 INVESTMENTS This table summarizes some of the principal investments and techniques, described below, that each Portfolio may use to achieve its investment objectives. The absence of a checkmark in the table does not preclude a Portfolio from engaging in the indicated transaction as part of a secondary investment strategy. In addition, a Portfolio may engage in transactions not described below as part of a principal or secondary investment strategy. For a more complete description of these and other investments and techniques, see the SAI. Income Portfolio High Yield Portfolio --------------------------------------------------------------- Asset-backed |X| securities --------------------------------------------------------------- Brady bonds --------------------------------------------------------------- Convertible |X| |X| securities --------------------------------------------------------------- Discount securities |X| |X| --------------------------------------------------------------- Distressed securities |X| |X| --------------------------------------------------------------- Eurobonds and global |X| |X| bonds --------------------------------------------------------------- Indexed securities |X| --------------------------------------------------------------- Loans |X| --------------------------------------------------------------- Money market funds |X| |X| --------------------------------------------------------------- Mortgage-related |X| |X| securities --------------------------------------------------------------- Short Sales |X| --------------------------------------------------------------- o Asset-backed securities have a structure that is similar to mortgage-related securities (see below). The collateral for these securities includes home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. o Brady bonds are debt securities issued in exchange for outstanding commercial bank loans to public and private entities in emerging countries in connection with sovereign debt restructurings, under a plan introduced by former U.S. Treasury Secretary Nicholas Brady. o Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for common stock. Convertible securities are characterized by higher yields than common stocks, but lower yields than comparable non-convertible securities, less price fluctuation than the underlying common stock since they have fixed income characteristics, and potential for capital appreciation if the market price of the underlying common stock increases. o Discount securities. Zero-coupon securities, which pay no cash income, are fixed income securities that are sold at substantial discounts from their face value. They include pay-in-kind bonds, which pay all or a portion of their interest in the form of debt or equity securities. Zero-coupon securities, pay-in-kind bonds and debt securities acquired at a discount are subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. o Distressed securities are debt or equity securities of financially troubled or bankrupt companies that the Adviser believes to be undervalued relative to their long-term potential for growth. o Eurobonds are issued and traded outside the country in whose currency they are denominated, and outside the regulations of a single country. Global bonds are designed so as to qualify for immediate trading in any domestic capital market and in the Euromarket. o Indexed securities are investments whose value is indexed to that of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Indexed securities typically are debt securities or deposits whose face value or coupon rate is determined by reference to a specific instrument or statistic. o Loans are arranged through private negotiations between a foreign entity and one or more financial institutions. A Portfolio will usually invest in loans through participations, in which the lending institution sells its right to receive principal and interest payments that it receives from the borrower. 12 o Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. o Short Sales. In a short sale, a portfolio sells a security it does not own anticipating that the price will decline. To complete a short sale, the Portfolio must borrow the security to make delivery and must then replace the security borrowed by buying it at the prevailing market price, which may be higher or lower than the price at which the Portfolio sold the security short. Short sales involve leverage, which may involve substantial gains or losses. Other Investment Strategies o Temporary defensive measures. From time to time, during unfavorable market conditions, the Adviser may invest "defensively." This means a Portfolio may make temporary investments that are not consistent with its investment objective and principal strategies. Engaging in temporary defensive measures may reduce the benefit from any upswing in the market and may cause a Portfolio to fail to meet its investment objective. For temporary defensive purposes, each Portfolio may hold cash (U.S. dollars) and may invest all of its assets in high-quality fixed-income securities, repurchase agreements or U.S. or foreign money market instruments. o Uninvested Cash and Cash Collateral. Each Portfolio may invest uninvested cash and cash collateral from securities lending transactions ("Uninvested Cash") in shares of the Prime Money Market Portfolio to the extent that a Portfolio's aggregate investment of Uninvested Cash in the Prime Money Market Portfolio does not exceed 25% of the Portfolio's total assets. Each Portfolio's acquisition of shares of the Prime Money Market Portfolio is subject to the following conditions: (a) the Prime Money Market Portfolio continues to operate as a money market fund in compliance with Rule 2a-7 under the Investment Company Act of 1940; and (b) the Prime Money Market Portfolio will invest only in high quality, U.S. dollar-denominated short-term liquid instruments, including: U.S. government obligations; commercial paper, notes, certificates of deposit, banker's acceptances; repurchase agreements; floating and variable rate securities; time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. o Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. High yield and emerging country markets are especially volatile and may result in more frequent trading. High portfolio turnover rates will generally result in higher transaction costs and higher levels of taxable realized gains to a Portfolio's shareholders. The SAI describes each Portfolio's investment strategies in more detail. RISK FACTORS As with all mutual funds, investing in the Portfolios involves certain risks. There is no guarantee that a Portfolio will meet its investment objective. You can lose money by investing in a Portfolio if you sell your shares after it declines in value below your original cost. There is never any assurance that a Portfolio will perform as it has in the past. The Portfolios may use various investment techniques, some of which involve greater amounts of risk than others. You will find a detailed discussion of these investment techniques in the SAI. To reduce risk, the Portfolios are subject to certain limitations and restrictions on their investments, which are also described in the SAI. Each Portfolio is subject to the following principal risks, except as noted. 13 General Risks o Market risk is the risk that the market value of a security may go up or down, sometimes rapidly. These fluctuations may cause the security to be worth less than it was at the time it was acquired. Market risk may involve a single security or a particular sector. o Management risk is the risk that the portfolio management team's investment strategy may not produce the intended results. Management risk also involves the possibility that the portfolio management team fails to execute an investment strategy effectively. Risks of Debt Securities o Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. o Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. o Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments from a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. o Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch or Moody's. o Below investment-grade securities ("junk bonds") may be less liquid, more susceptible to real or perceived adverse economic conditions and more difficult to evaluate than higher-rated securities. The market for these securities has relatively few participants, mostly institutional investors, and low trading volume. At times, a Portfolio may have difficulty selling particular high yield securities at a fair price and obtaining accurate valuations in order to calculate its net asset value. Securities that are rated "Ba" or lower by Moody's, "BB" or lower by S&P or comparably rated by any other NRSRO, or unrated securities that the Adviser determines to be of comparable quality may be considered speculative and subject to higher risk of default than investment-grade securities. High yield securities rated below "Caa" by Moody's or "CCC" by S&P and comparable unrated bonds are highly speculative and may be in default of principal and/or interest payments at the time of purchase. Risks of Foreign Securities o Foreign issuer risk. Compared to U.S. companies, less information is generally available to the public about foreign companies. Foreign brokers and issuers may not be subject to the uniform accounting, auditing, and financial reporting standards and practices prevalent in the U.S. In addition, foreign stock exchanges and other securities markets may be more volatile and subject to less governmental supervision than their counterparts in the U.S. Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. 14 o Currency risk. Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency-denominated investments and may widen any losses. Political and economic risks, along with other factors, could adversely affect the value of a Portfolio's securities. o Emerging markets risk. Emerging country economies often compare unfavorably with the United States economy in growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain emerging countries have experienced and continue to experience high rates of inflation, sharply eroding the value of their financial assets. An emergency may arise where trading of emerging country securities may cease or may be severely limited or where an emerging country governmental or corporate issuer defaults on its obligations. The governments of certain emerging countries impose restrictions or controls that may limit or preclude a Portfolio's investment in certain securities. A Portfolio may need governmental approval for the repatriation of investment income, capital or sales proceeds. An emerging country government may also impose temporary restrictions on the disposition of portfolio securities. Risks of Mortgage-Related and Asset-Backed Securities o Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the risk that, because prepayments generally occur when interest rates are falling, a Portfolio may have to reinvest the proceeds from prepayments at lower interest rates. Asset-backed securities are also subject to prepayment risk, to the extent of the average life of the underlying receivables, which generally are shorter than those of mortgages. o Extension risk is the risk that the rate of anticipated prepayments of principal may not occur, typically because of a rise in interest rates, and the expected maturity of the security will increase. During periods of rapidly rising interest rates, the weighted average maturity of a security may be extended past what was anticipated. The market value of securities with longer maturities tends to be more volatile. Risks of Distressed Securities o Distressed securities include securities of companies involved in bankruptcy proceedings, reorganizations and financial restructurings. Securities of financially troubled issuers are less liquid and more volatile than securities of companies not experiencing financial difficulties. A Portfolio may own a significant portion of a company's distressed securities. As a result, the Portfolio may participate actively in the affairs of the company, which may subject the Portfolio to litigation risks or prevent the Portfolio from selling the securities. 15 MANAGEMENT OF THE PORTFOLIOS Investment Adviser BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the investment adviser of the Portfolios. The Adviser was established in 1985 and is located at 383 Madison Avenue, New York, NY 10179. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading U.S. investment banking, securities trading and brokerage firm serving U.S. and foreign corporations, governments and institutional and individual investors. The Adviser is a registered investment adviser and offers investment advisory and administrative services to open-end investment funds and other managed accounts with aggregate assets at June 30, 2002, of approximately $_______ billion. The Adviser supervises and assists in the overall management of the affairs of the Trust, subject to oversight by the Trust's Board of Trustees. For the fiscal year ended March 31, 2002, the Adviser received management fees based on a percentage of the average daily net assets of each Portfolio, after waivers, as shown in the following table. Income Portfolio ----------------------------------------------------- High Yield Portfolio ----------------------------------------------------- The Adviser and/or an affiliate, at its own expense, and from its own resources and without reimbursement from the Portfolios, may compensate certain persons who provide certain shareholder services or services in connection with the sale or expected sale of shares of the Portfolios, subject to applicable laws and regulations. Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. A team usually consists of senior portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of each Portfolio. HOW THE PORTFOLIOS VALUE THEIR SHARES The net asset value ("NAV"), multiplied by the number of Portfolio shares you own, gives you the value of your investment. Each Portfolio calculates its share price, called its NAV, each business day as of the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), which is normally at 4:00 p.m. Eastern time. You may buy, sell or exchange shares on any business day at a price that is based on the NAV that is calculated after you place your order. A business day is a day on which the NYSE is open for trading or any day in which enough trading has occurred in the securities held by a Portfolio to affect the NAV materially. Portfolio securities that are listed primarily on foreign exchanges may trade on weekends or on other days on which the Portfolios do not price their shares. In this case, the NAV of a Portfolio's shares may change on days when you are not able to buy or sell shares. 16 The Portfolios value their investments based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by the Adviser pursuant to fair valuation procedures adopted by the Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant Portfolio's investments and other assets, subtracting its liabilities, and then dividing that figure by the number of outstanding shares of the class. Total Assets Less Liabilities NAV = ----------------------- Number of Shares Outstanding You can request each Portfolio's current NAV by calling 1-800- 447-1139. INVESTING IN THE PORTFOLIOS This section provides information to assist you in purchasing shares of the Portfolios. Please read the entire Prospectus carefully before buying Class Y shares of a Portfolio. How to Buy Shares The minimum initial investment is $3,000,000; there is no minimum for subsequent investments. BSF reserves the right to waive the minimum investment for accounts managed by BSAM, and employees of BSAM and its affiliates, and for certain fiduciary trust accounts. You may buy Class Y shares of a Portfolio through your account representative at a broker-dealer with whom the Distributor has entered into a sales agreement (an "Authorized Dealer") or the Transfer Agent by wire only. To buy Class Y shares of a Portfolio by Federal Reserve wire, call the Transfer Agent at 1-800- 447-1139 or call your account representative. If you do not wire Federal Funds, you must have the wire converted into Federal Funds, which usually takes one business day after receipt of a bank wire. The Transfer Agent will not process your investment until it receives Federal Funds. The following procedure will help assure prompt receipt of your Federal Funds wire: Call the Transfer Agent at 1-800- 447-1139 and provide the following information: Your name Address Telephone number Taxpayer ID number The amount being wired The identity of the bank wiring funds The Transfer Agent will then provide you with a Portfolio account number. (If you already have an account, you must also notify the Portfolio before wiring funds.) Instruct your bank to wire the specified amount to the Portfolio as follows: PNC Bank, N.A. ABA #031000053 Credit Account Number: #85-5102-0143 From: Name of Investor Account Number: Your Portfolio account number For the purchase of: Name of Portfolio Amount: Amount to be invested 17 You may open an account when placing an initial order by telephone, provided you then submit an Account Information Form by mail. The Transfer Agent will not process your investment until it receives a fully completed and signed Account Information Form. The Trust and the Transfer Agent each reserve the right to reject any purchase order for any reason. On the day of the purchase, call the Transfer Agent at 1-800- 447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time), to give notice of the purchase and before wiring any funds. After contacting the Transfer Agent, contact your financial institution to wire Federal Funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed. How to Sell Shares o You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. o When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. o The Trust will send you payment proceeds generally within seven days after it receives your redemption request. Redemption Procedures Redemption Through the Distributor or Authorized Dealers Method of Redemption Instructions [graphic] o Visit your account representative. In person o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Call your account representative. By telephone o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Mail your redemption request to your By mail account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Submit wiring instructions to your By wire account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 18 Redemption Through the Transfer Agent Method of Redemption Instructions [graphic] o Mail your redemption request to: By mail PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 [graphic] o Call the Transfer Agent at 1-800-447-1139. By telephone o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. Additional Information About Redemptions o Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. o Signature guarantees. If your redemption proceeds exceed $100,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including: - - a U.S. bank, trust company, credit union or savings association; - - a foreign bank that has a U.S. correspondent bank; - - a U.S. registered dealer or broker in securities, municipal securities or government securities; or - - a U.S. national securities exchange, a registered securities association or a clearing agency. If you are signing on behalf of a corporation, partnership or other business or as a fiduciary, you must also include your title in the signature. o Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. o Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative or the Transfer Agent by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. o Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. To the extent permitted under applicable law, the Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a share of actual portfolio securities. Call the Transfer Agent for details. 19 o Suspension of the Right of Redemption. A Portfolio may suspend your right to redeem your shares under any of the following circumstances: - -- during non-routine closings of the NYSE; - -- when the Securities and Exchange Commission ("SEC") determines either that trading on the NYSE is restricted or that an emergency prevents the sale or valuation of the Portfolio's securities; or - -- when the SEC orders a suspension to protect the Portfolio's shareholders. Exchanges You may exchange Class Y shares of one Portfolio for Class Y shares of another Portfolio described in this Prospectus, Class Y shares of another Portfolio of the Trust, or shares of the Money Market Portfolio of The RBB Fund, Inc. (You may obtain more information about other Portfolios of the Trust by calling the Transfer Agent at 1-800- 447-1139.) The Trust does not currently charge a fee for exchanges, although it may change this policy in the future. Exchange procedures. To exchange your shares, you must give exchange instructions to your account representative or the Transfer Agent in writing or by telephone. Exchange policies. When exchanging your shares, please keep in mind: o An exchange of shares may create a tax liability for you. You may have a gain or loss on the transaction, since the shares you are exchanging will be treated like a sale. o When the market is very active, telephone exchanges may be difficult to complete. You may have to submit exchange requests to your account representative or the Transfer Agent in writing, which will cause a delay. o The shares you exchange must have a value of at least $250 (except in the case of certain retirement plans). If you are establishing a new account, you must exchange the minimum dollar amount needed to open that account. o Before you exchange your shares, you must review a copy of the current prospectus of the Portfolio that you would like to buy. o Your exchange request may not be accepted if the Trust determines that your exchange would be detrimental to the interests of a Portfolio's shareholders. The Trust specifically reserves the right to refuse your request if it is part of multiple purchase or exchange requests that the Trust, in its sole discretion, deems to involve excessive trading or to be part of a market timing strategy since these types of trading practices may require a Portfolio to sell securities at a disadvantageous time or price. In making its determination, the Trust may consider orders you have placed individually, orders placed in combination with a group of shareholders or commonly controlled accounts and orders placed by your securities dealer or service agent. The Trust may modify or terminate the exchange option at any time. DIVIDENDS, DISTRIBUTIONS AND TAXES If you buy shares of a Portfolio shortly before it declares a dividend or a distribution, a portion of your investment in the Portfolio may be returned to you in the form of a taxable distribution. Distributions The Portfolios pass along your share of their investment earnings in the form of dividends. Dividend distributions are the net dividends or interest earned on investments after expenses. As with any investment, you should consider the tax consequences of an investment in a Portfolio. Ordinarily, each Portfolio declares dividends from its net investment income daily and pays them monthly. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: o Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account Information Form, you will receive your distributions this way. 20 o Cash. The Trust will send you a check no later than seven days after the payable date. o Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. o Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may not use this service to establish a new account. o Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account Information Form. If you would like to change the option you selected, please call your account executive or the Transfer Agent at 1-800- 447-1139. Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. Depending on the type of account in which the shares are held and the nature of the shareholder, a shareholder may be taxed on distributions received from a Portfolio. It is important for you to be aware of the following information about the tax treatment of your investment. o Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain (which may be taxable at different rates depending on the length of time a Portfolio holds its assets). o Dividends and distributions are treated in the same manner for federal income tax purposes whether you receive them in the form of cash or additional shares. They may also be subject to state and local taxes. o Dividends from the Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. o Certain dividends and distributions paid to you in January will be taxable as if they had been paid to you the previous December. o The Trust will mail you tax statements every January showing the amounts and tax status of distributions you received. o When you sell (redeem) or exchange shares of a Portfolio, you must recognize any gain or loss. o Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. o You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 21 ADDITIONAL INFORMATION Performance The Trust, the Distributor, the Adviser and certain financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These entities and publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, unless instructed to the contrary. Investors may request that the Trust send these documents to each shareholder individually by calling the Trust at 1-800-766-4111. 22 Financial Highlights -- Income Portfolio The financial highlights table is intended to help you understand the financial performance of the Income Portfolio over the past five years. This information reflects financial results for a single share of the Income Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the Income Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Income Portfolio's financial statements, are included in the Income Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Dividends Distributions Value, Investment and Unrealized from Net from Net Beginning Income*(1) Gain/(Loss) on Investment Realized of Period Investments*(2) Income Capital Gains ------------------------------------------------------------------------------------------------------------------------ Class Y For the fiscal year ended March 31, 2002 $11.99 $0.64 $(0.15) $(0.64) - ------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2001 11.53 0.77 0.46 (0.77) - ------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 2000 12.15 0.74 (0.62) (0.74) - ------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 12.37 0.78 (0.03) (0.78) $(0.19) ------------------------------------------------------------------------------------------------------------------------ For the fiscal year ended March 31, 1998 12.03 0.80 0.36 (0.80) (0.02)
* Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. 23 Financial Highlights -- Income Portfolio
Net Asset Total Net Ratio of Ratio of Increase/(Decrease) Portfolio Value, Investment Assets, Expenses Net Reflected in Turnover End of Return(3) End of To Investment Expense and Rate Period Period Average Income to Net Investment (000's Net Average Income Ratios Due to omitted) Assets(1) Net Waivers and Related Assets(1) Reimbursements - --------------------------------------------------------------------------------------------------------------------------------- Class Y $11.84 4.22% $12,884 0.45% 5.35% 1.45% 240.84% - --------------------------------------------------------------------------------------------------------------------------------- 11.99 11.07 8,321 0.45 6.52 2.48 174.46 - --------------------------------------------------------------------------------------------------------------------------------- 11.53 1.13 4,763 0.45 6.36 3.13 158.47 - --------------------------------------------------------------------------------------------------------------------------------- 12.15 6.13 4,406 0.45 6.27 3.23 107.21 - --------------------------------------------------------------------------------------------------------------------------------- 12.37 9.81 4,339 0.45 6.39 1.78 244.78
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment return is not annualized. 24 Financial Highlights -- High Yield Total Return Portfolio The financial highlights table is intended to help you understand the financial performance of the High Yield Total Return Portfolio since inception (July 11, 2001). This information reflects financial results for a single share of the High Yield Total Return Portfolio. The total return in the table represents the rate that an investor would have gained on an investment in the High Yield Total Return Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the High Yield Total Return Portfolio's financial statements, are included in the High Yield Total Return Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Net Realized Dividends Distributions Value, Investment and Unrealized from Net from Net Beginning Income*(1) Gain/(Loss) on Investment Realized of Period Investments*(2) Income Capital Gains ------------------------------------------------------------------------------------------------------------------------ Class Y For the period July 11, 2001*** through March $8.46 $0.53 $(0.10) $(0.53) - 31, 2002 ------------------------------------------------------------------------------------------------------------------------
* Calculated based on average settled shares outstanding during the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the dates of distributions. ** Commencement of investment operations. *** Commence of initial public offering. 1 Reflects waivers and related reimbursements. 2 The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses on investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. Net realized and unrealized gain/(loss) on investments include forward foreign currency exchange contracts and translation of foreign currency related transactions, if any. 25 Financial Highlights -- High Yield Total Return Portfolio
Net Asset Total Net Ratio of Ratio of Increase/(Decrease) Portfolio Value, Investment Assets, Expenses Net Reflected in Turnover End of Return(3) End of To Investment Expense and Rate Period Period Average Income to Net Investment (000's Net Average Income Ratios Due to omitted) Assets(1) Net Waivers and Related Assets(1) Reimbursements - --------------------------------------------------------------------------------------------------------------------------------- Class Y $8.36 4.99%(4) $16,862 0.65%(5) 8.67%(4)(5) 0.49%(4)(5) 212.94% - ---------------------------------------------------------------------------------------------------------------------------------
3 Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment return is not annualized. 4 The total investment return and rations for a class of shares are not necessarily comparable to those of any other outstanding class of shares, due to the timing differences in the commencement of initial public offerings. 5 Annualized. The Bear Stearns Funds 383 Madison Avenue New York, NY 10179 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 383 Madison Avenue PFPC Inc. New York, NY 10179 Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 INVESTMENT ADVISER COUNSEL Bear Stearns Asset Management Inc. Kramer Levin Naftalis & 383 Madison Avenue Frankel LLP New York, NY 10179 919 Third Avenue New York, NY 10022 ADMINISTRATOR INDEPENDENT AUDITORS Bear Stearns Asset Management Inc. Deloitte & Touche LLP 383 Madison Avenue Two World Financial Center New York, NY 10179 New York, NY 10281 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 27 Statement of Additional Information. The Statement of Additional Information ("SAI") provides a more complete discussion of several of the matters contained in this Prospectus and is incorporated by reference, which means that it is legally a part of this Prospectus as if it were included here. Annual and Semi-Annual Reports. The annual and semi-annual reports to shareholders contain additional information about each Portfolio's investments, including a discussion of the market conditions and investment strategies that significantly affected a Portfolio's performance during its last fiscal year. o To obtain a free copy of the SAI and the current annual or semi-annual reports or to make any other inquiries about a Portfolio, you may call or write: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 Telephone: 1-800-447-1139 or 1-800- 447-1139 o You may obtain copies of the SAI or financial reports o for free by calling or writing broker-dealers or other financial intermediaries that sell a Portfolio's shares; o upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102; or o for free by visiting the SEC's Worldwide Web site at http://www.sec.gov. o You may review and copy information about the Portfolios (including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 to obtain information on the operation of the SEC's Public Reference Room. Investment Company Act File No. 811-8798 BSF-P-018-05 The Bear Stearns Funds Prospectus Dated August 1, 2002 Prime Money Market Portfolio Class Y Shares This Prospectus provides important information about the Portfolio that you should know before investing. Please read it carefully and keep it for future reference. The Securities and Exchange Commission has not approved any Portfolio's shares or determined whether this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. The Bear Stearns Funds o 383 Madison Avenue, New York, NY 10179 1-800-447-1139 Table of Contents Risk/Return Summary Investments Risk Factors Management of the Portfolio How the Portfolio Values Its Shares Investing in the Portfolio How to Buy Shares How to Sell Shares Dividends, Distributions and Taxes Additional Information Financial Highlights The Portfolio described in this Prospectus is a series of The Bear Stearns Funds, a registered open-end management investment company (the "Trust"). It is important to keep in mind that mutual fund shares are: o not deposits or obligations of any bank; o not insured by the Federal Deposit Insurance Corporation; o subject to investment risk, including possible loss of the money invested. Prime Money Market Portfolio - -------------------------------------------------------------------------------- RISK/RETURN SUMMARY Investment Objective Liquidity and current income consistent with stability of principal. Principal Strategies In pursuing its investment objective, the Prime Money Market Portfolio (the "Portfolio") will invest in a broad range of U.S. dollar-denominated short-term instruments, including: U.S. government obligations; Commercial paper, notes, certificates of deposit, banker's acceptances; Repurchase agreements; Floating and variable rate securities; Time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. Quality. The Portfolio will invest in securities rated by at least two nationally recognized statistical rating organizations ("NRSROs"), including Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's"), or by one NRSRO if only that NRSRO has rated the security at the time that the Portfolio acquires it. For a discussion of the ratings categories of various NRSROs, see the Appendix to the Statement of Additional Information (the "SAI"). The Portfolio will limit its portfolio investments to: securities that are rated at the time of acquisition in one of an NRSRO's two highest short-term rating categories; securities of issuers whose other short-term debt securities are so rated; and unrated securities that are deemed to be of comparable quality by Bear Stearns Asset Management Inc., the Portfolio's investment adviser ("BSAM" or the "Adviser"). The Board of Trustees has established policies to ensure that the Portfolio invests in high-quality, liquid instruments. 1 Maturity. The Portfolio is required to maintain a weighted average maturity that does not exceed 90 days. In order to maintain its current AAA ratings (AAAm by S&P and AAA by Moody's), the Portfolio maintains a weighted average maturity of 60 days or less. The Portfolio may acquire individual investments with remaining maturities ranging from one day to 397 days. Floating and variable rate instruments are considered to be within the maturity range described above despite having nominal remaining maturities greater than 397 days, because of their floating rate or reset features. For a description of floating and variable rate securities, see "Investments" in this Prospectus. Principal Risks The Portfolio is subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risks may adversely affect the Portfolio's net asset value, yield and/or total return: Short-term interest rates may decline, causing the Portfolio to invest assets at lower rates. Rapidly rising short-term interest rates, a drop in the price of floating or variable rate securities or an issuer's default may cause the Portfolio's share price to decline below $1.00. High-quality, U.S. dollar-denominated foreign money market instruments may experience more volatility than their domestic counterparts, in part because of sovereign credit risk or the risk that a foreign issuer may not be able to obtain U.S. dollars to repay its obligations. An investment in the Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio. Who May Want to Invest in the Portfolio The Portfolio may be appropriate for investors who: want current income; are seeking preservation of capital. The Portfolio may not be appropriate for investors who: want potential growth over time; are not willing to accept lower potential returns in return for preservation of capital. 2 Performance The bar chart and table below illustrate the risks of investing in the Portfolio by showing changes in the performance of its Class Y shares for various time periods ended December 31st. The figures shown in the bar chart and table assume reinvestment of dividends and distributions. Prime Money Market Portfolio Annual Total Return (%)1 1998 5.55 1999 5.14 2000 6.42 2001 ( ) ==== ======= Past performance is not necessarily an indication of future results. 1 The Portfolio's year-to-date return as of June 30, 2002 was ( %). During the period shown in the bar chart, the highest quarterly return was ( %) (for the quarter ended ( ) and the lowest quarterly return was ( ) (for the quarter ended ( ). The table shows the average annual total returns for Class Y shares of the Portfolio for one year and since the date of inception.
Average Annual Total Returns 1 Year Since Inception (for the periods ended December 31, 2001) (July 14, 1997) ------------------------------------------------------------- ----------- ---------------------- Prime Money Market Portfolio--Class Y % % ===== ===== ------------------------------------------------------------- ----------- ----------------------
The "seven-day yield" is an annualized figure--the amount you would earn if you kept your investment in the Portfolio and the Portfolio continued to earn the same net interest income throughout the year. The Portfolio's seven-day yield as of December 31, 2001 was ( %). The "seven-day effective yield" (also an annualized figure) assumes that dividends are reinvested and compounded. The Portfolio's seven-day effective yield as of December 31, 2001 was ( %). For the Portfolio's current seven-day yield and seven-day effective yield, call 1-800- 447-1139. 3 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder Fees (paid directly from your investment)* Class Y ----------------------------------------------------- ------- Maximum sales charge (load) imposed on purchases None (as a percentage of offering price) Maximum deferred sales charge (load) None (as a percentage of the lower of purchase or sale price) Sales charge imposed on reinvested dividends None Redemption fees None** Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) --------------------------------------------------- Management Fees 0.20% Distribution (12b-1) Fees 0.00% Other Expenses 0.13% Total Annual Portfolio Operating Expenses 0.33% Fee Waiver and Expense Reimbursement (0.13)% Net Expenses1 0.20% ==== --------------------------------------------------------------------------------
* A broker or agent may charge additional fees on the purchase or sale of Portfolio shares. ** There is a transaction fee of $7.50 for wiring redemption proceeds. 1 The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2003, so that the Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Portfolio over various time periods. It is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds. The Example assumes that: you invest $10,000 in the Portfolio; your investment returns 5% each year; the Portfolio's operating expenses remain the same.* 4 Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ----------------- ------------- -------------- ----------- ---------- Class Y $20 $93 $172 $405 ----------------- ------------- -------------- ----------- ---------- * This Example assumes that net portfolio operating expenses will equal 0.20% until July 31, 2003 and thereafter will equal 0.33%. 5 INVESTMENTS The Portfolio may invest in the following instruments to achieve its investment objective. Floating and variable rate securities. The interest rate offered by a floating rate security adjusts whenever a specified interest rate (such as a bank's prime lending rate) changes. The interest rate offered by a variable rate security adjusts (resets) on particular dates (such as the last day of a month or calendar quarter). Upon adjustment, the market value of a floating or variable rate security can reasonably be expected to equal its amortized cost. Some of these securities may be illiquid. Repurchase agreements are a type of secured lending and typically involve the acquisition of debt securities from a financial institution, such as a bank, savings and loan association or broker-dealer, which then agrees to repurchase the security at a specified resale price on a specified future date (ordinarily one week or less). The difference between the purchase and resale prices generally reflects the market interest rate for the term of the agreement. Reverse repurchase agreements. The Portfolio may borrow funds for temporary purposes by entering into reverse repurchase agreements in which the Portfolio would sell securities to financial institutions and agree to repurchase them at an agreed upon date and price. The Portfolio may enter into reverse repurchase agreements to avoid selling securities during unfavorable market conditions. Reverse repurchase agreements involve the risk that the market value of the securities that the Portfolio sold may decline below the price of the securities the Portfolio must repurchase. Treasury STRIPS. The principal and interest components of U.S. Treasury bonds may be separated and traded independently under the federal Separate Trading of Registered Interest and Principal of Securities ("STRIPS") program. The resulting securities pay no interest and are sold at a discount to face value. The interest component of STRIPS may be more volatile than that of U.S. Treasury bills with comparable maturities. U.S. government obligations are bills, notes and bonds issued or guaranteed by the U.S. government (including Treasury STRIPS, described above), its agencies or instrumentalities. Some are direct obligations of the U.S. Treasury; others are obligations only of the U.S. agency or instrumentality. Funding Agreements. The Portfolio may invest in funding agreements (sometimes referred to as Guaranteed Interest Contracts or "GICs") of insurance companies. In such cases, the Portfolio contributes cash to a deposit fund of the insurance company's general account, and the insurance company then credits the Portfolio, on a monthly basis, guaranteed interest that is based on an index. All funding agreements will provide that this guaranteed interest will not be less than a certain minimum rate. Because the principal amount of a funding agreement may not be received from the insurance company on seven days notice or less, the agreement is 6 considered to be an illiquid investment and, together with other instruments in the Portfolio which are not readily marketable, will not exceed 10% of the Portfolio's net assets. In determining dollar-weighted average portfolio maturity, all funding agreements will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate. When-issued securities and forward commitments. When-issued transactions arise when securities are purchased with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield. In a forward commitment transaction, a buyer agrees to purchase securities for a fixed price at a future date beyond customary settlement time. A purchaser may enter into offsetting contracts for the forward sale of other securities that it owns. Other Investment Strategies Temporary defensive measures. From time to time, during unfavorable market conditions, the Adviser may invest "defensively." This means the Portfolio may make temporary investments that are not consistent with its investment objective and principal strategies. Engaging in temporary defensive measures may reduce the benefit from any upswing in the market and may cause the Portfolio to fail to meet its investment objective. For temporary defensive purposes, the Portfolio may hold cash (U.S. dollars). Portfolio turnover. The Adviser may trade actively to achieve the Portfolio's goals. This may result in higher capital gains distributions, which would increase your tax liability. Frequent trading may also increase the Portfolio's costs, lessening its performance over time. The SAI describes the Portfolio's investment strategies in more detail. 7 RISK FACTORS As with all mutual funds, investing in the Portfolio involves certain risks. There is no guarantee that the Portfolio will meet its investment objective. There is never any assurance that the Portfolio will perform as it has in the past. The Portfolio may use various investment techniques, some of which involve greater amounts of risk than others. You will find a detailed discussion of these investment techniques in the SAI. To reduce risk, the Portfolio is subject to certain limitations and restrictions on its investments, which are also described in the SAI. The Portfolio is subject to the following principal risks. General Risks Market risk is the risk that the market value of a security may go up or down, sometimes rapidly. These fluctuations may cause the security to be worth less than it was at the time it was acquired. Market risk may involve a single security or a particular sector. Management risk is the risk that the portfolio management team's investment strategy may not produce the intended results. Management risk also involves the possibility that the portfolio management team fails to execute an investment strategy effectively. $1.00 Net Asset Value risk. In order to maintain a $1.00 per-share net asset value, the Portfolio could reduce the number of its outstanding shares. The Portfolio could do this if there were a default on, or significant decline in value of, an investment held by the Portfolio. If this happened, you would own fewer shares. Risks of Debt Securities Income risk. Declines in the general level of short-term interest rates could obligate the Portfolio to make new investments in securities that offer a lower rate of interest than older securities. Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by the Portfolio's debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. Adjustable rate security risk. The market price of an adjustable rate security may fall for various reasons, including the following: -- The relationship among interest rates across a range of maturities (often referred to as the "yield curve") changes. -- Investors demand higher risk premiums. 8 -- Investors believe that interest rates will rise. -- The supply of securities associated with the relevant benchmark interest rate or index exceeds the demand. An adjustable rate security's market price will decline if one or more of these factors causes the interest rate of newly issued adjustable rate securities to be set at a higher level than that paid by the older security. Risks of Foreign Securities Foreign issuer risk. Compared to U.S. companies, less information is generally available to the public about foreign companies. Foreign brokers and issuers may not be subject to the uniform accounting, auditing, and financial reporting standards and practices prevalent in the U.S. In addition, foreign securities markets may be more volatile and subject to less governmental supervision than their counterparts in the U.S. Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments more volatile than U.S. investments. 9 MANAGEMENT OF THE PORTFOLIO Investment Adviser BSAM, a wholly owned subsidiary of The Bear Stearns Companies Inc., is the investment adviser of the Portfolio. The Adviser was established in 1985 and is located at 383 Madison Avenue, New York, NY 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries, including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading U.S. investment banking, securities trading and brokerage firm serving U.S. and foreign corporations, governments and institutional and individual investors. The Adviser is a registered investment adviser and offers investment advisory and administrative services to open-end investment funds and other managed accounts with aggregate assets at June 30, 2002 of approximately $_________billion. The Adviser supervises and assists in the overall management of the affairs of the Trust, subject to oversight by the Trust's Board of Trustees. For the fiscal year ended March 31, 2002, the Adviser received management fees based on a percentage of the average daily net assets of the Portfolio in the amount of %_____. The Adviser and/or an affiliate, at its own expense, and from its own resources and without reimbursement from the Portfolio, may compensate certain persons who provide services in connection with the sale or expected sale of shares of the Portfolio, subject to applicable laws and regulations. HOW THE PORTFOLIO VALUES ITS SHARES The net asset value ("NAV"), multiplied by the number of Portfolio shares you own, gives you the value of your investment. The Portfolio normally calculates its share price, called its NAV, each business day at 1:00 p.m. Eastern time and 4:00 p.m. Eastern time. You may buy or sell shares on any business day at a price that is based on the NAV that is next calculated after you place your order. A business day is a day on which the New York Stock Exchange, Inc. ("NYSE") and the Federal Reserve Bank of New York are open. On any business day when the Bond Market Association ("BMA") recommends that the securities markets close early, the Portfolio reserves the right to close at or prior to the BMA recommended closing time. If the Portfolio does so, it will process purchase and redemption orders received after the Portfolio's closing time on the next business day. During certain emergency closings of the NYSE, however, the Portfolio may open for business if it can maintain its operations. In this event, the Portfolio will calculate its NAV as described above. To 10 determine if the Portfolio is open for business on a day the NYSE is closed for an emergency, please call us at (800) 766-4111. The Portfolio seeks to maintain a $1.00 NAV, although there is no guarantee that it will be able to do so. The Portfolio uses the "Amortized Cost Method" to value securities. You can read about this method in the SAI. 11 INVESTING IN THE PORTFOLIO This section provides information to assist you in buying and selling shares of the Portfolio. Please read the entire Prospectus carefully before buying shares of the Portfolio. How to Buy Shares The minimum initial investment is $1,000,000; there is no minimum for subsequent investments. You may buy Class Y shares of the Portfolio through your account representative at a broker-dealer with whom the Distributor has entered into a sales agreement (an "Authorized Dealer") or the Transfer Agent by wire only. To buy Class Y shares of the Portfolio by Federal Reserve wire, call the Transfer Agent at 1-800- 447-1139 or call your account representative. Orders for shares of the Portfolio received before 1:00 p.m. Eastern time on a business day will be executed at 1:00 p.m. Eastern time. Orders for shares of the Portfolio received between 1:00 p.m. and 4:00 p.m. Eastern time will be executed at 4:00 p.m. Eastern time. Orders received after 4:00 p.m. will be executed at the next-determined NAV. Under certain circumstances, the Portfolio may reject large orders placed after 1:00 p.m. Eastern time. If you do not wire Federal Funds, you must have the wire converted into Federal Funds, which usually takes one business day after receipt of a bank wire. The Transfer Agent will not process your investment until it receives Federal Funds. The following procedure will help assure prompt receipt of your Federal Funds wire: Call the Transfer Agent at 1-800- 447-1139 and provide the following information: Your name Address Telephone number Taxpayer ID number The amount being wired The identity of the bank wiring funds The Transfer Agent will then provide you with a Portfolio account number. (If you already have an account, you must also notify the Portfolio before wiring funds.) 12 Instruct your bank to wire the specified amount to the Portfolio as follows: PNC Bank, N.A. ABA #031000053 Credit Account Number: #85-5102-0143 From: Name of Investor Account Number: Your Portfolio account number For Purchase of Prime Money Market Portfolio Amount: Amount to be invested You may open an account when placing an initial order by telephone, provided you then submit an Account Information Form by mail. The Transfer Agent will not process your investment until it receives a fully completed and signed Account Information Form. The Trust and the Transfer Agent each reserve the right to reject any purchase order for any reason. To ensure that transactions are completed as requested, investors are encouraged to give the Transfer Agent a firm indication of the approximate size of the intended investment before 12:30 p.m. Eastern time for purchases to be executed at 1:00 p.m., or before 3:30 p.m. Eastern time for purchases to be executed at 4:00 p.m. On the day of the purchase, call the Transfer Agent at 1-800- 447-1139 prior to 4:00 p.m. Eastern time, to give notice of the purchase and before wiring any funds. After contacting the Transfer Agent, contact your financial institution to wire Federal Funds to PFPC. Please refer to the wire instructions indicated above. Funds must be wired the same day that your trade is placed. How to Sell Shares o You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. o When the Trust receives your redemption request in proper form, it will sell your shares at the next determined NAV. o Normally, the Trust will send your redemption proceeds in federal funds on the same day on which it receives your redemption request, provided the Trust receives your request before 1:00 p.m. Eastern time (or such earlier time as described above in "How the Portfolio Values Its Shares"). o If the Trust receives your redemption request between 1:00 p.m. Eastern time and 4:00 p.m. Eastern time, normally it will send your redemption proceeds in federal funds on the same day, but not later 13 than the next business day (or such earlier time as described above in "How the Portfolio Values Its Shares"). 14 Redemption Procedures Redemption Through the Distributor or Authorized Dealers Method of Redemption Instructions [graphic] o Visit your account representative. In person o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Call your account representative. By telephone o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Mail your redemption request to your By mail account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [graphic] o Submit wiring instructions to your By wire account representative. o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. Redemption Through the Transfer Agent [graphic] o Mail your redemption request to: By mail PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 [graphic] o Call the Transfer Agent at 1-800-447-1139. By telephone o Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 15 Additional Information About Redemptions Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. Signature guarantees. If your redemption proceeds exceed $100,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including: - a U.S. bank, trust company, credit union or savings association; - a foreign bank that has a U.S. correspondent bank; - a U.S. registered dealer or broker in securities, municipal securities or government securities; or - a U.S. national securities exchange, a registered securities association or a clearing agency. If you are signing on behalf of a corporation, partnership or other business or as a fiduciary, you must also include your title in the signature. Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. The Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a combination of cash and a share of actual portfolio securities. Call the Transfer Agent for details. 16 Suspension of the Right of Redemption or the Trust's Obligation to Send Redemption Proceeds on the Same Day. The Portfolio may suspend your right to redeem your shares, or its obligation to send your proceeds on the same day it receives your request to redeem your shares, under any of the following circumstances: o during non-routine closings of the NYSE; o when the Securities and Exchange Commission ("SEC") determines either that trading on the NYSE is restricted or that an emergency prevents the sale or valuation of the Portfolio's securities; or o when the SEC orders a suspension of the right of redemption to protect the Portfolio's shareholders. 17 DIVIDENDS, DISTRIBUTIONS AND TAXES Distributions The Portfolio passes along your share of its investment earnings in the form of dividends. Dividend distributions are the net dividends or interest earned on investments after expenses. As with any investment, you should consider the tax consequences of an investment in the Portfolio. Ordinarily, the Portfolio declares dividends from its net investment income daily and pays them monthly. The Portfolio will distribute short- term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of the Portfolio. If you do not indicate another choice on your Account Information Form, you will receive your distributions this way. Cash. The Trust will send you a check no later than seven days after the payable date. Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of the Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account Information Form. If you would like to change the option you selected, please call your account executive or the Transfer Agent at 1-800- 447-1139. 18 Taxes The Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. It is important for you to be aware of the following information about the tax treatment of your investment. Ordinary dividends from the Portfolio are taxable as ordinary income; distributions from the Portfolio's long-term capital gains, if any, are taxable as capital gain (which may be taxable at different rates depending on the length of time the Portfolio holds its assets). Dividends and distributions are treated in the same manner for federal income tax purposes whether you receive them in the form of cash or additional shares. They may also be subject to state and local taxes. Dividends from the Portfolio that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from the Portfolio. Certain dividends and distributions paid to you in January will be taxable as if they had been paid to you the previous December. The Trust will mail you tax statements every January showing the amounts and tax status of distributions you received. When you sell (redeem) shares of the Portfolio, you must recognize any gain or loss. However, as long as the Portfolio's NAV per share does not deviate from $1.00, there will be no gain or loss. Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in the Portfolio. 19 ADDITIONAL INFORMATION Performance Financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare the Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These publications may also compare the Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as iMoneyNet, Inc. and Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, unless instructed to the contrary. Investors may request that the Trust send these documents to each shareholder individually by calling the Trust at 1-800-766-4111. 20 Financial Highlights -- Prime Money Market Portfolio The financial highlights table is intended to help you understand the financial performance of the Portfolio since its inception. This information reflects financial results for a single share of the Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the Portfolio (assuming reinvestment of all dividends). This information has been audited by Deloitte & Touche LLP, whose report, along with the Portfolio's financial statements, are included in the Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
- -------------------------------------------------- --------------- ---------------- ---------------- ------------------ ------------ For the For the For the For the For the Period Fiscal Fiscal Fiscal Fiscal July 14, 1997* Year Ended Year Ended Year Ended Year Ended through March 31, 2002 March 31, 2001 March 31, 2000 March 31, 1999 March 31, 1998 - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Per Share Operating Performance $1.000 $1.0000 $1.0000 $1.0000 $1.0000 Net asset value, beginning of period - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Net investment income (1) 0.0308 0.0622 0.0526 0.0524 0.0399 - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Net increase in net assets resulting from 0.0308 0.0622 0.0526 0.0524 0.0399 operations - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Dividends to shareholders from net investment (0.0308) (0.0622) (0.0526) (0.0524) (0.0399) income - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Net asset value, end of period $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Total investment return (2) 3.13% 6.40% 5.39% 5.37% 4.08% - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Ratios/Supplemental Data $2,637,721 $1,963,646 $913,907 $386,201 $121,460 Net assets, end of period (000's omitted) - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Ratio of expenses to average net assets(1) 0.20% 0.20% 0.20% 0.20% 0.13%(3) - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Ratio of net investment income to average net 2.95% 6.15% 5.36% 5.24% 5.58%(3) assets (1) - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ---------------- Increase/(decrease) reflected in above expense and 0.10% 0.13% 0.17% 0.25% 0.52%(3) net investment income ratios due to waivers and related reimbursements - -------------------------------------------------- --------------- ---------------- -------------- ---------------- ----------------
* Commencement of investment operations. 1 Reflects waivers and related reimbursements. 2 Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends. Total investment return is not annualized. 3 Annualized. 21 The Bear Stearns Funds 383 Madison Avenue New York, NY 10179 1-800-766-4111 DISTRIBUTOR COUNSEL Bear, Stearns & Co. Inc. Kramer Levin Naftalis & Frankel LLP 245 Park Avenue 919 Third Avenue New York, NY 10167 New York, NY 10022 INVESTMENT ADVISER INDEPENDENT AUDITORS Bear Stearns Asset Management Inc. Deloitte & Touche LLP 383 Madison Avenue [UPDATE] New York, NY 10179 New York, NY ADMINISTRATOR Bear Stearns Funds Management Inc. 383 Madison Avenue New York, NY 10179 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 TRANSFER & DIVIDEND DISBURSEMENT AGENT PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 22 Statement of Additional Information. The Statement of Additional Information ("SAI") provides a more complete discussion of several of the matters contained in this Prospectus and is incorporated by reference, which means that it is legally a part of this Prospectus as if it were included here. Annual and Semi-Annual Reports. The annual and semi-annual reports to shareholders contain additional information about the Portfolio's investments, including a discussion of the market conditions and investment strategies that significantly affected the Portfolio's performance during its last fiscal year. To obtain a free copy of the SAI and the current annual or semi-annual reports or to make any other inquiries about the Portfolio, you may call or write: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 Telephone: 1-800- 447-1139 or 1-800-766-4111 You may obtain copies of the SAI or financial reports for free by calling or writing broker-dealers or other financial intermediaries that sell the Portfolio's shares; upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102; or for free by visiting the SEC's Worldwide Web site at http://www.sec.gov. You may review and copy information about the Portfolio (including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 to obtain information on the operation of the SEC's Public Reference Room. Investment Company Act File No. 811-8798 BSF-P- PART B THE BEAR STEARNS FUNDS STATEMENT OF ADDITIONAL INFORMATION
Prime Money Market Portfolio S&P STARS Portfolio Intrinsic Value Portfolio Income Portfolio S&P STARS Opportunities Small Cap Value Portfolio High Yield Total Return Portfolio Alpha Growth Portfolio Portfolio The Insiders Select International Equity Fund Portfolio
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES August 1, 2002 This Statement of Additional Information ("SAI"), which is not a prospectus, supplements and should be read in conjunction with the current relevant prospectus (the "Prospectus") dated August 1, 2002 of The Bear Stearns Funds (the "Trust"), as each may be revised from time to time, offering shares of the portfolios listed above (each, a "Portfolio"). To obtain a free copy of such Prospectus, please write to the Trust at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960; call the Trust at 1-800-635-1404 or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-635-1404. Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a wholly owned subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's investment adviser. Marvin & Palmer Associates, Inc. (the "Sub-Adviser") has been engaged to provide investment advisory services, including portfolio management, to the International Equity Portfolio subject to the supervision of BSAM. BSAM and the Sub-Adviser are collectively referred to herein as the "Advisers." Bear Stearns Funds Management Inc. ("BSFM"), a wholly owned subsidiary of The Bear Stearns Companies Inc., is the administrator of the Portfolios. Bear, Stearns & Co. Inc., an affiliate of BSAM, serves as distributor of each Portfolio's shares. TABLE OF CONTENTS Page Investment and Management Policies...........................................1 Management of the Trust................................................... 48 Management Arrangements.....................................................52 Purchase and Redemption of Shares......................................... 63 Determination of Net Asset Value.......................................... 68 Taxes..................................................................... 70 Dividends -- Money Market Portfolio....................................... 79 Portfolio Transactions.................................................... 79 Performance Information................................................... 84 Code of Ethics............................................................ 86 Information about the Trust............................................... 87 Custodians, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors.................................................................. 95 Financial Statements...................................................... 97 Appendix...................................................................A-1 Each of the Portfolios described in this SAI, other than the Prime Money Market Portfolio (the "Money Market Portfolio"), currently offers Class A, Class B, Class C and Class Y shares. The Money Market Portfolio currently offers only Class Y shares. The Portfolios, other than the Money Market Portfolio, may be categorized as follows: Fixed Income Funds: Income Portfolio High Yield Total Return Portfolio ("High Yield Portfolio") Equity Funds: S&P STARS Portfolio S&P STARS Opportunities Portfolio The Insiders Select Fund Intrinsic Value Portfolio ("Intrinsic Portfolio") Small Cap Value Portfolio ("Small Cap Portfolio") Alpha Growth Portfolio International Equity Portfolio The investment objectives and principal investment policies of each Portfolio are described in the Prospectus. Each Portfolio's investment objective cannot be changed without approval by the holders of a majority of such Portfolio's outstanding voting shares (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")). A Portfolio's investment objective may not be achieved. The following Portfolios are non-diversified: The Insiders Select Fund and the S&P STARS, S&P STARS Opportunities and Alpha Growth Portfolios. The other Portfolios are diversified. See "Investment and Management Policies -- Management Policies -- Non-Diversified Status." INVESTMENT AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the sections in the Prospectus entitled "Risk/Return Summary," "Investments" and "Risk Factors." Unless otherwise stated, the indicated percentage relates to a Portfolio's total assets that may be committed to the stated investment, measured at the time the Portfolio makes the investment. New financial products and risk management techniques continue to be developed, and each Portfolio may use these new investments and techniques to the extent consistent with its investment objective and policies. Asset-Backed Securities. The Money Market, Income, High Yield and International Equity Portfolios each may invest in asset-backed securities. The High Yield Portfolio may invest up to 5% of total assets in asset-backed securities. Asset-backed securities represent participations in, or are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (credit card) agreements and other categories of receivables. Such assets are securitized through the use of trusts and special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued by a financial institution unaffiliated with the trust or corporation, or other credit enhancements may be present. Like mortgage-related securities, asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. A Portfolio's ability to maintain positions in such securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. To the extent that the Portfolio invests in asset-backed securities, the values of its portfolio securities will vary with changes in market interest rates generally and the differentials in yields among various kinds of asset-backed securities. Asset-backed securities present certain additional risks that are not presented by mortgage-related securities because asset-backed securities generally do not have the benefit of a security interest in collateral that is comparable to mortgage assets. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. Any asset-backed securities held by the Money Market Portfolio must comply with the portfolio maturity and quality requirements contained in Rule 2a-7 under the 1940 Act. The Money Market Portfolio will monitor the performance of these investments and will not acquire any such securities unless rated in the highest rating category by at least two nationally recognized statistical rating organizations ("NRSROs"). Bank Obligations. Each Portfolio may invest in bank obligations. Domestic commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to have their deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). State banking authorities supervise and examine domestic banks organized under state law. State banks are members of the Federal Reserve System only if they elect to join. In addition, a Portfolio may acquire state bank-issued certificates of deposit ("CDs") that are insured by the FDIC (although such insurance may not be of material benefit, depending on the principal amount of the CDs of each bank that is held) and are subject to federal examination and to a substantial body of federal law and regulation. As a result of federal or state laws and regulations, domestic branches of domestic banks generally must, among other things, maintain specified levels of reserves, limit the amounts they loan to a single borrower and comply with other regulations designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. Obligations of foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as CDs and time deposits ("TDs"), may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks from those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, 2 auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge a certain percentage of their assets, as fixed from time to time by the appropriate regulatory authority, by depositing assets with a designated bank within the state; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of federal and state branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, the Advisers carefully evaluate such investments on a case-by-case basis. Bank Debt. The High Yield Portfolio may invest up to 15% of its total assets in Participations and Assignments, defined below. Bank debt includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring or in connection with recapitalizations, acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans that provide temporary or "bridge" financing to a borrower pending the sale of identified assets, the arrangement of longer-term loans or the issuance and sale of debt obligations. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions, including banks ("Lenders"). These investments take the form of participations in loans ("Participations") or of assignments of all or a portion of loans from third parties ("Assignments"). Participations differ both from public and private debt securities and from Assignments. In Participations, an investor has a contractual relationship only with the Lender, not with the borrower. As a result, the investor has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, an investor generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the investor may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. Thus, the investor assumes the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender, an investor may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. In Assignments, by contrast, the investor acquires direct rights against the borrower, except that under certain circumstances such rights may be more limited than those held by the assigning Lender. Participations and Assignments otherwise bear risks common to other debt securities, including nonpayment of principal and interest by the borrower, impairment of loan collateral and lack of liquidity. The market for such instruments is not liquid and only a limited number of institutional 3 investors participate in it. The lack of a liquid secondary market may have an adverse impact on the value of such instruments and will have an adverse impact on an investor's ability to dispose of particular Assignments or Participations in response to a specific event, such as deterioration in the creditworthiness of the borrower. In addition to the creditworthiness of the borrower, an investor's ability to receive payment of principal and interest is also dependent on the creditworthiness of any institution (i.e., the Lender) interposed between the investor and the borrower. Borrowing. Each Portfolio, other than the Income Portfolio, may borrow in an amount up to 33-1/3% of its total assets (including the amount borrowed), less all liabilities and indebtedness other than the borrowing. The Income Portfolio currently intends to borrow money only for temporary or emergency (net leveraging) purposes, in an amount up to 15% of the value of its total assets. A Portfolio may not purchase securities when borrowings exceed 5% of its total assets. Borrowings create leverage, a speculative factor. To the extent the income derived from the assets obtained with borrowed funds exceeds the interest and other expenses that a Portfolio will have to pay, the Portfolio's net income will be greater than if borrowing were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of borrowing, the net income of the Portfolio will be less than if borrowing were not used, and, therefore, the amount available for distribution to shareholders as dividends will be reduced. Brady Bonds. The Income, High Yield and International Equity Portfolios may invest in Brady bonds. Debt obligations commonly known as "Brady bonds" are created through the exchange of existing commercial bank loans to foreign entities for new obligations in connection with debt restructurings under a plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady bonds have been issued in connection with the restructuring of the bank loans, for example, of the governments of Mexico, Venezuela and Argentina. As a consequence of substantial volatility in commodity prices and a dramatic increase in interest rates in the early 1980s, many emerging market countries defaulted on syndicated bank loans made during the 1970s and early 1980s. Much of the debt owed by governments to commercial banks was subsequently restructured, involving the exchange of outstanding bank indebtedness for Brady bonds. They may be collateralized or uncollateralized and issued in various currencies (although most are dollar-denominated) and are actively traded in the over-the-counter secondary market. As a pre-condition to issuing Brady bonds, debtor nations are generally required to agree to monetary and fiscal reform measures prescribed by the World Bank or the International Monetary Fund, including liberalization of trade and foreign investments, privatization of state-owned enterprises and setting targets for public spending and borrowing. These policies and programs are designed to improve the debtor country's ability to service its external obligations and promote its growth and development. Dollar-denominated, collateralized Brady bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal due at maturity by U.S. Treasury zero coupon obligations with the same maturity as the Brady bonds. Interest payments on these Brady bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the "residual risk"). In the event of a default with respect to collateralized Brady bonds as a result of which the payment obligations of the 4 issuer are accelerated, the U.S. Treasury zero coupon obligations held as collateral for the payment of principal will not be distributed to investors, nor will such obligations be sold and the proceeds distributed. The collateral will be held by the collateral agent to the scheduled maturity of the defaulted Brady bonds, which will continue to be outstanding, at which time the face amount of the collateral will equal the principal payments which would have then been due on the Brady bonds in the normal course. In addition, in light of the residual risk of Brady bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady bonds, investments in Brady bonds are considered speculative. Commercial Paper and Other Short-Term Corporate Obligations. Each Portfolio may invest in commercial paper and other short-term obligations. Commercial paper consists of unsecured promissory notes issued by banks, corporations and other borrowers. Such instruments are usually discounted, although some are interest-bearing. Except as noted below with respect to variable amount master demand notes, issues of commercial paper normally have maturities of less than nine months and fixed rates of return. Variable rate demand notes include variable amount master demand notes, which are obligations that permit a Portfolio to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, a Portfolio may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and the borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, a Portfolio's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, the Advisers will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and a Portfolio may invest in them only if at the time of investment the borrower meets the criteria that the Trust's Board of Trustees (the "Board") has established. Convertible Securities. Each Portfolio, other than the Money Market and Alpha Growth Portfolios, may invest in convertible securities. The Insiders Select Fund and the Intrinsic, Small Cap and International Equity Portfolios each may invest in convertible debt securities that are rated no lower than "BBB" by Standard & Poor's ("S&P") or "Baa" by Moody's Investors Service ("Moody's"), or if unrated by these rating organizations, determined to be of comparable quality by the Advisers. Convertible securities include debt securities and preferred stock that are convertible at stated exchange rates into the issuer's common stock. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. As with all fixed income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. When the market price of the common stock underlying a convertible security exceeds the conversion price, however, the convertible security tends to reflect the market price of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a yield basis, and thus may not decline in price to the same extent as the underlying common stock. Convertible securities rank senior to common stocks in an issuer's capital structure and consequently entail less risk than the issuer's common stock. The convertible securities in which a Portfolio may invest are subject to the same rating criteria as the Portfolio's investments in non-convertible debt securities. In the case of convertible security with a call feature, the issuer may call the 5 security at a pre-determined price. If a convertible security held by a Portfolio is called, the Portfolio may permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Convertible debt securities may be considered equity investments for purposes of a Portfolio's investment policies. Corporate Debt Obligations. Each of the Income and High Yield Portfolios may invest 100% of its total assets in corporate debt obligations, and the International Equity Portfolio may invest up to 35% of its total assets in these securities. Corporate debt obligations include obligations of industrial, utility and financial issuers in the form of bonds, debentures, and notes. These securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity. Except under conditions of default, changes in the value of a Portfolio's fixed income securities will not affect cash income derived from these securities but will affect the Portfolio's net asset value. Custodial Receipts. The High Yield Portfolio may invest in custodial receipts, and the International Equity Portfolio may invest up to 5% of its net assets in these instruments. Custodial receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. government, its agencies, instrumentalities, political subdivisions or authorities. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATs"). For certain securities law purposes, custodial receipts are not considered U.S. government securities. Distressed Securities. The High Yield Portfolio may invest up to 20% of its total assets in distressed securities. Distressed securities are issued by financially troubled or bankrupt companies ("financially troubled issuers") or companies whose securities are, in the view of the Adviser, currently undervalued, out-of-favor or price depressed relative to their long-term potential for growth and income ("operationally troubled issuers"). The securities of financially and operationally troubled issuers may require active monitoring and at times may require the Adviser to participate in bankruptcy or reorganization proceedings on behalf of a Portfolio. To the extent that the Adviser becomes involved in such proceedings, a Portfolio may have a more active participation in the affairs of the issuer than is generally assumed by an investor and such participation may subject the Portfolio to the litigation risks described below. However, no Portfolio invests in the securities of financially or operationally troubled issuers for the purpose of exercising day-to-day management of any issuer's affairs. Bankruptcy and Other Proceedings -- Litigation Risks. When a company seeks relief under the Federal Bankruptcy Code (or has a petition filed against it), an automatic stay prevents all entities, including creditors, from foreclosing or taking other actions to enforce claims, perfect liens or reach collateral securing such claims. Creditors who have claims against the company prior to the date of the bankruptcy filing must petition the court to permit them to take any action to protect or enforce their claims or their rights in any collateral. Such creditors may be prohibited from doing so if the court concludes that the value of the property in which the creditor has an interest will be "adequately protected" during the proceedings. If the bankruptcy court's assessment of adequate protection is inaccurate, a creditor's collateral may be wasted without the creditor being afforded the opportunity to preserve it. Thus, even if an investor holds a secured claim, it may be prevented from collecting the liquidation value of the collateral securing its debt, unless relief from the automatic stay is granted by the court. 6 Security interests held by creditors are closely scrutinized and frequently challenged in bankruptcy proceedings and may be invalidated for a variety of reasons. For example, security interests may be set aside because, as a technical matter, they have not been perfected properly under the Uniform Commercial Code or other applicable law. If a security interest is invalidated, the secured creditor loses the value of the collateral and because loss of the secured status causes the claim to be treated as an unsecured claim, the holder of such claim will almost certainly experience a significant loss of its investment. While the Advisers will scrutinize any security interests, the security interests may be challenged vigorously and found defective in some respect, or a Portfolio may not be able to prevail against the challenge. Debt may be disallowed or subordinated to the claims of other creditors if the creditor is found guilty of certain inequitable conduct resulting in harm to other parties with respect to the affairs of a company filing for protection from creditors under the Federal Bankruptcy Code. Creditors' claims may be treated as equity if they are deemed to be contributions to capital, or if a creditor attempts to control the outcome of the business affairs of a company prior to its filing under the Bankruptcy Code. If a creditor is found to have interfered with the company's affairs to the detriment of other creditors or shareholders, the creditor may be held liable for damages to injured parties. While a Portfolio will attempt to avoid taking the types of action that would lead to equitable subordination or creditor liability, such claims may be asserted and the Portfolio may not be able to defend against them successfully. While the challenges to liens and debt described above normally occur in a bankruptcy proceeding, the conditions or conduct that would lead to an attack in a bankruptcy proceeding could in certain circumstances result in actions brought by other creditors of the debtor, shareholders of the debtor or even the debtor itself in other state or federal proceedings. As is the case in a bankruptcy proceeding, such claims may be asserted and a Portfolio may not be able to defend against them successfully. To the extent that a Portfolio assumes an active role in any legal proceeding involving the debtor, the Portfolio may be prevented from disposing of securities issued by the debtor due to the Portfolio's possession of material, non-public information concerning the debtor. Equity Securities. The Insiders Select Fund and the S&P STARS, Intrinsic and Small Cap Portfolios each must invest at least 85% of its total assets in equities; and the Alpha Growth, S&P STARS Opportunities and International Equity Portfolios must each invest at least 90%, 80% and 65%, respectively, of its total assets in equities. The Income and High Yield Portfolios each may invest 35% and 20% , respectively, of its total assets in equity securities, including distressed securities, as described above. These securities include foreign and domestic common stocks or preferred stocks, rights and warrants and debt securities or preferred stock that are convertible or exchangeable for common stock or preferred stock. Investors in these Portfolios should be willing to accept the price volatility associated with stocks in exchange for their relatively high return potential compared to other asset classes. Fixed Income Securities. The Money Market Portfolio may invest without limit in short-term fixed income securities. The Income and High Yield Portfolios each must invest at least 65% and 80%, respectively, of its total assets in fixed income securities. The Insiders Select Fund and the S&P STARS, Intrinsic and Small Cap Portfolios each may invest up to 15% of its total assets in fixed income securities. The Alpha Growth, S&P STARS Opportunities and International Equity Portfolios each may invest up to 10%, 20% and 35%, respectively, of its total assets in fixed income securities. Fixed-income securities include certain corporate debt obligations and U.S. government securities. Although interest-bearing securities are investments that promise a stable stream of income, the prices of such securities typically are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Thus, if interest rates have increased from the time a security was 7 purchased, such security, if sold, might be sold at a price less than its cost. Similarly, if interest rates have declined from the time a security was purchased, such security, if sold, might be sold at a price greater than its cost. In either instance, if the security was purchased at face value and held to maturity, no gain or loss would be realized. Certain securities purchased by a Portfolio, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. Emerging Market Countries. The Income, High Yield, S&P STARS, S&P STARS Opportunities and International Equity Portfolios each may invest in the securities of issuers located in countries that are considered to be emerging or developing ("emerging countries") by the World Bank, the International Finance Corporation, or the United Nations and its authorities. The Income Portfolio may invest up to 5% of its total assets in these securities. A company is considered to be an emerging country issuer if: (i) its securities are principally traded in an emerging country; (ii) it derives at least 50% of its total revenue from (a) providing goods or services in emerging countries or (b) sales made in emerging countries; (iii) it maintains 50% or more of its assets in one or more emerging countries; or (iv) it is organized under the laws of, or has a principal office in, an emerging country. Emerging Market Securities. The Income, High Yield, S&P STARS, S&P STARS Opportunities and International Equity Portfolios each may invest in emerging market securities. The Income Portfolio may invest up to 5% of its total assets in these securities. The securities markets of certain emerging market countries may be marked by a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of ownership of such securities by a limited number of investors. The markets for securities in certain emerging market countries are in early stages of their development. Even the markets for relatively widely traded securities in emerging markets may not be able to absorb, without price disruptions, a significant increase in trading volume or trades of a size customarily undertaken by institutional investors in the securities markets of developed countries. In addition, market making and arbitrage activities are generally less extensive in such markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging markets may also affect a Portfolio's ability to accurately value its portfolio securities or to acquire or dispose of securities at the price and time it wishes to do so or in order to meet redemption requests. Transaction costs, including brokerage commissions or dealer mark-ups, in emerging market countries may be higher than in the United States and other developed securities markets. In addition, the securities of non-U.S. issuers generally are not registered with the Securities and Exchange Commission (the "SEC"), and issuers of these securities usually are not subject to its reporting requirements. Accordingly, there may be less publicly available information about foreign securities and issuers than is available with respect to U.S. securities and issuers. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those prevalent in the U.S. Existing laws and regulations of emerging market countries may be inconsistently applied. As legal systems in emerging market countries develop, investors may be adversely affected by new or amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement of the law. A Portfolio's ability to enforce its rights against private emerging market country issuers by attaching assets to enforce a judgment may be limited. Bankruptcy, moratorium and other similar laws applicable to private emerging market country issuers may differ substantially from those of other countries. The political context, expressed as an emerging market governmental issuer's willingness to meet the terms of its debt obligations, for example, is of considerable importance. In addition, the holders of commercial bank debt may contest payments to the 8 holders of emerging market country debt securities in the event of default under commercial bank loan agreements. Certain emerging market countries require governmental approval prior to investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuer's outstanding securities or a specific class of securities which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. In addition, the repatriation of both investment income and capital from several of the emerging market countries is subject to restrictions such as the need for certain governmental consents. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operation of the Portfolio. The Portfolio may be required to establish special custodial or other arrangements before investing in certain emerging market countries. Emerging market countries may be subject to a greater degree of economic, political and social instability than is the case in the United States, Japan and most Western European countries. Such instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making, including changes or attempted changes in governments through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection or conflict. Such economic, political and social instability could disrupt the principal financial markets in which a Portfolio may invest and adversely affect the value of its assets. The economies of emerging market countries may differ unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments. Many emerging market countries have experienced in the past, and continue to experience, high rates of inflation. In certain countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative interest rate environment and sharply eroding the value of outstanding financial assets in those countries. The economies of certain emerging market countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners. In addition, the economies of certain emerging market countries are vulnerable to weakness in world prices for their commodity exports. A Portfolio's income and, in some cases, capital gains from foreign stocks and securities will be subject to applicable taxation in certain countries in which it invests, and treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates. See "Taxes." Foreign Government Securities. The Income, High Yield and International Equity Portfolios each may invest in foreign government securities to the extent that these Portfolios may invest in fixed income securities, as described in "Fixed Income Securities" above. Investment in sovereign debt obligations involves special risks not present in debt obligations of U.S. corporate issuers. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due in accordance with the terms of such debt, and an investor may have limited recourse in the event of a default. Periods of economic uncertainty may result in volatile sovereign debt market prices. A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders and the political constraints to which a sovereign debtor may be subject. 9 When an emerging country government defaults on its debt obligations, the investor must pursue any remedies in the courts of the defaulting party itself. Certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank, and may be unwilling or unable to make repayments as they become due. Below-investment-grade debt securities are generally unsecured and may be subordinated to the claims of other creditors, resulting in a heightened risk of loss due to default. Foreign Securities. Each Portfolio may invest in foreign (non-U.S.) securities. The International Equity Portfolio must invest at least 65% (and may invest up to 100%) of its total assets in foreign securities. The High Yield Portfolio may invest up to 25% of its total assets in foreign securities, the Intrinsic and Small Cap Portfolios each may invest up to 10% of its total assets in these securities. Investing in foreign securities involves certain special considerations, including those set forth below, which are not typically associated with investing in U.S. dollar-denominated or quoted securities of U.S. issuers. Investments in foreign securities usually involve currencies of foreign countries. Accordingly, a Portfolio's investment in foreign securities may be affected by changes in currency rates and in exchange control regulations and costs incurred in converting among various currencies. A Portfolio may also be subject to currency exposure as a result of its investment in currency or currency futures. Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks or the failure to intervene or by currency controls or political developments in the United States or abroad. Since foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than about a U.S. company. Volume and liquidity in most foreign securities markets are less than in the United States and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although a Portfolio that invests in such securities endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted companies than in the United States. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when some of the Portfolio's assets are uninvested and no return is earned on such assets. The inability of a Portfolio to make intended security purchases due to settlement problems could cause the Portfolio to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio securities or, if the Portfolio has entered into a contract to sell the securities, could result in possible liability to the purchaser. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments which could affect the Portfolio's investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such 10 respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Investment in foreign companies, foreign branches of U.S. banks, foreign banks, or other foreign issuers, may take the form of ownership of securities issued by such entities or may take the form of sponsored and unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") or other similar instruments representing securities of foreign issuers. An ADR is a negotiable receipt, usually issued by a U.S. bank, that evidences ownership of a specified number of foreign securities on deposit with a U.S. depository and entitles the shareholder to all dividends and capital gains of the underlying securities. ADRs are traded on U.S. exchanges or in the U.S. over-the-counter market and, generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security. In the case of sponsored ADRs, the issuer of the underlying foreign security and the depositary enter into a deposit agreement, which sets out the rights and responsibilities of the issuer, the depositary and the ADR holder. Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions, thereby ensuring that ADR holders will be able to exercise voting rights through the depositary with respect to deposited securities. In addition, the depositary usually agrees to provide shareholder communications and other information to the ADR holder at the request of the issuer of the deposited securities. In the case of an unsponsored ADR, there is no agreement between the depositary and the issuer and the depositary is usually under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through voting rights to ADR holders in respect of deposited securities. With regard to unsponsored ADRs, there may be an increased possibility that the Portfolio would not become aware of or be able to respond to corporate actions such as stock splits or rights offerings in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Funding Agreements. The Portfolios may invest in funding agreements (sometimes referred to as Guaranteed Interest Contracts or "GICs") of insurance companies. In such cases, the Portfolio contributes cash to a deposit fund of the insurance company's general account, and the insurance company then credits the Portfolio, on a monthly basis, guaranteed interest that is based on an index. All funding agreements will provide that this guaranteed interest will not be less than a certain minimum rate. Because the principal amount of a funding agreement may not be received from the insurance company on seven days notice or less, the agreement is considered to be an illiquid investment and, together with other instruments in a Portfolio which are not readily marketable, will not exceed, for the Money Market Portfolio, 10% of the Portfolio's net assets and for all other Portfolios, 15% of the Portfolio's net assets. In determining dollar-weighted average portfolio maturity, all funding agreements will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate. Illiquid Securities. Each Portfolio, other than the Money Market Portfolio, may invest up to 15% of its net assets in illiquid securities. The Money Market Portfolio may invest up to 10% of its assets in these securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Limitations on resale may have an adverse effect on the marketability of portfolio securities and an investor might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying 11 redemptions within seven days. An investor might also seek to have such restricted securities registered in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. Rule 144A under the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The Advisers anticipate that the market for certain restricted securities will expand further as a result of this regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act and commercial paper for which there is a readily available market will not be deemed to be illiquid. The Advisers will monitor the liquidity of such restricted securities subject to the supervision of the Board. In reaching liquidity decisions, the Advisers will consider, inter alia, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). In addition, in order for commercial paper that is issued in reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it must be rated in one of the two highest rating categories by at least two NRSROs, or if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable quality in the view of the Advisers; and (ii) it must not be "traded flat" (i.e., without accrued interest) or in default as to principal or interest. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period. The SEC has taken the position that purchased over-the-counter ("OTC") options and the assets used as "cover" for written OTC options are deemed illiquid securities unless a Portfolio and the counterparty have provided for the Portfolio, at the Portfolio's election, to unwind the OTC option. The unwinding of such an option would ordinarily involve the payment by the Portfolio of an amount designed to reflect the counterparty's economic loss from an early termination, thereby allowing the Portfolio to treat as liquid those securities that were formerly used as "cover." Inverse Floating Rate Securities. The interest rate on leveraged inverse floating rate debt instruments ("inverse floaters") resets in the opposite direction from the market rate of interest to which the inverse floater is indexed . An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Accordingly, the duration of an inverse floater may exceed its stated final maturity. Certain inverse floaters may be deemed to be illiquid securities for purposes of the 15% limitation on investments in such securities. 12 Investment in Prime Money Market Portfolio. Each Portfolio (other than the Money Market Portfolio) may invest uninvested cash and cash collateral from securities lending transactions ("Uninvested Cash") in shares of the Money Market Portfolio to the extent that a Portfolio's aggregate investment of Uninvested Cash in the Money Market Portfolio does not exceed 25% of the Portfolio's total assets . Each Portfolio's acquisition of shares of the Money Market Portfolio is subject to the following conditions: (a) the Money Market Portfolio continues to operate as a money market fund in compliance with Rule 2a-7 under the Investment Company Act of 1940; and (b) the Money Market Portfolio will invest only in high quality, U.S. dollar-denominated short-term liquid instruments, including: U.S. government obligations; commercial paper, notes, certificates of deposit, banker's acceptances; repurchase agreements; floating and variable rate securities; time deposits and instruments issued or backed by U.S. or foreign banks or savings institutions with total assets of at least $1 billion at the time of purchase; and U.S. dollar-denominated foreign securities. Money Market Instruments. Each Portfolio may invest in money market instruments. The S&P STARS, Intrinsic and Small Cap Portfolios each may invest 15% of its total assets in these instruments. The S&P STARS Opportunities Portfolio may invest 20% of its total assets in these instruments. The International Equity Portfolio may invest 35% of its total assets in these instruments. A Portfolio may invest in money market instruments, including U.S. government obligations, U.S. Treasury bills and commercial paper that is (a) rated at the time of purchase in the highest category by an NRSRO; (b) issued by a company having an outstanding unsecured debt issue currently rated not lower than "Aa3" by Moody's or "AA" by S&P or Fitch IBCA, Duff & Phelps ("Fitch"); or (c) if unrated, of comparable quality. A Portfolio may also invest in bank obligations, including, without limitation, time deposits, bankers' acceptances and certificates of deposit, which may be general obligations of the parent bank or may be limited to the issuing branch by the terms of the specific obligations or by government regulation. Banks are subject to extensive governmental regulations, which may limit both the amount and types of loans which may be made and interest rates which may be charged. In addition the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry. Mortgage-Related Securities. The Money Market, Income, High Yield and International Equity Portfolios each may invest in mortgage-related securities. Mortgage-related securities are backed by mortgage obligations including, among others, conventional 30-year fixed rate mortgage obligations, graduated payment mortgage obligations, 15-year mortgage obligations, and adjustable-rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments of principal (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-related securities are often subject to more rapid prepayment of principal than their stated maturity indicates. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may 13 not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. A Portfolio may purchase mortgage-related securities at a premium or at a discount. The Income Portfolio may invest in stripped mortgage-related securities that are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities. Each has a specified percentage of the underlying security's principal or interest payments. Mortgage securities may be partially stripped, so that each class receives some interest and some principal, or they may be completely stripped. In that case, all of the interest is distributed to holders of an "interest-only" security, and all of the principal is distributed to holders of a "principal-only" security. Strips can be created for pass-through certificates or collateralized mortgage obligations ("CMOs"). The yields to maturity of interest-only and principal-only stripped mortgage-related securities are very sensitive to principal repayments on the underlying mortgages. U.S. Government Agency Securities. Mortgage-related securities issued by the Government National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes"). Ginnie Maes are guaranteed as to the timely payment of principal and interest by GNMA and are backed by the full faith and credit of the United States. GNMA is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. U.S. Government Related Securities. Mortgage-related securities issued by the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of the FNMA and are not backed by or entitled to the full faith and credit of the United States. FNMA is a government-sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"). FHLMC is a corporate instrumentality of the United States created pursuant to an Act of Congress, which is owned entirely by the Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. Mortgage Dollar Rolls. The Money Market, Income, High Yield and International Equity Portfolios each may invest in mortgage "dollar rolls," which involve the sale of securities for delivery in the current month and a simultaneous contract with the counterparty to repurchase substantially similar (same type, coupon and maturity) but not identical securities on a specified future date. During the roll period, the seller loses the right to receive principal and interest paid on the securities sold. An investor would benefit, however, to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase or fee income plus the interest earned on the cash proceeds of the securities sold until the settlement date for the forward purchase. The use of this technique will diminish investment performance unless such benefits exceed the income, capital appreciation and gain or loss due to mortgage prepayments that would have been realized on the securities 14 sold as part of the mortgage dollar roll. Successful use of mortgage dollar rolls depends on the Adviser's ability to predict correctly interest rates and mortgage prepayments. Municipal Obligations. The Income and High Yield Portfolios each may invest up to 25% and 5% of total assets, respectively, in municipal obligations. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligation and purchased and sold separately. The Portfolios may invest in municipal obligations, the ratings of which correspond with the ratings of other permissible investments. Real Estate Investment Trusts ("REITs"). REITs are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment companies such as the Portfolio, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Internal Revenue Code of 1986, as amended (the "Code"). A Portfolio will indirectly bear its proportionate share of any expenses incurred by REITs in which it invests in addition to the expenses paid by the Portfolio. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks. Repurchase Agreements. Each Portfolio may enter into repurchase agreements. Repurchase agreements are a type of secured lending and typically involve the acquisition of debt securities from a financial institution, such as a bank, savings and loan association or broker-dealer, which then agrees to repurchase the security at a specified resale price on an agreed future date (ordinarily one week or less). The difference between the purchase and resale prices generally reflects the market interest rate for the term of the agreement. A Portfolio's custodian or sub-custodian will have custody of, and will hold in a segregated account, securities that the Portfolio acquires under a repurchase agreement. Repurchase agreements are considered by the SEC to be loans. If the seller defaults, a Portfolio might suffer a loss to 15 the extent the proceeds from the sale of the securities underlying the repurchase agreement are less than the repurchase price. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, a Portfolio will enter into repurchase agreements only with counterparties whose short-term paper is rated no lower than "A1/P1" or whose corporate parent has a rating of no lower than "A1/P1" with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which each Portfolio may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. The Adviser will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. A Portfolio will consider on an ongoing basis the creditworthiness of the institutions with which it enters into repurchase agreements. Reverse Repurchase Agreements. The High Yield Portfolio may borrow by entering into reverse repurchase agreements, pursuant to which, it would sell portfolio securities to financial institutions, such as banks and broker-dealers, and agree to repurchase them at an agreed upon date, price and interest payment. When effecting reverse repurchase transactions, securities of a dollar amount equal in value to the securities subject to the agreement will be maintained in a segregated account with the custodian. A reverse repurchase agreement involves the risk that the market value of the portfolio securities sold by a Portfolio may decline below the price of the securities it must repurchase, which price is fixed at the time the Portfolio enters into such agreement. Structured Securities. Each Portfolio, other than the Money Market Portfolio, may invest in structured or indexed securities. Structured securities (sometimes referred to as hybrid securities or indexed securities) are considered derivative instruments. The value of the principal of and/or interest on structured securities is linked to, or determined by, reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the "Reference") or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, result in the loss of a Portfolio's investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may entail a greater degree of market risk than other types of fixed-income securities. Structured securities may also be more volatile, less liquid and more difficult to accurately price than less complex securities. Trade Claims. The High Yield Portfolio may invest in trade claims. Trade claims are non-securitized rights of payment arising from obligations other than borrowed funds. Trade claims typically arise when, in the ordinary course of business, vendors and suppliers extend credit to a company by offering payment terms. Generally, when a company files for bankruptcy protection, payments on trade claims cease and the claims are subject to compromise along with the other debts of the company. Trade claims typically are bought and sold at a discount reflecting the degree of uncertainty with respect to the timing and extent of recovery. In addition to the risks otherwise associated with low-quality obligations, trade claims have other risks, including (i) the possibility that the amount of the claim may be disputed by the debtor, (ii) the debtor may have a variety of defenses to assert against the claim under the bankruptcy code, (iii) volatile pricing due to a less liquid market, including a small number of brokers for trade claims and a small universe of potential buyers, (iv) the possibility that a Portfolio may be obligated to purchase a trade claim larger than initially anticipated and (v) the risk of failure of sellers of trade claims to indemnify a Portfolio against loss due to the bankruptcy or insolvency of such sellers. The negotiation and enforcement of rights in connection with trade claims may result in substantial legal expenses to a Portfolio, which may reduce return on such investments. It is not unusual for trade claims 16 to be priced at a discount to publicly traded securities that have an equal or lower priority claim. Additionally, trade claims may be treated as non-securities investments. As a result, any gains may be considered "non-qualifying" under the Code. Variable and Floating Rate Securities. Each Portfolio may invest in variable and floating rate securities. The interest rates payable on certain fixed-income securities in which a Portfolio may invest are not fixed and may fluctuate based upon changes in market rates. A variable rate obligation is one whose terms provide for the readjustment of its interest rate on set dates and which, upon such readjustment, reasonably can be expected to have a market value that approximates its par value. A floating rate obligation is one whose terms provide for the readjustment of its interest rate whenever a specified interest rate changes and which, at any time, reasonably can be expected to have a market value that approximates its par value. Variable and floating rate obligations provide holders with protection against rises in interest rates, but pay lower yields than fixed rate obligations of the same maturity. Variable rate obligations may fluctuate in value in response to interest rate changes if there is a delay between changes in market interest rates and the interest reset date for the obligation. Warrants and Stock Purchase Rights. The Insiders Select Fund and the S&P STARS, S&P STARS Opportunities, Intrinsic, Small Cap and International Equity Portfolios each may invest up to 5% of its total assets in these instruments. Warrants or rights (other than those acquired in units or attached to other securities) entitle the holder to buy equity securities at a specific price for a specific period of time. Warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer. When-Issued and Forward Commitments. Each Portfolio, other than the Money Market and International Equity Portfolios, may invest up to 33-1/3% of its total assets in when-issued or forward commitment transactions. The Money Market and International Equity Portfolios each may invest up to 25% and 20% of its total assets, respectively, in these transactions. A Portfolio may purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis. These transactions involve a commitment by the Portfolio to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such commitments are not traded on exchanges. A Portfolio will purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Portfolio may dispose of or negotiate a commitment after entering into it. A Portfolio may realize a capital gain or loss in connection with these transactions. For purposes of determining a Portfolio's duration, the maturity of when-issued or forward commitment securities will be calculated from the commitment date. A Portfolio is required to hold and maintain in a segregated account with the Portfolio's custodian until three days prior to the settlement date, cash and liquid securities in an amount sufficient to meet the purchase price. Alternatively, the Portfolio may enter into offsetting contracts for the forward sale of other securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. The issuance of certain securities depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization, leveraged buyout or debt restructuring ("when, as and if issued securities"). As a result, the period from the trade date to the issuance date may be considerably longer than a typical when-issued trade. Each when-issued transaction specifies a date upon 17 which the commitment to enter into the relevant transaction will terminate if the securities have not been issued on or before such date. In some cases, however, the securities may be issued prior to such termination date, but may not be deliverable until a period of time thereafter. If the anticipated event does not occur and the securities are not issued, a Portfolio would be entitled to retain any funds committed for the purchase, but the Portfolio may have foregone investment opportunities during the term of the commitment. Zero Coupon, Pay-In-Kind Or Deferred Payment Securities. Each Portfolio may invest in zero coupon securities and each Portfolio, other than the International Equity Portfolio, may invest in pay-in-kind and other discount securities. Zero coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. While interest payments are not made on such securities, holders of such securities are deemed to have received annually "accreted income." A Portfolio accrues income with respect to these securities for federal income tax and accounting purposes prior to the receipt of cash payments. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is entitled to receive the aggregate par value of the securities. Deferred payment securities are securities that remain zero coupon securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. Zero coupon, pay-in-kind and deferred payment securities may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular intervals. In addition, because a Portfolio must distribute income to its shareholders to qualify for pass-through federal tax treatment (including "accreted income" or the value of the pay-in-kind interest), it may have to dispose of its investments under disadvantageous circumstances to generate the cash, or may have to borrow to implement these distributions. Management Policies Below Investment Grade and Unrated Securities. Debt securities that are unrated or below investment grade are generally considered to have a credit quality rated below investment grade by NRSROs such as Moody's and S&P. Securities rated below investment grade are the equivalent of high yield, high risk bonds, commonly known as "junk bonds." Investment grade debt is generally rated "BBB" or higher by S&P or "Baa" or higher by Moody's. Below investment-grade debt securities (that is, securities rated "Ba1" or lower by Moody's or "BB+" or lower by S&P) are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Some of the debt securities held by a Portfolio may be comparable to securities rated as low as "C" by Moody's or "D" by S&P, the lowest ratings assigned by these agencies. These securities are considered to have extremely poor prospects of ever attaining any real investment grade standing, and to have a current identifiable vulnerability to default, and the issuers and/or guarantors of these securities are considered to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions and/or to be in default or not current in the payment of interest or principal. Below investment-grade and unrated debt securities generally offer a higher current yield than that available from investment grade issues, but involve greater risk. Below investment-grade and unrated securities are especially subject to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of below-investment-grade and unrated instruments may experience financial stress that could adversely affect their ability to make 18 payments of principal and interest, to meet projected business goals and to obtain additional financing. If the issuer of a bond defaults, a Portfolio may incur additional expenses to seek recovery. A foreign issuer may not be willing or able to repay the principal or interest of such obligations when it becomes due, due to factors such as debt service, cash flow situation, the extent of its foreign reserves, and the availability of sufficient foreign exchange on the date a payment is due. The risk of loss due to default by the issuer is significantly greater for the holders of below-investment-grade and unrated debt securities because such securities may be unsecured and may be subordinated to other creditors of the issuer. In addition, in recent years some Latin American countries have defaulted on their sovereign debt. A Portfolio may have difficulty disposing of certain high yield, high risk securities because there may be a thin trading market for such securities. The secondary trading market for high yield, high risk securities is generally not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and a Portfolio's ability to dispose of particular issues when necessary to meet liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Below investment-grade and unrated debt securities frequently have call or redemption features which would permit an issuer to repurchase the security from a Portfolio. If a call were exercised by the issuer during a period of declining interest rates, the Portfolio likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Portfolio and dividends to shareholders. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of below investment-grade and unrated securities especially in a market characterized by low trading volume. Factors adversely affecting the market value of high yield, high risk securities are likely to adversely affect a Portfolio's net asset value ("NAV"). In addition, a Portfolio may incur additional expenses to the extent it is required to seek recovery upon a default on a portfolio holding or participate in the restructuring of an obligation. An economic downturn could severely affect the ability of highly leveraged issuers of below investment-grade securities to service their debt obligations or to repay their obligations upon maturity. Factors having an adverse impact on the market value of below-investment-grade bonds will have an adverse effect on a Portfolio's NAV to the extent it invests in such securities. In addition, the Portfolio may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings. The secondary market for below investment-grade bonds, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for investment grade securities. This reduced liquidity may have an adverse effect on the ability of the Portfolio to dispose of a particular security when necessary to meet its redemption requests or other liquidity needs. Under adverse market or economic conditions, the secondary market for below investment-grade bonds could contract further, independent of any specific adverse changes in the condition of a particular issuer. As a result, the Advisers could find it difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of below-investment-grade or comparable unrated securities, under such circumstances, may be less than the prices used in calculating the Portfolio's NAV. Since investors generally perceive that there are greater risks associated with the medium-rated and below investment-grade securities, the yields and prices of such securities may tend to fluctuate more than those for highly rated securities because changes in the perception of these issuers' creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in 19 higher quality segments of the fixed-income securities market, resulting in greater yield and price volatility. Another factor which causes fluctuations in the prices of fixed-income securities is the supply and demand for similarly rated securities. In addition, the prices of fixed-income securities fluctuate in response to the general level of interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Portfolio's NAV. Medium rated, below investment-grade and comparable unrated securities tend to offer higher yields than higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. Since these securities generally involve greater risks of loss of income and principal than higher rated securities, investors should consider carefully the relative risks associated with investment in securities which carry medium to lower ratings and in comparable unrated securities. In addition to the risk of default, there are the related costs of recovery on defaulted issues. A Portfolio may attempt to reduce these risks through portfolio diversification and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends and corporate developments. Downgraded Debt Securities. Subsequent to its purchase by a Portfolio, a debt issue may cease to be rated or its rating may be reduced below the minimum required for purchase. Neither event will require the sale of such securities by a Portfolio, but the Advisers will consider such event in determining whether the Portfolio should continue to hold the securities. To the extent that the ratings given by Moody's, S&P or Fitch may change as a result of changes in such organizations or their rating systems, a Portfolio will attempt to use comparable ratings as standards for its investments in accordance with the investment policies contained in the Prospectus and this SAI. Options, in General. Each Portfolio (other than the Money Market Portfolio) may, but is not required to, use derivatives to reduce risk or enhance return, including options on securities and financial indices. A Portfolio may invest up to 5% of its total assets, represented by the premium paid, in the purchase of put and call options. A Portfolio may write covered put or call option contracts in an amount up to 20% of its net assets at the time such option contracts are written. Options on Securities. A Portfolio may purchase put and call options and write covered put and call options on debt and equity securities, financial indices (including stock indices), U.S. and foreign government debt securities and foreign currencies. These may include options traded on U.S. or foreign exchanges and options traded on U.S. or foreign over-the-counter markets ("OTC options"), including OTC options with primary U.S. government securities dealers recognized by the Federal Reserve Bank of New York. The purchaser of a call option has the right, for a specified period of time, to purchase the securities subject to the option at a specified price (the "exercise price" or "strike price"). By writing a call option, a Portfolio becomes obligated during the term of the option, upon exercise of the option, to deliver the underlying securities to the purchaser against receipt of the exercise price. When a Portfolio writes a call option, it loses the potential for gain on the underlying securities in excess of the exercise price of the option during the period that the option is open. A Portfolio may purchase call options on securities in order to fix the cost of a future purchase. A Portfolio also may purchase call options as a means of enhancing returns by, for example, participating in an anticipated price increase of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying 20 security, use of this strategy would serve to limit a Portfolio's potential loss to the option premium paid; conversely, if the market price of the underlying security increases above the exercise price and the Portfolio either sells or exercises the option, any profit eventually realized will be reduced by the premium paid. The purchaser of a put option has the right, for a specified period of time, to sell the securities subject to the option to the writer of the put at the specified exercise price. By writing a put option, a Portfolio becomes obligated during the term of the option, upon exercise of the option, to purchase the securities underlying the option at the exercise price. The Portfolio might, therefore, be obligated to purchase the underlying securities for more than their current market price. A Portfolio may purchase put options on securities in order to attempt to hedge against a decline in the market value of securities it holds. A put option would enable a Portfolio to sell the underlying security at a predetermined exercise price; thus the potential for loss to the Portfolio below the exercise price would be limited to the option premium paid. If the market price of the underlying security were higher than the exercise price of the put option, any profit a Portfolio realizes on the sale of the security would be reduced by the premium paid for the put option less any amount for which the put option may be sold. The writer of an option retains the amount of the premium, although this amount may be offset or exceeded, in the case of a covered call option, by a decline and, in the case of a covered put option, by an increase in the market value of the underlying security during the option period. A Portfolio may wish to protect certain portfolio securities against a decline in market value at a time when put options on those particular securities are not available for purchase. The Portfolio may therefore purchase a put option on other carefully selected securities, the values of which the Advisers expect will have a high degree of positive correlation to the values of such portfolio securities. If the Advisers' judgment is correct, changes in the value of the put options should generally offset changes in the value of the portfolio securities being hedged. If the Advisers' judgment is not correct, the value of the securities underlying the put option may decrease less than the value of the Portfolio's investments and therefore the put option may not provide complete protection against a decline in the value of the Portfolio's investments below the level sought to be protected by the put option. A Portfolio may similarly wish to hedge against appreciation in the value of securities that it intends to acquire at a time when call options on such securities are not available. The Portfolio may, therefore, purchase call options on other carefully selected securities the values of which the Advisers expect will have a high degree of positive correlation to the values of the securities that the Portfolio intends to acquire. In such circumstances, the Portfolio will be subject to risks analogous to those summarized above in the event that the correlation between the value of call options so purchased and the value of the securities intended to be acquired by the Portfolio is not as close as anticipated and the value of the securities underlying the call options increases less than the value of the securities acquired. A Portfolio may write options on securities in connection with buy-and-write transactions; that is, it may purchase a security and concurrently write a call option against that security. If the call option is exercised, the Portfolio's maximum gain will be the premium it received for writing the option, adjusted upwards or downwards by the difference between the security's purchase price and the exercise price of the option. If the option is not exercised and the price of the underlying security declines, the amount of the decline will be offset in part, or entirely, by the premium received. 21 The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. Buy-and-write transactions using in-the-money call options may be used when it is expected that the price of the underlying security will remain flat or decline moderately during the option period. Buy-and-write transactions using at-the-money call options may be used when it is expected that the price of the underlying security will remain fixed or advance moderately during the option period. A buy-and-write transaction using an out-of-the-money call option may be used when it is expected that the premium received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call option is exercised in such a transaction, a Portfolio's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the security's purchase price and the exercise price of the option. If the option is not exercised and the price of the underlying security declines, the amount of the decline will be offset in part, or entirely, by the premium received. Prior to being notified of the exercise of the option, the writer of an exchange-traded option that wishes to terminate its obligation may effect a "closing purchase transaction" by buying an option of the same series as the option previously written. (Options of the same series are options with respect to the same underlying security, having the same expiration date and the same strike price.) The effect of the purchase is that the writer's position will be canceled by the exchange's affiliated clearing organization. Likewise, an investor who is the holder of an exchange-traded option may liquidate a position by effecting a "closing sale transaction" by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction can be effected. Exchange-traded options are issued by a clearing organization affiliated with the exchange on which the option is listed which, in effect, gives its guarantee to every exchange-traded option transaction. In contrast, OTC options are contracts between the Portfolio and its contra-party with no clearing organization guarantee. Thus, when a Portfolio purchases an OTC option, it relies on the dealer from which it has purchased the OTC option to make or take delivery of the securities underlying the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as the loss of the expected benefit of the transaction. When a Portfolio writes an OTC option, it generally will be able to close out the OTC option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Portfolio originally wrote the OTC option. While a Portfolio will enter into OTC options only with dealers which agree to, and which are expected to be capable of, entering into closing transactions with the Portfolio, the Portfolio may not be able to liquidate an OTC option at a favorable price at any time prior to expiration. Until a Portfolio is able to effect a closing purchase transaction in a covered OTC call option, it will not be able to liquidate securities used as cover until the option expires or is exercised or different cover is substituted. In the event of insolvency of the contra-party, the Portfolio may be unable to liquidate an OTC option. See "Illiquid Securities." OTC options purchased by a Portfolio will be treated as illiquid securities subject to any applicable limitation on such securities. Similarly, the assets used to "cover" OTC options written by a Portfolio will be treated as illiquid unless the OTC options are sold to qualified dealers who agree that the Portfolio may repurchase any OTC options it writes for a maximum price to be calculated by a formula set forth in the option agreement. The "cover" for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. See "Illiquid Securities." 22 A Portfolio may write only "covered" options. This means that so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the option or an option to purchase the same underlying securities, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option a segregated account consisting of cash or other liquid securities, marked-to-market daily, having a value equal to or greater than the exercise price of the option. Options on Securities Indices. A Portfolio also may purchase and write call and put options on securities indices in an attempt to hedge against market conditions affecting the value of securities that the Portfolio owns or intends to purchase. Through the writing or purchase of index options, a Portfolio can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike security options, all settlements are in cash and gain or loss depends upon price movements in the market generally (or in a particular industry or segment of the market), rather than upon price movements in individual securities. Price movements in securities will probably not correlate perfectly with movements in the level of an index and, therefore, the Portfolio bears the risk that a loss on an index option would not be completely offset by movements in the price of such securities. When a Portfolio writes an option on a securities index, it will be required to deposit with its custodian, and mark-to-market, eligible securities equal in value to 100% of the exercise price in the case of a put, or the contract value in the case of a call. In addition, where a Portfolio writes a call option on a securities index at a time when the contract value exceeds the exercise price, the Portfolio will segregate and mark-to-market, until the option expires or is closed out, cash or cash equivalents equal in value to such excess. Options on a securities index involve risks similar to those risks relating to transactions in financial futures contracts described below. Also, an option purchased by the Portfolio may expire worthless, in which case the Portfolio would lose the premium paid therefor. Options Spreads. A Portfolio may engage in option "spread" strategies on individual securities or indices. Generally, these strategies are designed to hedge or partially hedge against potential decreases in the prices of portfolio securities, or potential increases in the price of securities a Portfolio anticipates purchasing. A "bull spread" involves the purchase of a call option on a security or index and the simultaneous sale of a call option on the same security or index at a higher strike price. BSAM may use this strategy as an anticipatory hedge when BSAM believes that the price of a security or group of securities a Portfolio wishes to purchase may increase; the purchase of the call establishes a base price. The premium payments received by the simultaneous sale of the call option limits the cost to the Portfolio to the premiums paid for the option purchased, albeit it limits the potential value of the anticipatory hedge to the price set by the strike price of the option sold. A "bear spread" involves the purchase of a put option on a security or index and the simultaneous sale of a put option on the same security or index at a lower strike price. BSAM may use this strategy as a hedge against the potential fall in price of a security or group of securities held by a 23 Portfolio. The premium payments received by the simultaneous sale of the put option limits the cost to the Portfolio to the premiums paid for the option purchased, albeit it limits the hedge of the long securities positions to prices no lower than the strike price of the option sold. Other strategies may include cross-index spreads, when BSAM believes that price movements of various indices are likely to move correlatively, and more complex strategies such as "butterfly spreads", when BSAM attempts to utilize multiple options, with varying strike prices, to set more specified risk parameters around the potential increase or decrease of the price of an individual security or security index. Options Straddles. A Portfolio may purchase and write covered straddles on securities or bond indices. A long straddle is a combination of a call and a put option purchased on the same security where the exercise price of the put is less than or equal to the exercise price of the call. A Portfolio would enter into a long straddle when the Adviser believes that it is likely that the price of the underlying security will be more volatile during the term of the options than the option pricing implies. A short straddle is a combination of a call and a put written on the same security where the exercise price of the put is less than or equal to the exercise price of the call and where the same issue of security or currency is considered cover for both the put and the call. A Portfolio would enter into a short straddle when the Adviser believes that it is unlikely that the price of the underlying security will be as volatile during the term of the options as the option pricing implies. In the case of a straddle written by a Portfolio, the amount maintained in the segregated account will equal the amount, if any, by which the put is "in-the-money." Special Characteristics and Risks of Options Trading. A Portfolio may effectively terminate its right or obligation under an option by entering into a closing transaction. If a Portfolio wishes to terminate its obligation to purchase or sell securities under a put or call option it has written, it may purchase a put or call option of the same series (i.e., an option identical in its terms to the option previously written); this is known as a closing purchase transaction. Conversely, in order to terminate its right to purchase or sell specified securities or currencies under a call or put option it has purchased, a Portfolio may write an option of the same series as the option held; this is known as a closing sale transaction. Closing transactions essentially permit a Portfolio to realize profits or limit losses on its options positions prior to the exercise or expiration of the option. Whether a profit or loss is realized from a closing transaction depends on the price movement of the underlying security or currency and the market value of the option. The following considerations are important in deciding whether to use options to enhance income or to hedge a Portfolio's investments: (1) The value of an option position will reflect, among other things, the current market price of the underlying security, or bond index, the time remaining until expiration, the relationship of the exercise price to the market price, the historical price volatility of the underlying security, or bond index and general market conditions. For this reason, the successful use of options as a hedging strategy depends upon the Adviser's ability to forecast the direction of price fluctuations in the underlying securities or, in the case of bond index options, fluctuations in the market sector represented by the selected index. (2) Exchange-traded options normally have expiration dates of up to 90 days and OTC options normally have expiration dates up to one year. The exercise price of the options may be below, equal to or above the current market value of the underlying securities, bond index or currencies. Purchased options that expire unexercised have no value. Unless an option purchased by a Portfolio is 24 exercised or unless a closing transaction is effected with respect to that position, the Portfolio will realize a loss in the amount of the premium paid and any transaction costs. (3) A position in an exchange-listed option may be closed out only on an exchange that provides a secondary market for identical options. Although a Portfolio intends to purchase or write only those options for which there appears to be an active secondary market, a liquid secondary market may not exist for any particular option at any specific time because of: (a) insufficient trading interest in certain options; (b) restrictions on transactions imposed by an exchange; (c) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (d) interruption of the normal operations on an exchange; (e) inadequacy of the facilities of an exchange or clearinghouse, such as The Options Clearing Corporation (the "O.C.C.") to handle current trading volume; or (f) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the O.C.C. as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. Closing transactions may be effected with respect to options traded in the OTC markets (currently the primary markets for options on debt securities) only by negotiating directly with the other party to the option contract, or in a secondary market for the option if such a market exists. Although a Portfolio will enter into OTC options only with dealers that are expected to be capable of entering into closing transactions with the Portfolio, the Portfolio may not be able to liquidate an OTC option at a favorable price at any time prior to expiration. In the event of the bankruptcy of a broker through which a Portfolio engages in options transactions, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. In the event of insolvency of the counter-party, the Portfolio may be unable to liquidate an OTC option. Accordingly, it may not be possible to effect closing transactions with respect to certain options, with the result that a Portfolio would have to exercise those options which it has purchased in order to realize any profit. Transactions are entered into by a Portfolio only with brokers or financial institutions that the Adviser deems to be creditworthy. With respect to options written by a Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because a Portfolio must maintain a covered position with respect to any call option it writes on a security, securities index or currency, the Portfolio may not sell the underlying security or currency (or invest any cash, or liquid securities used to cover a securities index option) during the period it is obligated under the option. This requirement may impair the Portfolio's ability to sell the underlying security or make an investment at a time when such a sale or investment might be advantageous. (4) Securities index options are settled exclusively in cash. If a Portfolio writes a call option on an index, the Portfolio will not know in advance the difference, if any, between the closing value of the index on the exercise date and the exercise price of the call option itself and thus will not know the amount of cash payable upon settlement. In addition, a holder of a securities index option who exercises it before the closing index value for that day is available runs the risk that the level of the underlying index may subsequently change. (5) A Portfolio's activities in the options markets may result in higher portfolio turnover rates and additional brokerage costs; however, the Portfolio may also save on commissions by 25 using options as a hedge rather than buying or selling individual securities in anticipation or as a result of market movements. (6) The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. Risks of Options on Foreign Currencies. Options on foreign currencies involve the currencies of two nations and therefore, developments in either or both countries affect the values of options on foreign currencies. Risks include those described in the Prospectus under "Risk Factors -- Foreign Securities," including government actions affecting currency valuation and the movements of currencies from one country to another. The quantity of currency underlying option contracts represent odd lots in a market dominated by transactions between banks; this can mean extra transaction costs upon exercise. Option markets may be closed while round-the-clock interbank currency markets are open, and this can create price and rate discrepancies. Futures Contracts, in General. Each Portfolio (other than the Money Market Portfolio) may, but is not required to, use derivatives to reduce risk or enhance return, including futures contracts on securities and indices and related options. Futures Contracts and Related Options. A Portfolio may enter into futures contracts for the purchase or sale of securities and financial indices and currencies in accordance with the Portfolio's investment objective. A "purchase" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire a specified quantity of the securities underlying the contract at a specified price at a specified future date. A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver a specified quantity of the securities underlying the contract at a specified price at a specified future date. At the time a futures contract is purchased or sold, the Portfolio is required to deposit cash or securities with a futures commission merchant or in a segregated custodial account representing between approximately 10% to 5% of the contract amount, called "initial margin." Thereafter, the futures contract will be valued daily and the payment in cash of "maintenance" or "variation margin" may be required, resulting in a Portfolio paying or receiving cash that reflects any decline or increase in the contract's value, a process known as "marking-to-market." Some futures contracts by their terms may call for the actual delivery or acquisition of the underlying assets and other futures contracts must be "cash settled." In most cases the contractual obligation is extinguished before the expiration of the contract by buying (to offset an earlier sale) or selling (to offset an earlier purchase) an identical futures contract calling for delivery or acquisition in the same month. The purchase (or sale) of an offsetting futures contract is referred to as a "closing transaction." A Portfolio's ability to establish and close out positions in futures contracts and options on futures contracts would be affected by the liquidity of these markets. Although a Portfolio generally would purchase or sell only those futures contracts and options thereon for which there appeared to be a liquid market, a liquid market on an exchange may not exist for any particular futures contract or option at any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Portfolio maintains a position, it would not be possible to effect a closing transaction in that contract or to do so at a satisfactory price and the Portfolio would have to either make or take delivery under the futures contract or, in the case of a written call option, wait to sell the underlying securities until the option expired or was exercised, or, in the case of a purchased option, exercise the 26 option. In the case of a futures contract or an option on a futures contract which a Portfolio had written and which it was unable to close, it would be required to maintain margin deposits on the futures contract or option and to make variation margin payments until the contract is closed. Risks inherent in the use of these strategies include (1) dependence on the Advisers' ability to predict correctly movements in the direction of interest rates, securities prices and markets; (2) imperfect correlation between the price of futures contracts and options thereon and movement in the prices of the securities being hedged; (3) the fact that the skills needed to use these strategies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences; and (6) the possible inability of a Portfolio to sell a portfolio security at a time that otherwise would be favorable for it to do so. In the event it did sell the security and eliminated its "cover," it would have to replace its "cover" with an appropriate futures contract or option or segregate securities with the required value, as described in "Limitations on the Purchase and Sale of Futures Contracts and Related Options -- Segregation Requirements." Although futures prices themselves have the potential to be extremely volatile, in the case of any strategy involving futures contracts and options thereon when the Advisers' expectations are not met, assuming proper adherence to the segregation requirement, the volatility of the investment as a whole should be no greater than if the same strategy had been pursued in the cash market. Exchanges on which futures and related options trade may impose limits on the positions that a Portfolio may take in certain circumstances. In addition, the hours of trading of financial futures contracts and options thereon may not conform to the hours during which a Portfolio may trade the underlying securities. To the extent the futures markets close before the securities markets, significant price and rate movements can take place in the securities markets that cannot be reflected in the futures markets. Pursuant to the requirements of the Commodity Exchange Act, all futures contracts and options thereon must be traded on an exchange. Since a clearing corporation effectively acts as the counterparty on every futures contract and option thereon, the counter party risk depends on the strength of the clearing or settlement corporation associated with the exchange. Additionally, although the exchanges provide a means of closing out a position previously established, a liquid market may not exist for a particular contract at a particular time. In the case of options on futures, if such a market does not exist, a Portfolio, as the holder of an option on futures contracts, would have to exercise the option and comply with the margin requirements for the underlying futures contract to utilize any profit, and if the Portfolio were the writer of the option, its obligation would not terminate until the option expired or the Portfolio was assigned an exercise notice. Limitations on the Purchase and Sale of Futures Contracts and Related Options. CFTC Limits. In accordance with Commodity Futures Trading Commission ("CFTC") regulations, a Portfolio is not permitted to purchase or sell futures contracts or options thereon for return enhancement or risk management purposes if immediately thereafter the sum of the amounts of initial margin deposits on existing futures and premiums paid for options on futures exceed 5% of the liquidation value of the Portfolio's total assets (the "5% CFTC limit"). This restriction does not apply to the purchase and sale of futures contracts and options thereon for bona fide hedging purposes. Segregation Requirements. To the extent a Portfolio enters into futures contracts, the SEC requires it to segregate or earmark assets with its custodian (or a futures commission merchant) sufficient to cover the Portfolio's obligations with respect to such futures contracts, which will consist of 27 cash and liquid securities marked-to-market daily, in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Portfolio with the custodian (or a futures commission merchant) with respect to such futures contracts. Offsetting the contract by another identical contract eliminates the segregation requirement. With respect to options on futures, there are no segregation requirements for options that are purchased and owned by a Portfolio. However, written options, since they involve potential obligations of the Portfolio, may require segregation of its assets if the options are not "covered" as described under "Options on Futures Contracts." If a Portfolio writes a call option that is not "covered," it must segregate and maintain with the custodian (or a futures commission merchant) for the term of the option cash or liquid securities equal to the fluctuating value of the optioned futures. If a Portfolio writes a put option that is not "covered," the segregated amount would have to be at all times equal in value to the exercise price of the put (less any initial margin deposited by the Portfolio with the custodian or a futures commission merchant) with respect to such option. Securities, currencies or other options or futures positions used for cover and securities held in a segregated account cannot be sold or closed out while the option or futures strategy is outstanding, unless they are replaced with similar assets. As a result, there is a possibility that the use of cover or segregation involving a large percentage of a Portfolio's assets could impede fund management or the Portfolio's ability to meet current obligations. Uses of Futures Contracts. Futures contracts will be used for bona fide hedging, risk management and return enhancement purposes. Position Hedging. A Portfolio might sell futures contracts to protect against a decrease in the market value of its securities. This would be considered a bona fide hedge and, therefore, is not subject to the 5% CFTC limit. For example, if market values are expected to decline, a Portfolio might sell futures contracts on securities, the values of which historically have correlated closely or are expected to correlate closely to the values of its portfolio securities. Such a sale would have an effect similar to selling an equivalent value of portfolio securities. If market values decrease, the value of a Portfolio's securities will decline, but the value of the futures contracts will increase at approximately an equivalent rate, thereby keeping the Portfolio's NAV from declining as much as it otherwise would have. In the case of debt securities, a Portfolio could accomplish similar results by selling securities with longer maturities and investing in securities with shorter maturities. However, since the futures market may be more liquid than the cash market, the use of futures contracts as a hedging technique would allow the Portfolio to maintain a defensive position without having to sell portfolio securities. If in fact market values rise rather than fall, the value of the futures contract will fall but the value of the securities should rise and should offset all or part of the loss. If futures contracts are used to hedge 100% of the securities position and correlate precisely with the securities position, there should be no loss or gain with a rise (or fall) in market values. However, if only 50% of the securities position is hedged with futures, then the value of the remaining 50% of the securities position would be subject to change because of market fluctuations. Whether securities positions and futures contracts correlate precisely is a significant risk factor. Anticipatory Position Hedging. When a Portfolio expects that market values may decline and it intends to acquire securities, a Portfolio might purchase futures contracts. The purchase of futures contracts for this purpose would constitute an anticipatory hedge against increases in the price of the securities which a Portfolio subsequently acquires and would normally qualify as a bona fide hedge not subject to the 5% CFTC limit. Since fluctuations in the value of appropriately selected futures contracts should approximate that of the securities that would be purchased, a Portfolio could take advantage of the anticipated rise in the cost of the securities without actually buying them. The Portfolio could therefore 28 make the intended purchases of the securities in the cash market and concurrently liquidate the futures positions. Risk Management and Return Enhancement -- Debt Securities. A Portfolio might sell interest rate futures contracts covering bonds. This has the same effect as selling bonds in the portfolio and holding cash and reduces the duration of the portfolio. (Duration measures the price sensitivity of the portfolio to interest rates. The longer the duration, the greater the impact of interest rate changes on the portfolio's price.) This should lessen the risks associated with a rise in interest rates. In some circumstances, this may serve as a hedge against a loss of principal, but is usually referred to as an aspect of risk management. A Portfolio might buy interest rate futures contracts covering bonds with a longer maturity than its portfolio average. This would tend to increase the duration and should increase the gain in the overall portfolio if interest rates fall. This is often referred to as risk management rather than hedging but, if it works as intended, has the effect of increasing principal value. If it does not work as intended because interest rates rise instead of fall, the loss will be greater than would otherwise have been the case. Futures contracts used for these purposes are not considered bona fide hedges and, therefore, are subject to the 5% CFTC limit. A Portfolio may use interest rate futures contracts to hedge its fund against changes in the general level of interest rates and in other circumstances permitted by the CFTC. A Portfolio may purchase an interest rate futures contract when it intends to purchase debt securities but has not yet done so. This strategy may minimize the effect of all or part of an increase in the market price of the debt securities that the Portfolio intends to purchase in the future. A rise in the price of the debt securities prior to their purchase may be either offset by an increase in the value of the futures contract purchased by a Portfolio or avoided by taking delivery of the debt securities under the futures contract. Conversely, a fall in the market price of the underlying debt securities may result in a corresponding decrease in the value of the futures position. A Portfolio may sell an interest rate futures contract in order to continue to receive the income from a debt security, while endeavoring to avoid part or all of the decline in market value of that security that would accompany an increase in interest rates. A Portfolio may sell bond index futures contracts in anticipation of a general market or market sector decline that could adversely affect the market value of the Portfolio's securities. To the extent that a portion of a Portfolio's portfolio correlates with a given index, the sale of futures contracts on that index could reduce the risks associated with a market decline and thus provide an alternative to the liquidation of securities positions. For example, if a Portfolio correctly anticipates a general market decline and sells bond index futures to hedge against this risk, the gain in the futures position should offset some or all of the decline in the value of the Portfolio. A Portfolio may purchase bond index futures contracts if a significant market or market sector advance is anticipated. Such a purchase of a futures contract would serve as a temporary substitute for the purchase of individual debt securities, which debt securities may then be purchased in an orderly fashion. This strategy may minimize the effect of all or part of an increase in the market price of securities that a Portfolio intends to purchase. A rise in the price of the securities should be partly or wholly offset by gains in the futures position. The settlement price of a futures contract is generally a function of the spot market price of the underlying security and a cost of financing, adjusted for any interest, dividends or other income received on the underlying instrument over the life of the contract. It is therefore possible to earn a return approximating that of debt securities of a similar tenor to that of a forward contract by security or basket of securities and selling a futures contract for such security or basket. A Portfolio may enter into such future strategies, using securities other than debt obligations, in cases where (a) government regulations 29 restrict foreign investment in fixed income securities but not in other securities, such as common stocks, or commodities; and (b) in the Adviser's opinion both the cash and futures markets are sufficiently liquid. Options on Futures Contracts. A Portfolio may enter into options on futures contracts for certain bona fide hedging, risk management and return enhancement purposes. This includes the ability to purchase put and call options and write (i.e., sell) "covered" put and call options on futures contracts that are traded on commodity and futures exchanges. If a Portfolio purchases an option on a futures contract, it has the right but not the obligation, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call or a short position if the option is a put) at a specified exercise price at any time during the option exercise period. Unlike purchasing an option, which is similar to purchasing insurance to protect against a possible rise or fall of security prices or currency values, the writer or seller of an option undertakes an obligation upon exercise of the option to either buy or sell the underlying futures contract at the exercise price. The writer of a call option has the obligation upon exercise to assume a short futures position and a writer of a put option has the obligation to assume a long futures position. Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account which represents the amount by which the market price of the futures contract at exercise exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. If there is no balance in the writer's margin account, the option is "out of the money" and will not be exercised. A Portfolio, as the writer, has income in the amount it was paid for the option. If there is a margin balance, the Portfolio will have a loss in the amount of the balance less the premium it was paid for writing the option. When a Portfolio writes a put or call option on futures contracts, the option must either be "covered" or, to the extent not "covered," will be subject to segregation requirements. A Portfolio will be considered "covered" with respect to a call option it writes on a futures contract if the Portfolio owns the securities or currency which is deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option. A Portfolio will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option. To the extent a Portfolio is not "covered" as described above with respect to written options, it will segregate and maintain with its custodian for the term of the option cash or liquid securities as described under "Limitations of the Purchase and Sale of the Futures Contracts and Related Options -- Segregation Requirements." Uses of Options on Futures Contracts. Options on futures contracts would be used for bona fide hedging, risk management and return enhancement purposes. Position Hedging. A Portfolio may purchase put options on interest rate, currency or other financial index futures contracts to hedge its portfolio against the risk of a decline in the market value of the securities it owns. Anticipatory Hedging. A Portfolio may also purchase call options on futures contracts as a hedge against an increase in the value of securities it intends to acquire. 30 Writing a put option on a futures contract may serve as a partial anticipatory hedge against an increase in the value of securities a Portfolio intends to acquire. If the futures price at expiration of the option is above the exercise price, a Portfolio retains the full amount of the option premium which provides a partial hedge against any increase that may have occurred in the price of the securities the Portfolio intended to acquire. If the market price of the underlying futures contract is below the exercise price when the option is exercised, a Portfolio would incur a loss, which may be wholly or partially offset by the decrease in the value of the securities it intends to acquire. Whether an option on a futures contract is subject to the 5% CFTC limit depends on whether use of the option constitutes a bona fide hedge. Risk Management and Return Enhancement. Writing a put option that does not relate to securities a Portfolio intends to acquire would be a return enhancement strategy which would result in a loss if market values fall. Similarly, writing a covered call option on a futures contract is also a return enhancement strategy. If the market price of the underlying futures contract at expiration of a written call is below the exercise price, a Portfolio would retain the full amount of the option premium, increasing its income. If the futures price when the option is exercised is above the exercise price, however, a Portfolio would sell the underlying securities which were the "cover" for the contract and incur a gain or loss depending on the cost basis for the underlying asset. Writing a covered call option as in any return enhancement strategy can also be considered a partial hedge against a decrease in the value of portfolio securities. The amount of the premium received acts as a partial hedge against any decline that may have occurred in the market value of a Portfolio's securities. A Portfolio's use of futures contracts and related options may not be successful and it may incur losses in connection with its purchase and sale of future contracts and related options. Futures Straddles. A Portfolio may also purchase and write covered straddles on interest rate, foreign currency or bond index futures contracts. A long straddle is a combination of a call and a put purchased on the same futures contract where the exercise price of the put option is less than the exercise price of the call option. A Portfolio would enter into a long straddle when it believes that it is likely that interest rates or foreign currency exchange rates will be more volatile during the term of the options than the option pricing implies. A short straddle is a combination of a call and put written on the same futures contract where the exercise price of the put option is less than the exercise price of the call option and where the same security or futures contract is considered for both the put and the call. The Portfolio would enter into a short straddle when it believes that it is unlikely that interest rates or foreign currency exchange rates will be as volatile during the term of the options as the option pricing implies. Special Characteristics and Risks of Futures Trading. No price is paid upon entering into a futures contract. Instead, upon entering into a futures contract, a Portfolio will be required to deposit with its custodian the initial margin. Unlike margin in securities transactions, margin on futures contracts a Portfolio has written does not involve borrowing to finance the futures transactions. Rather, initial margin on futures contracts or on such options is in the nature of a performance bond or good-faith deposit on the contract that will be returned to the Portfolio upon termination of the transaction, assuming all contractual obligations have been satisfied. Similarly, variation margin does not involve borrowing to finance the futures, but rather represents a daily settlement of a Portfolio's obligations to or from a clearing organization. 31 Positions in futures contracts may be closed only on an exchange or board of trade providing a secondary market for such futures. A Portfolio will incur brokerage fees and related transaction costs when it purchases or sells futures contracts and premiums. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract may vary either up or down from the previous day's settlement price. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and, therefore, does not limit potential losses because futures prices could move to the daily limit for several consecutive trading days with little or no trading and thereby prevent prompt liquidation of positions. In such event, it may not be possible for the Portfolio to close a position and, in the event of adverse price movements, the Portfolio would have to make daily cash payments of variation margin (except in the case of purchased options). However, in the event futures contracts have been used to hedge fund securities, such securities will not be sold until the contracts can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, there is no guarantee that the price of the securities will, in fact, correlate with the price movements in the contracts and thus provide an offset to losses on the contracts. The following considerations are important in deciding whether to use futures contracts: (1) Successful use by a Portfolio of futures contracts will depend upon the Adviser's ability to predict movements in the direction of the overall securities, currency and interest rate markets, which requires skills and techniques that are different from those needed to predict changes in the prices of individual securities. Moreover, futures contracts relate not to the current price level of the underlying instrument or currency but to the anticipated levels at some point in the future. There is, in addition, the risk that the movements in the price of the futures contract will not correlate with the movements in prices of the securities or currencies being hedged. For example, if the price of the futures contract moves less than the price of the securities or currencies that are the subject of the hedge, the hedge will not be fully effective; however, if the price of securities or currencies being hedged has moved in an unfavorable direction, a Portfolio would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, the advantage may be partially offset by losses on the futures position. In addition, if a Portfolio has insufficient cash, it may have to sell portfolio investments to meet daily variation margin requirements. Any such sale of assets may or may not be made at prices that reflect the rising market. Consequently, the Portfolio may need to sell assets at a time when such sales are disadvantageous to the Portfolio. If the price of the futures contract moves more than the price of the underlying securities or currencies, a Portfolio will experience either a loss or a gain on the futures contract that may or may not be completely offset by movements in the price of the securities or currencies that are the subject of the hedge. (2) In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between price movements in the futures position and the securities or currencies being hedged, movements in the prices of futures contracts may not correlate perfectly with movements in the prices of the hedged securities or currencies due to price distortions in the futures market. There may be several reasons unrelated to the value of the underlying securities or currencies that cause this situation to occur. First, as noted above, all participants in the futures market are subject to initial and variation margin requirements. If, to avoid meeting additional margin deposit requirements or for other reasons, investors choose to close a significant number of futures contracts through offsetting transactions, distortions in the normal price relationship between the securities or currencies and the futures markets may occur. Second, because the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market, there may be increased participation by speculators in the futures market; such speculative activity in the futures market also may cause temporary price distortions. Third, participants could make or take delivery of the underlying securities or currencies instead of closing out their contracts. As a result, a correct forecast of general market trends may not result in successful hedging through the use of futures contracts over the short term. In addition, activities of large traders in both the futures and securities markets involving arbitrage and other investment strategies may result in temporary price distortions. 32 (3) Positions in futures contracts may be closed out only on an exchange or board of trade that provides a secondary market for such futures contracts. Although each Portfolio intends to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract at any particular time. In such event, it may not be possible to close a futures position, and in the event of adverse price movements, a Portfolio would continue to be required to make variation margin payments. (4) As is the case with options, a Portfolio's activities in the futures markets may result in higher fund turnover rates and additional transaction costs in the form of added brokerage commissions; however, the Portfolio may save on commissions by using futures contracts or options thereon as a hedge rather than buying or selling individual securities or currencies in anticipation or as a result of market movements. Guideline for Futures. No Portfolio will purchase or sell futures contracts if, immediately thereafter, the sum of the amount of initial margin deposits on the Portfolio's existing futures positions and initial margin deposits would exceed 5% of the market value of the Portfolio's total assets. This guideline may be modified by the board without shareholder vote. Adoption of this guideline will not limit the percentage of the Portfolio's assets at risk to 5%. Forward Foreign Currency Contracts. Each Portfolio, other than the Money Market Portfolio, may enter into forward contracts. The High Yield Portfolio may invest up to 5% of its total assets in these instruments. A Portfolio may engage in foreign currency hedging strategies, including among others, settlement hedging, transaction hedging, position hedging, proxy hedging and cross-hedging. A "settlement hedge" or "transaction hedge" is designed to protect the Portfolio against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A Portfolio may also use forward contracts to purchase or sell a foreign currency in anticipation of future purchases or sales of securities denominated in foreign currency, even if the Adviser has not yet selected the specific investments. A Portfolio may also use forward contracts to hedge against a decline in the value of existing investments denominated in a foreign currency. For example, if a Portfolio owns securities denominated in a particular currency, it could enter into a forward contract to sell that particular currency in return for U.S. dollars to hedge against possible declines in the particular currency's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. A Portfolio could also hedge the position by selling another currency (or basket of currencies) expected to perform similarly to a particular currency. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated. With regard to a Portfolio's use of proxy hedges, historical correlations between the movement of certain foreign currencies relating to the U.S. dollar may not continue. Thus, at any time poor correlation may 33 exist between movements in the exchange rates of the foreign currencies underlying the Portfolio's proxy hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio assets that are the subject of such proxy-hedges are denominated. A Portfolio may enter into forward contracts to shift its investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Portfolio had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Portfolio to assume the risk of fluctuations in the value of the currency it purchases. Successful use of currency management strategies will depend on the Adviser's skill in analyzing currency values. Currency management strategies may substantially change a Portfolio's investment exposure to changes in currency exchange rates and could result in losses to the Portfolio if currencies do not perform as the Adviser anticipates. For example, if a currency's value rose at a time when the Adviser had hedged a Portfolio by selling that currency in exchange for dollars, the Portfolio would not participate in the currency's appreciation. If the Adviser hedges currency exposure through proxy hedges, a Portfolio could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if the Adviser increases a Portfolio's exposure to a foreign currency and that currency's value declines, the Portfolio will realize a loss. The Adviser's use of currency management strategies may not be advantageous to a Portfolio and the Adviser may not hedge at appropriate times. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are generally charged at any stage for trades. At the maturity of a forward contract, a Portfolio may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing purchase transaction involving the purchase or sale of an offsetting contract. Closing purchase transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. A Portfolio may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency for any lawful purpose. For example, a Portfolio may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Portfolio intends to acquire. In addition, a Portfolio may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security denominated in a foreign currency. The cost to a Portfolio of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When a Portfolio enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction. 34 Settlement of hedging transactions involving foreign currencies might be required to take place within the country issuing the underlying currency. Thus, a Portfolio might be required to accept or make delivery of the underlying foreign currency in accordance with any U.S. or foreign regulations regarding the maintenance of foreign banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country. A Portfolio may also create non-speculative "synthetic" positions. A synthetic position is deemed not to be speculative if the position is covered by segregation of short-term liquid assets. A synthetic position is the duplication of a cash market transaction when the Adviser deems it to be advantageous for cost liquidity or transactional efficiency reasons. A cash market transaction is the purchase or sale of a security or other asset for cash. For example, a Portfolio may experience large cash inflows which may be redeemed from the Portfolio in a relatively short period. In this case, the Portfolio can leave the amounts uninvested in anticipation of the redemption or the Portfolio can invest in securities for a relatively short period, incurring transaction costs on the purchase and subsequent sale. Alternatively, the Portfolio could create a synthetic position by investing in a futures contract on a security, such as a bond denominated in a foreign currency or on a securities index gaining investment exposure to the relevant market while incurring lower overall transaction costs. Since the financial markets in emerging countries are not as developed as in the United States, these financial investments may not be available to a Portfolio and the Portfolio may be unable to hedge certain risks or enter into certain transactions. A Portfolio would enter into such transactions if the markets for these instruments were sufficiently liquid and there was an acceptable degree of correlation to the cash market. By segregating cash, a Portfolio's futures contract position would generally be no more leveraged or riskier than if it had invested in the cash market i.e., purchased securities. As is the case with futures contracts, holders and writers of forward currency contracts can enter into offsetting closing transactions, similar to closing transactions on futures, by selling or purchasing, respectively, an instrument identical to the instrument held or written. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, a Portfolio may not in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, a Portfolio might be unable to close out a forward currency contract at any time prior to maturity. In either event, the Portfolio would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or securities in a segregated account. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the foreign currency contract has been established. Thus, a Portfolio might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Unless a Portfolio engages in currency hedging transactions, it will be subject to the risk of changes in relation to the U.S. dollar of the value of the currencies in which its assets are denominated. A Portfolio may from time to time seek to protect, during the period prior to the remittance, the value of the amount of interest, dividends and net realized capital gains received or to be received in a local currency that it intends to remit out of the foreign country by investing in high-quality short-term U.S. dollar-denominated debt securities of such country and/or participating in the forward currency market for the purchase of U.S. dollars in the country. Suitable U.S. dollar-denominated investments may not be 35 available at the time the Adviser wishes to use them to hedge amounts to be remitted. In addition, dollar-denominated securities may not be available in some or all emerging countries, that the forward currency market for the purchase of U.S. dollars in many emerging countries is not highly developed and that in certain emerging countries no forward market for foreign currencies currently exists or that such market may be closed to investment by a Portfolio. A separate account of a Portfolio consisting of cash or liquid assets equal to the amount of the Portfolio's assets that could be required to consummate forward contracts, when required under applicable laws, will be established with the Portfolio's Custodian. For the purpose of determining the adequacy of the assets in the account, the deposited assets will be valued at market or fair value. If the market or fair value of such assets declines, additional cash or assets will be placed in the account daily so that the value of the account will equal the amount of such commitments by the Portfolio. The segregated account will be marked-to-market on a daily basis. Although the contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate these contracts. In such event, a Portfolio's ability to utilize forward foreign currency exchange contracts may be restricted. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the Portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Portfolio to sustain losses on these contracts and transaction costs. A Portfolio may enter into a forward contract and maintain a net exposure on such contract only if (1) the consummation of the contract would not obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency or (2) the Portfolio maintains cash or liquid assets in a segregated account in an amount not less than the value of the Portfolio's total assets committed to the consummation of the contract which value must be marked to market daily. Each Portfolio will comply with guidelines established by the SEC with respect to coverage of forward contracts entered into by the Portfolio (including SEC guidelines in respect of forward contracts subject to netting arrangements) and, if such guidelines so require, will set aside liquid assets in a segregated account with its custodian in the amount prescribed. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the Adviser believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of a Portfolio will be served. At or before the maturity date of a forward contract requiring a Portfolio to sell a currency, the Portfolio may either sell the portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Portfolio will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, a Portfolio may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. A Portfolio would realize a gain or loss as a result of entering into such an offsetting forward currency contract under either 36 circumstance to the extent the exchange rate or rates between the currencies involved moved between the execution dates of the first contract and the offsetting contract. The cost to a Portfolio of engaging in forward currency contracts will vary with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. The use of forward currency contracts will not eliminate fluctuations in the prices of the underlying securities a Portfolio owns or intends to acquire, but it will fix a rate of exchange in advance. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase. Although a Portfolio will value its assets daily in terms of U.S. dollars, the Portfolio does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Portfolio may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. A Portfolio generally will not enter into a forward contract with a term of greater than one year. Swaps, Caps, Floors and Collars. The Income, High Yield, Intrinsic and Small Cap Portfolios each may engage in swaps. The High Yield Portfolio may invest up to 5% of its total assets in these instruments. A Portfolio may enter into currency swaps, mortgage swaps, index swaps and interest rate swaps, caps, floors and collars. A Portfolio may enter into currency swaps for both hedging purposes and to seek to increase total return. In addition, a Portfolio may enter into mortgage, index and interest rate swaps and other interest rate swap arrangements such as rate caps, floors and collars, for hedging purposes or to seek to increase total return. Currency swaps involve the exchange by a Portfolio with another party of their respective rights to make or receive payments in specified currencies. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Mortgage swaps are similar to interest rate swaps in that they represent commitments to pay and receive interest. The notional principal amount, however, is tied to a reference pool or pools of mortgages. Index swaps involve the exchange by a Portfolio with another party of the respective amounts payable with respect to a notional principal amount at interest rates equal to two specified indices. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates. A Portfolio will enter into interest rate, mortgage and index swaps only on a net basis, which means that the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Interest rate, index and mortgage swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate, index and mortgage swaps is limited to the net amount of interest payments that a Portfolio is contractually obligated to make. If the other party to an interest rate, index or mortgage swap defaults, a Portfolio's risk of loss consists of the net amount of interest payments that the Portfolio is 37 contractually entitled to receive. In contrast, currency swaps usually involve the delivery of a gross payment stream in one designated currency in exchange for the gross payment stream in another designated currency. Therefore, the entire payment stream under a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. To the extent that the net amount payable under an interest rate, index or mortgage swap and the entire amount of the payment stream payable by a Portfolio under a currency swap or an interest rate floor, cap or collar is held in a segregated account consisting of cash or liquid assets; the Adviser believes that swaps do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Portfolio's borrowing restrictions. A Portfolio will not enter into swap transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to a swap transaction, a Portfolio will have contractual remedies pursuant to the agreements related to the transaction. The use of interest rate, mortgage, index and currency swaps, as well as interest rate caps, floors and collars, is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Adviser is incorrect in its forecasts of market values, interest rates and currency exchange rates, the investment performance of a Portfolio would be less favorable than it would have been if this investment technique were not used. The SEC currently takes the position that swaps, caps, floors and collars are illiquid and thus subject to a Portfolio's 15% limitation on investments in illiquid securities. Lending Portfolio Securities. Each Portfolio, other than the Money Market Portfolio, may lend its portfolio securities. The High Yield Portfolio may lend portfolio securities with a market value of up to 30% of its total assets and each other Portfolio that can lend portfolio securities can do so up to 33-1/3% of its total assets. A Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions, provided it receives cash collateral which at all times is maintained in an amount equal to at least 100% of the current market value of the securities loaned. By lending its portfolio securities, a Portfolio can increase its income through the investment of the cash collateral. For purposes of this policy, a Portfolio considers collateral consisting of U.S. government securities or irrevocable letters of credit issued by banks whose securities meet the Portfolio's investment standards to be the equivalent of cash. From time to time, a Portfolio may return to the borrower (or a third party that is unaffiliated with such Portfolio) and that is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. The SEC currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the lender must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the lender must be able to terminate the loan at any time; (4) the lender must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the lender may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Board must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. The Portfolios have appointed Custodial Trust Company ("CTC"), an affiliate of BSAM, as Lending Agent. CTC receives a transaction fee for its services. The Trust, CTC, Bear Stearns and other affiliates have obtained an exemptive order from the SEC that , among other things, permits the Portfolios to: (a) pay to CTC, or any of its affiliates, fees based on a share of the proceeds derived by the Portfolios from securities lending transactions; (b) deposit some or all of the cash collateral received in 38 connection with their securities lending activities and other uninvested cash in one or more joint trading accounts; and (c) lend portfolio securities to any affiliated broker-dealers, including Bear Stearns. Non-Diversified Status. A non-diversified fund, within the meaning of the 1940 Act, means that the fund is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. The Adviser intends to limit a non-diversified Portfolio's investments, however, in order to qualify as a "regulated investment company" for the purposes of Subchapter M of the Code. See "Taxes." To qualify, a non-diversified Portfolio must comply with certain requirements, including limiting its investments so that at the close of each quarter of the taxable year (i) not more than 25% of the value of the Portfolio's total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the value of its total assets, not more than 5% of the value of the Portfolio's total assets will be invested in the securities of a single issuer and the Portfolio will not own more than 10% of the outstanding voting securities of a single issuer. To the extent that a non-diversified Portfolio assumes large positions in the securities of a small number of issuers, the Portfolio's return may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or in the market's assessment of the issuers. Short Selling. The Insiders Select Fund and the Income, High Yield, S&P STARS, S&P STARS Opportunities, Intrinsic and Small Cap Portfolios may engage in short sales. Short sales are transactions in which a Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, a Portfolio must borrow the security to make delivery to the buyer. A Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Portfolio. Until the security is replaced, a portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, a Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until a Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing liquid assets, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the staff of the SEC. A Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. A Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest a Portfolio may be required to pay in connection with a short sale. Each Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by a Portfolio. Each Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of a Portfolio's net assets. No Portfolio may sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. No Portfolio may sell 39 short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. Short Sales "Against the Box." The Insiders Select Fund and the Income, S&P STARS, Alpha Growth, Intrinsic and Small Cap Portfolios at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. The High Yield, the S&P STARS Opportunities and the International Equity Portfolios at no time will have more than 25% of the value of its net assets in deposits on short sales against the box. A Portfolio may make short sales "against the box," a transaction in which a Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date, at which time a Portfolio delivers be security to close the short position. A Portfolio receives the net proceeds from the short sales. It currently is anticipated that each Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Additional Information about the S&P STARS Portfolio's Investment Strategies. Under normal circumstances, the S&P STARS Portfolios will invest at least 80% of its net assets in securities with any STARS ranking at the time of purchase. For purposes of this policy, "net assets" includes any borrowings for investment purposes. As described in the Prospectus, the principal strategy of the S&P STARS Portfolio is to invest at least 85% of its total assets in securities ranked 5-STARS at their time of purchase, or to sell short securities ranked 1-STAR at their time of short sale. The remaining 15% of the Portfolio's assets may be invested in securities without regard to ratings by S&P (the "15% bucket"). Generally, STARS rankings are determined "at their time of purchase" or "at their time of short sale." Compliance with the STARS rankings for purposes of the 15% bucket test is measured on any given day without giving effect to securities transactions executed on that day. Securities transactions executed on any given day are given effect for purposes of the 15% bucket test on the start of the following day. Cash and cash equivalents are counted as part of the Portfolio's total assets, but do not count as part of the 15% bucket for purposes of determining compliance. The 15% bucket includes securities that are ranked below 5-STARS at the time of purchase, and securities sold short that are ranked above 1-STAR at the time of sale. Once the 15% bucket is full, the Portfolio cannot continue to purchase non 5-STARS ranked securities, or sell non 1-STAR ranked securities, unless under one of the following two exceptions. First, if the Portfolio buys a 5-STARS ranked stock that S&P later downgrades to a 4-STARS rating, that stock is not included in the 15% bucket, and the Portfolio may continue to hold that stock, and, going forward, may purchase more shares of that stock, without regard to the 15% limitation as long as it is ranked 4-STARS. Second, if the Portfolio has sold short a 1-STAR ranked stock that is later upgraded to 2-STARS, that stock is not included in the 15% bucket. The Portfolio may continue to maintain its short position in that stock and, going forward, may sell short more shares of that stock, without regard to the 15% limitation as long as it is ranked 2-STARS. Under certain circumstances, the Portfolio's holdings of securities ranked 3-STARS (or less) and/or short positions in securities ranked 3-STARS (or more) can exceed 15% of its total assets without being a violation of the 15% bucket test. These circumstances include: situations when the 15% bucket is exceeded because of changes in net assets due to market appreciation, depreciation or share redemptions; situations when S&P downgrades a stock to 3-STARS or below; situations when S&P upgrades a stock that the Portfolio has sold short to 3-STARS or higher; and 40 situations when, by a corporate action, a 5-STARS stock (or 4-STARS stock that was previously ranked 5-STARS while held by the Portfolio) is split or spun off into two or more stocks ranked below 4-STARS, or unranked. In each of these situations, however, if the 15% bucket is full or overflowing, the Portfolio cannot buy additional non 5-STARS ranked stock, or sell non 1-STAR ranked stock, except under the two exceptions described above. If S&P upgrades a stock that the Portfolio owns to 5-STARS, that stock is considered to be a 5-STARS stock for all purposes. For example, if the Portfolio has invested 4% of its assets in a stock ranked 3-STARS, and if S&P upgrades the stock to 5-STARS, that stock is no longer counted in the 15% buckets. Moreover, if S&P upgrades a 3-STARS stock to a 5-STARS stock, and later downgrades it to a 4-STARS stock, the Portfolio may continue to own and purchase more shares of that stock under the first exception described above. Similarly, if S&P downgrades a security that the Portfolio has sold short to 1-STAR, that stock is considered to be a 1-STAR stock for all purposes, and is not counted in the 15% bucket. As described in the Prospectus, the S&P STARS Portfolio need not sell a security whose S&P STARS ranking has been downgraded and the Portfolio may purchase additional shares of a four- STARS security that was ranked five STARS at the time it was initially purchased. If the S&P STARS ranking of that security is downgraded to three STARS or less, however, that security is counted toward the 15% of total assets that the S&P STARS Portfolio may invest (or sell short) without regard to STARS ranking. Similarly, the S&P STARS Portfolio need not buy back a one star security it has sold short if the STARS ranking of the security is upgraded and the Portfolio may sell short additional shares of a two- STARS security that was ranked one STAR at the time of the initial short sale. If the S&P STARS ranking of that security is upgraded to three or more STARS, however, new short sales of that security are counted toward the 15% of total assets that the S&P STARS Portfolio may invest (or sell short) without regard to STARS ranking. At any time that the S&P STARS Portfolio's holdings of securities ranked three STARS (or less) and/or short positions in securities ranked three STARS (or more) exceed 15% of its total assets, the Portfolio may not acquire or sell short additional shares of such securities until the amount so invested declines below 15% of total assets. "Standard & Poor's(R)", "S&P and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co. Inc. The S&P StARS Portfolio is not sponsored, managed, advised, sold or promoted by S&P. Additional Information about the S&P STARS Opportunities Portfolio's Investment Strategies. As described in the Prospectus, the principal strategy of the S&P STARS Opportunities Portfolio is to invest at least 75% of its total assets in securities ranked 5-STARS at their time of purchase, or to sell short securities ranked 1-STAR at their time of short sale. The remaining 25% of the Portfolio's assets may be invested in securities without regard to any particular STARS ranking at the time of purchase (the "25% bucket"), provided that the S&P STARS Opportunities Portfolio invests (or short sells) at least 80% of its net assets in securities with any STARS ranking at the time of purchase (or short sale). For purposes of this policy, "net assets" includes any borrowings for investment purposes. Generally, STARS rankings are determined "at their time of purchase" or "at their time of short sale." Compliance with the STARS rankings for purposes of the 25% bucket test is measured on 41 any given day without giving effect to securities transactions executed on that day. Securities transactions executed on any given day are given effect for purposes of the 25% bucket test on the start of the following day. Cash and cash equivalents are counted as part of the Portfolio's total assets, but do not count as part of the 25% bucket for purposes of determining compliance, provided that the Portfolio invests (or short sells) at least 80% of its total assets in stocks with any STARS rating. The 25% bucket includes securities that are ranked below 5-STARS at the time of purchase, and securities sold short that are ranked above 1-STAR at the time of sale. Once the 25% bucket is full, the S&P STARS Opportunities Portfolio cannot continue to purchase non-5-STARS ranked securities, or sell non-1-STAR ranked securities, unless under one of the following two exceptions. First, if the S&P STARS Opportunities Portfolio buys a 5-STARS ranked stock that S&P later downgrades to a 4-STARS rating, that stock is not included in the 25% bucket. The S&P STARS Opportunities Portfolio may continue to hold that stock, and, going forward, may purchase more shares of that stock, without regard to the 25% limitation as long as it is ranked 4-STARS. Second, if the S&P STARS Opportunities Portfolio has sold short a 1-STAR ranked stock that is later upgraded to 2-STARS, that stock is not included in the 25% bucket. The S&P STARS Opportunities Portfolio may continue to maintain its short position in that stock and, going forward, may sell short more shares of that stock, without regard to the 25% limitation as long as it is ranked 2-STARS. Under certain circumstances, the S&P STARS Opportunities Portfolio's holdings of securities ranked 3-STARS (or less) and/or short positions in securities ranked 3-STARS (or more) can exceed 25% of its total assets without being a violation of the 25% bucket test. These circumstances include: situations when the 25% bucket is exceeded because of changes in net assets due to market appreciation, depreciation or share redemptions; situations when S&P downgrades a stock to 3-STARS or below; situations when S&P upgrades a stock that the Portfolio has sold short to 3-STARS or higher; and situations when, by a corporate action, a 5-STARS stock (or 4-STARS stock that was previously ranked 5-STARS while held by the Portfolio) is split or spun off into two or more stocks ranked below 4-STARS, or is unranked. In each of these situations, however, if the 25% bucket is full or overflowing, the S&P STARS Opportunities Portfolio cannot buy additional non-5-STARS ranked stock, or sell non-1-STAR ranked stock, except under the two exceptions described above. If S&P upgrades a stock that the S&P STARS Opportunities Portfolio owns to 5-STARS, that stock is considered to be a 5-STARS stock for all purposes. For example, if the Portfolio has invested 4% of its assets in a stock ranked 3-STARS, and if S&P upgrades the stock to 5-STARS, that stock is no longer counted in the 25% bucket. Moreover, if S&P upgrades a 3-STARS stock to a 5-STARS stock, and later downgrades it to a 4-STARS stock, the S&P STARS Opportunities Portfolio may continue to own and purchase more shares of that stock under the first exception described above. Similarly, if S&P downgrades a security that the S&P STARS Opportunities Portfolio has sold short to 1-STAR, that stock is considered to be a 1-STAR stock for all purposes, and is not counted in the 25% bucket. As described in the Prospectus, the S&P STARS Opportunities Portfolio need not sell a security whose S&P STARS ranking has been downgraded and the S&P STARS Opportunities Portfolio 42 may purchase additional shares of a four-STARS security that was ranked five STARS at the time of the initial purchase. If the S&P STARS ranking of that security is downgraded to three STARS or less, however, new purchases of that security are counted toward the 25% of total assets that the S&P STARS Portfolio may invest (or sell short) without regard to STARS ranking. Similarly, the S&P STARS Opportunities Portfolio need not buy back a one-STAR security it has sold short if the STARS ranking of the security is upgraded and the S&P STARS Opportunities Portfolio may sell short additional shares of a two-STAR security that was ranked one STAR at the time of the initial short sale. If the S&P STARS ranking of that security is upgraded to three or more STARS, however, new short sales of that security are counted toward the 25% of total assets that the S&P STARS Opportunities Portfolio may invest (or sell short) without regard to STARS ranking. At any time that the S&P STARS Opportunities Portfolio's holdings of securities ranked three STARS (or less) and/or short positions in securities ranked three STARS (or more) exceed 25% of its total assets, the S&P STARS Opportunities Portfolio may not acquire or sell short additional shares of such securities until the amount so invested declines below 25% of total assets. "Standard & Poor's(R)", "S&P(R) and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear, Stearns & Co. Inc. The S&P STARS Opportunities Portfolio is not sponsored, managed, advised, sold or promoted by S&P. Investment Restrictions. Each Portfolio has adopted certain investment restrictions as fundamental policies. These restrictions cannot be changed without the approval of a majority of the Portfolio's outstanding voting shares (as defined in the 1940 Act). Investment restrictions that are not fundamental policies may be changed by vote of a majority of the Trustees at any time. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. Fundamental Restrictions 1. Concentration The Money Market Portfolio may not purchase any securities which would cause 25% or more of the value of its total assets at the time of such purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that there is no limitation with respect to investments in U.S. government securities or in bank instruments issued by domestic banks. The Insiders Select Fund and the Income, High Yield, S&P STARS, S&P STARS Opportunities, Intrinsic, Small Cap, Alpha Growth and International Equity Portfolios each may not purchase any securities which would cause 25% or more of the value of its total assets at the time of such purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that there is no limitation with respect to investments in U.S. government securities. For purposes of determining concentration of investments in particular industries, the Trust will rely on the following industry classifications: For Fixed Income Funds Standard & Poor's Industry Classifications 43 For Equity Funds Bloomberg's Industry Classifications (all Equity Funds except International Equity Portfolio) MSCI Industry Classifications (for International Equity Portfolio) 2. Diversification The Money Market Portfolio may not purchase securities of any one issuer if as a result more than 5% of the value the Portfolio's assets would be invested in the securities of such issuer, except that up to 25% of the value of the Portfolio's total assets may be invested without regard to such 5% limitation and provided that there is no limitation with respect to investments in U.S. government securities and domestic bank instruments. The Income, Intrinsic and Small Cap Portfolios each may not invest more than 5% of its assets in the obligations of any single issuer, except: (i) that up to 25% of the value of a Portfolio's total assets may be invested, and securities issued or guaranteed by the U.S. government, or its agencies or sponsored enterprises may be purchased, without regard to any such limitation; and (ii) up to 25% of the value of a Portfolio's total assets may be invested in shares of the Money Market Portfolio. 3. Single Issuer The Income, Intrinsic and Small Cap Portfolios each may not hold more than 10% of the outstanding voting securities of any single issuer, except for shares of the Money Market Fund (see "Diversification" above). This Investment Restriction applies only with respect to 75% of the Portfolio's total assets. 4. Commodities The Money Market Portfolio may not purchase or sell commodities contracts, or invest in oil, gas or mineral exploration or development programs or in mineral leases. Each Portfolio, other than the Money Market Portfolio, may not invest in commodities, except that each such Portfolio may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 5. Real Estate The Money Market Portfolio may not purchase or sell real estate or real estate limited partnerships, provided that the Portfolio may purchase securities of issuers which invest in real estate or interests therein. Each Portfolio, other than the Money Market Portfolio, may not purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but each such Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 6. Borrowing The Money Market Portfolio may not borrow money, except that the Portfolio may (i) borrow money for temporary or emergency purposes from banks or, subject to specific authorization 44 by the SEC, from funds advised by the Adviser to an affiliate of the Adviser, and (ii) engage in reverse repurchase agreements; provided that (i) and (ii) in combination do not exceed one-third of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings). Each Portfolio, other than the Money Market Portfolio, may not borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33-1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entering into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 7. Lending The Money Market Portfolio may not make loans, except that the Portfolio may (i) purchase or hold debt obligations in accordance with its investment objective and policies, (ii) enter into repurchase agreements for securities, (iii) subject to specific authorization by the SEC, lend money to other funds advised by the Adviser or an affiliate of the Adviser. Each Portfolio, other than the Money Market Portfolio, may not make loans to others, except through the purchase of debt obligations and the entering into of repurchase agreements. However, each such Portfolio may lend its portfolio securities in an amount not to exceed 33-1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the SEC and the Board. 8. Underwriting The Money Market Portfolio may not act as an underwriter of securities, except insofar as the Portfolio may be deemed an underwriter under applicable securities laws in selling portfolio securities. Each Portfolio, other than the Money Market Portfolio, may not act as an underwriter of securities of other issuers, except to the extent each such Portfolio may be deemed an underwriter under the Securities Act, by virtue of disposing of portfolio securities. 9. Senior Securities The Money Market, High Yield, S&P STARS Opportunities, Intrinsic, Alpha Growth and International Equity Portfolios each may not issue any senior security (as such term is defined in Section 18(f) of the 1940 Act) except that (a) each such Portfolio may engage in transactions that may result in the issuance of senior securities to the extent permitted under applicable regulations and interpretations of the 1940 Act or an exemptive order; (b) each such Portfolio may acquire other securities, the acquisition of which may result in the issuance of a senior security, to the extent permitted under applicable regulations or interpretations of the 1940 Act; and (c) subject to the Investment Restriction related to Borrowing, each such Portfolio may borrow money as authorized by the 1940 Act. The Insiders Select Fund and the Income, S&P STARS and Small Cap Portfolios each may not issue any senior security (as such term is defined in Section 18(f) of the 1940 Act). 10. Margin The Insiders Select Fund and the Income, S&P STARS, S&P STARS Opportunities, Intrinsic and Small Cap Portfolios each may not purchase securities on margin, but each such Portfolio 45 may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 11. Unseasoned Issuers The S&P STARS Portfolio may not purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments, in all such companies to exceed 5% of the value of its total assets. 12. Management or Control The S&P STARS Portfolio may not invest in the securities of a company for the purpose of exercising management or control, but it will vote the securities it owns in its portfolio as a shareholder in accordance with its views. Non-Fundamental Restrictions. 1. Pledging Assets Each Portfolio, other than the Money Market Portfolio may not pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 2. Options The Money Market Portfolio may not write or sell puts, calls, straddles, spreads or combinations thereof. The Insiders Select Fund and the Income, S&P STARS, S&P STARS Opportunities, Intrinsic and Small Cap Portfolios each may not purchase, sell or write puts, calls or combinations thereof, except as described in the Prospectus and SAI. 3. Other Investment Companies The Money Market Portfolio may not purchase securities of other investment companies except as permitted under the 1940 Act or in connection with a merger, consolidation, acquisition, or reorganization. Each Portfolio, other than the Money Market Portfolio, may not purchase securities of other investment companies, except to the extent permitted under the 1940 Act. This restriction does not apply to investments in shares of the Money Market Fund. 4. Unseasoned Issuers The Insiders Select Fund and the S&P STARS Opportunities and Intrinsic Portfolios each may not purchase securities of any company having less than three years' continuous operations 46 (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets. 5. Management or Control The Insiders Select Fund and the Intrinsic, Small Cap and S&P STARS Opportunities Portfolios each may not invest in the securities of a company for the purpose of exercising management or control, but each such Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 6. Illiquid Securities The Money Market Portfolio may not knowingly invest more than 10% of the value of its assets in securities that may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. The Insiders Select Fund and the Income, S&P STARS, S&P STARS Opportunities, Intrinsic and Small Cap Portfolios each may not enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. The High Yield, Alpha Growth and International Equity Portfolios each may not knowingly invest more than 15% of the value of its assets in securities that may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. 7. Margin The Money Market Portfolio may not purchase securities on margin, make short sales of securities, or maintain a short position. The High Yield, Alpha Growth and International Equity Portfolios each may not purchase securities on margin, but each such Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 8. Short Sales The Alpha Growth and International Equity Portfolios each may not make short sales of securities, other than short sales "against the box." 9. Investments while Borrowing. The Money Market, High Yield, Alpha Growth and International Equity Portfolios each may not make additional investments when borrowing exceeds 5% of Portfolio assets. 10. Warrants The Money Market Portfolio may not invest in warrants. 47 MANAGEMENT OF THE TRUST Trustees and officers of the Trust, together with information as to their principal business occupations during at least the last five years, are shown below. There is also one Advisory Trustee who attends meetings and serves on committees but does not vote. Each Trustee who is an "interested person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk. Sen. Dixon may be considered an interested person because the law firm with which he is affiliated has performed legal services for Bear Stearns. TRUSTEES AND OFFICERS Overall responsibility for management of the Trust rests with the Trustees. The Trust is managed by the Trustees in accordance with the laws of The Commonwealth of Massachusetts. There are currently seven Trustees, four of whom are not "interested persons" of the Trust within the meaning of that term under the 1940 Act ("Independent Trustees"). In addition, there is one Advisory Board Member. The Trustees, in turn, elect the officers of the Trust to supervise actively its day-to-day operations. The Trustees, their ages, positions with the Trust, length of time served, principal occupations during the past five years, and other directorships held are as follows. Each Trustee oversees 10 portfolios in the Trust. There is no defined term of office, and each Trustee serves until the earlier of resignation, retirement, removal, death, or the election of a qualified successor. The Board has adopted a retirement policy that (i) requires a Trustee to retire before reaching the age of 75 and (ii) prohibits a Trustee who has reached the age of 72 from standing for re-election to the Board. The mailing address of the Trustees is 383 Madison Avenue, New York, New York 10179.
- ------------------------------------------------------------------------------------------- Name and Age of Position Principal Occupation(s) in the Other Directorships Trustee with the Past 5 Years Held by Trustee Trust and Length of Time Served(1) - ------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES and ADVISORY TRUSTEE - ------------------------------------------------------------------------------------------- Peter Bren - 69 Trustee, Chairman and President , Koll None since 1995 Bren Schreiber Realty Advisers (realty) - ------------------------------------------------------------------------------------------- John S. Levy - Trustee, Managing Partner, Fayerwearther Director, SL Green 67 since 2000 Capital Partners (private investment partnership) - ------------------------------------------------------------------------------------------- M.B. Oglesby, Trustee, Consultant (1999-present); None Jr. - 59 since 1995 Formerly, Chief of Staff to United States Trade Representative, Office of the President (2001-2002); Consultant, Chairman , Oglesby Properties, Inc. [years served]; President and Chief Executive Officer, Association of American Railroads (1997-2001); Vice Chairman, Cassidy & Associates (1996-1997); Senior Vice President, RJR Nabisco (1989-1996) - ------------------------------------------------------------------------------------------- Robert E. Trustee, Retired; Formerly, Vice None Richardson - 61 since 2000 President, Broker/Dealer Department, Mellon Bank (financial services) (1990-1999) - ------------------------------------------------------------------------------------------- 48 - ------------------------------------------------------------------------------------------- Name and Age of Position Principal Occupation(s) in the Other Directorships Trustee with the Past 5 Years Held by Trustee Trust and Length of Time Served(1) - ------------------------------------------------------------------------------------------- Alan J. Dixon Advisory Partner - Corporate, Business and Advisory Board Member, - - 75 Trustee , Legislative Law, Bryan Cave (law U.S. Bankcorp; Advisory since 1995 firm); Formerly, United States Board Member, SVS Senator [years served] Vision - ------------------------------------------------------------------------------------------- "INTERESTED" TRUSTEES - ------------------------------------------------------------------------------------------- Michael Minikes Chairman of Treasurer, The Bear Stearns None - - 59 the Board Companies Inc. and Bear Stearns & and Trustee, Co. Inc.; Senior Managing since 1999 Director , Bear Stearns & Co. Inc.; Co-President, Bear Stearns Securities Corporation (1999-present) - ------------------------------------------------------------------------------------------- Doni L. Fordyce Trustee and Chief Executive Officer , Bear Director and President, - - 43 President, Stearns Asset Manaement BSAM Capital Corp.; since 2000 (2000-present); Senior Managing Director and Chairman Director, Bear Stearns FOF Asset of the Board, Bear Management LLC (1998-present), Stearns Realty Partners Bear Stearns Private Opportunity Corporation; Director, Ventures Management LLC Bear Stearns Asset (2000-present); Senior Managing Management (Ireland) Director and Investment Committee Limited, Bear Stearns Member, Bear Stearns FOF II Asset Asset Management, Management LLC (1998-present), Luxembourg) S.A., Bear Bear Stearns Ventures Management Stearns Funds plc, Bear LLC (2000-present); Senior Stearns Multi-Strategy Managing Director and President's Offshore Fund, Ltd.; Advisory Council Committee Director and Executive Member, Bear Stearns & Co., Inc. Vice President , (1996-present); Investment Priton Holding, Inc. Committee Member, Lynx New Media Ventures LP (2000-present) - ------------------------------------------------------------------------------------------- Robert M. Trustee, Senior Managing Director , Bear None Steinberg - 56 since 2001 Stearns & Co.Inc. - -------------------------------------------------------------------------------------------
The Board currently has an Audit Committee. The committee met two times during the last fiscal year. The members of the Audit Committee are Mr. Richardson (Chairman), Mr. Bren and Mr. Levy. The primary purpose of the Audit Committee is to oversee the Trust's accounting and financial reporting policies, practices and internal controls, as required by the statutes and regulations administered by the Securities and Exchange Commission, including the 1940 Act. The Trustees who are not "interested persons" of the trust, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Trust. The Independent Trustees will not consider nominee recommendations from shareholders of the Portfolios. The dollar ranges of securities beneficially owned by the Trustees in each Portfolio and in the Bear Stearns Family of Investment Companies* as of December 31, 2001, are as follows: 49 Aggregate Dollar Range of Equity Securities Held in All Registered Investment Companies Overseen by Trustee in Dollar Range of Equity Securities Family of Name of Trustee Held in the Funds Investment Companies - --------------- --------------------------------- --------------------- Peter M. Bren Alan J. Dixon None None (Advisory Trustee) Doni L. Fordyce John S. Levy None None Michael Minikes M. B. Oglesby, Jr. None None Robert E. Richardson Robert M. Steinberg * "Family of Investment Companies" includes the Trust and the following investment companies in the Bear Stearns Family of Investment Companies: ___________________________________ No Independent Trustee and no immediate family member of any Independent Trustee owns beneficially or of record an interest in the Adviser, the Sub-Adviser or the Distributor or in any person directly or indirectly controlling, controlled by, or under common control with the Adviser, the Sub-Adviser, or the Distributor. Remuneration of Trustees The Trust pays each Independent and Advisory Trustee an annual fee of $25,000 for serving as an Independent or Advisory Trustee, and an additional per meeting fee ($2,000 per in person and $1,500 per telephonic meeting). Independent and Advisory Trustees attending an audit committee meeting (whether in-person or by telephone) receive a per meeting fee of $1,000. Each Independent or advisory Trustee is reimbursed for all expenses in attending a Board or committee meeting. The following table indicates the estimated compensation received by each Trustee from "The Bear Stearns Fund Complex"* for the fiscal year ended March 31, 2002. 50 TRUSTEE COMPENSATION (1) (2) (3) (4) (5) Name of Board Member Aggregate Pension or Estimated Total Compensation Retirement Annual Compensation from Trust * Benefits Benefits from from the Trust Accrued as Retirement Paid to Board Part of Members Trust's Expenses Peter M. Bren $24,500 None None $24,500 Alan J. Dixon $22,250 None None $22,250 (Advisory Trustee) Doni L. Fordyce None None None None John S. Levy $24,500 None None $24,500 Michael Minikes None None None None M.B. Oglesby, Jr. $2,250 None None $2,250 Robert E. Richardson $24,500 None None $24,500 Robert M. Steinberg None None None None * There are currently 10 mutual funds in the Bear Stearns "Fund Complex" for which the above-named Trustees are compensated. Officers The officers of the Trust who are not Trustees, their ages, positions with the Trust and length of time served, and their principal occupations during the past five years, are as follows. Each serves until the earlier of resignation, removal, retirement, death, or the election of a successor. The mailing address for each officer is 383 Madison Avenue, New York, New York 10179.
- ---------------------------------------------------------------------------------------------- Name and Age of Position Principal Occupation(s) in the Directorships Held by Officer with the Past 5 Years Officer Trust and Length of Time Served - ---------------------------------------------------------------------------------------------- OFFICERS WHO ARE NOT TRUSTEES - ---------------------------------------------------------------------------------------------- Barry Sommers - Executive Senior Managing Director, Bear None 33 Vice Stearns & Co., Inc. President, (2000-present); Managing since 1998 Director and Head of Marketing and Sales for the Trust (1997-present) - ---------------------------------------------------------------------------------------------- Stephen A. Vice General Counsel, Bear Stearns Director, Bear Stearns Bornstein - 59 President Asset Management (1997-present); Asset Management (Ireland) and Managing Director, Executive Limited, Bear Stearns Asset Secretary, Vice President, Ethics Committee Management (Luxembourg) since 1995 Member and Best Execution S.A, Bear Stearns Funds Committee Member, Bear Stearns plc, Bear Stearns Asset Management Inc. Mutli-Strategy Offshore (1997-present); Managing Fund, Ltd., Bear Stearns Director and Principal 401(k) Mutli-Strategy Protected Committee Member, Bear Stearns & Limited, Bear Stearns Co., Inc. (1985-present); Vice Mutli-Strategy Protected President and Secretary, Bear SPV Limited; Director, Stearns FLLC Corp. Executive Vice President (1996-present); General Counsel and Secretary, BSAM Capital and Secretary, Bear Stearns Corp.; Director and Funds Management Inc. President, MBS Cayman (1997-present); Assistant Funding Limited. Secretary, Gregory Madison Avenue Inc. (corporation) (1998-present); Co-Secretary, New Castle Holding, Inc. (holding company) (1998-present), New Castle Holding Partners LLC (investment company) (1999-present); General Counsel, Executive Vice President and Secretary, Priton Holding, Inc. (holding company) (1998-present) - ---------------------------------------------------------------------------------------------- 51 - ---------------------------------------------------------------------------------------------- Name and Age of Position Principal Occupation(s) in the Directorships Held by Officer with the Past 5 Years Officer Trust and Length of Time Served - ---------------------------------------------------------------------------------------------- Frank J. Vice President and Chief Executive None Maresca - 43 President Officer, Bear Stearns Fund and Management Inc. (1997 - Treasurer, present); Senior Managing since 1995 Director, Bear Stearns & Co., Inc. (2001 - present); Managing Director, Bear, Stearns & Co. Inc. (1999-2001); Assistant Treasurer, Cornerstone Strategic Return Fund, Inc. (2001 - present), Cornerstone Strategic Value Fund, Inc. (2001- present), EIS Fund, Inc. (2002 - present) and Progressive Return Fund, Inc. (2001 - present). - ---------------------------------------------------------------------------------------------- Vincent L. Assistant Executive Vice President, Bear None Pereira - 36 Treasurer, Stearns Funds Management since 1995 (1997-present); Managing Director, Bear, Stearns & Co. Inc. (1997-1999) - ----------------------------------------------------------------------------------------------
The officers of the Trust receive no compensation directly from the Trust for performing the duties of their offices. As of July __, 2002, the Trustees and officers as a group owned beneficially less than 1% o f all classes of outstanding shares of the Funds. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Management of the Portfolios." General. On December 3, 1997, BSFM, the registered investment adviser of the Portfolios, changed its name to BSAM. On December 4, 1997, BSFM formed a new corporate entity under the laws of Delaware to conduct mutual fund administrative work for the Trust and other affiliated and non-affiliated investment companies. S&P STARS Portfolio. Prior to June 25, 1997, the Portfolio invested all of its assets into the S&P STARS Master Series of S&P STARS Fund (the "Master Series"), rather than directly in a portfolio of securities in an arrangement typically referred to as a "master-feeder" structure. Active portfolio management was performed at the Master Series level and BSFM was retained by the Master 52 Series rather than the Portfolio. At a meeting held on June 18, 1997, a majority of the shareholders of the Portfolio approved an investment advisory contract between BSAM and the Portfolio and BSAM began active management of the Portfolio's investments. Historical information provided below for periods prior to June 25, 1997 pertaining to items such as advisory fees, portfolio turnover, and brokerage expenses reflects those items as incurred by the Master Series. Investment Advisory Agreement. BSAM provides investment advisory services to each Portfolio pursuant to an Amended and Restated Investment Advisory Agreement with the Trust approved by a majority of each Portfolio's shareholders on April 17, 2000 (May 21, 2001 with respect to the S&P STARS Opportunities Portfolios). The Advisory Agreement had an initial term of two years from the date of execution and continues automatically for successive annual periods ending on April 17th of each year, provided such continuance is specifically approved at least annually by (i) the Board or (ii) the vote of a majority (as defined in the 1940 Act) of the applicable Portfolio's outstanding voting securities, provided that in either event the continuance also is approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust or BSAM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement is terminable, as to a Portfolio, without penalty, on 60 days' notice, by the Board or by vote of the holders of a majority of the Portfolio's shares, or, on not less than 90 days' notice, by BSAM. As to the relevant Portfolio, the Advisory Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). BSAM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The following persons are directors and/or senior officers of BSAM: Mark A. Kurland, Director, Chief Investment Officer and Senior Managing Director; Doni L. Fordyce, Director, President, Chairman of the Board, Chief Executive Officer, Chief Operations Officer and Senior Managing Director; Stephen A. Bornstein, General Counsel, Executive Vice President and Managing Director; and Warren J. Spector and Robert M. Steinberg, Directors. [Update] The following factors characterize BSAM's overall investment operations: o disciplined fundamental analysis augmented by identifying catalysts for improved financial results; o first-hand knowledge of company management; o focus on long-term market efficiency and timeliness; not timing; o active portfolio management with disciplined sell strategy; and o access to Bear Stearns' Equity Research Department, whose analysts cover more than 1,100 companies in roughly 100 industries around the world. Portfolio Managers. BSAM provides investment advisory services to each Portfolio in accordance with its stated policies, subject to the approval of the Board. BSAM provides each Portfolio with a portfolio management team authorized by the Board to execute purchases and sales of securities. All purchases and sales are reported for the Board of Trustees' review at the meeting subsequent to such transactions. Advisory Fees. The following table shows the monthly fees that the Trust has agreed to pay BSAM for advisory services to the Portfolios, at the indicated annual percentage of the value of a Portfolio's average daily net assets. Advisory Fee - ------------------------------------------------------------------------------- Money Market Portfolio 0.20% - ------------------------------------------------------------------------------- 53 - ------------------------------------------------------------------------------- Income Portfolio 0.45% - ------------------------------------------------------------------------------- High Yield Portfolio 0.60% - ------------------------------------------------------------------------------- S&P STARS Portfolio 0.75% - ------------------------------------------------------------------------------- S&P STARS Opportunities 0.75% Portfolio - ------------------------------------------------------------------------------- Alpha Growth Portfolio 0.65% - ------------------------------------------------------------------------------- Intrinsic Portfolio 0.75% - ------------------------------------------------------------------------------- Small Cap Portfolio 0.75% - ------------------------------------------------------------------------------- Insiders Select Fund 1.00% - ------------------------------------------------------------------------------- International Equity Portfolio 1.00% - ------------------------------------------------------------------------------- Insiders Select Fund. The monthly fee that the Insiders Select Fund will pay BSAM will be adjusted monthly if the Portfolio's performance outperforms or underperforms the S&P MidCap 400 Index. This adjustment may increase or decrease the total advisory fee payable to BSAM by an annual rate of up to 0.50% of the value of the Portfolio's average daily net assets. The following table details this adjustment. INSIDERS SELECT FULCRUM FEE SCHEDULE - ------------------------------------------------------------------------------- Percentage Point Difference Between Designated Class Basic PerformanceTotal Performance Fee Adjustment Fee (Net of Expenses Including Advisory Fees) and (%) Rate (%) (%) Percentage Change in the S&P MidCap 400 Index - ------------------------------------------------------------------------------- +3.00 percentage points or more 1.00% 0.50% 1.50% - ------------------------------------------------------------------------------- +2.75 percentage points or more but less than + 3.00 1.00% 0.40% 1.40% percentage points - ------------------------------------------------------------------------------- +2.50 percentage points or more but less than + 2.75 1.00% 0.30% 1.30% percentage points - ------------------------------------------------------------------------------- +2.25 percentage points or more but less than + 2.50 1.00% 0.20% 1.20% percentage points - ------------------------------------------------------------------------------- +2.00 percentage points or more but less than + 2.25 1.00% 0.10% 1.10% percentage points - ------------------------------------------------------------------------------- Less than + 2.00 percentage points but more than 1.00% 00.0% 1.00% - -2.00 percentage points - ------------------------------------------------------------------------------- - -2.00 percentage points or less but more than -2.25 1.00% -0.10% 0.90% percentage points - ------------------------------------------------------------------------------- - -2.25 percentage points or less but more than -2.50 1.00% -0.20% 0.80% percentage points - ------------------------------------------------------------------------------- - -2.50 percentage points or less but more than -2.75 1.00% -0.30% 0.70% percentage points - ------------------------------------------------------------------------------- - -2.75 percentage points or less but more than -3.00 1.00% -0.40% 0.60% percentage points - ------------------------------------------------------------------------------- - -3.00 percentage points or less 1.00% -0.50% 0.50% - ------------------------------------------------------------------------------- The following table shows the investment advisory fees that the Portfolios paid to BSAM and the amounts that BSAM waived for the last three fiscal years ended March 31. - -------------------------------------------------------------------------------- ADVISORY FEES PAID TO BSAM - -------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Paid Waived Paid Waived Paid Waived - -------------------------------------------------------------------------------- Money Market $2,202,531 $2,020,737 $937,235 $1,490,775 $244,099 $937,253 - -------------------------------------------------------------------------------- 54
ADVISORY FEES PAID TO BSAM - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- Income - $138,087 $0 $70,036 $0 $58,835 - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- High Yield $128,825 $643,460 $18,894 $545,577 $48,217 $601,201 - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- S&P STARS $154,730 Opportunities Fund - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- S&P STARS $17,982,175 $2,186,175 $14,715,672 $2,351,311 $4,111,635 $1,311,869 - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- Insiders Select $401,010 $19,430 $201,339 $0 $229,835 Fund - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- Intrinsic $2,224 $371,549 $0 $166,359 $0 $148,333 (formerly, Large Cap) - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- Small Cap $154,416 $371,006 $173,034 $369,022 $33,542 $417,207 - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- Alpha Growth - $203,504 $0 $214,667 $0 $152,064 (formerly, Focus List) - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- International $360,938 $467,388 $1,058,013 $553,510 $0 $265,757 Equity - ------------------- ----------------- ---------------- ----------------- --------------- ---------------- --------------- In addition, BSAM reimbursed the following amounts for the last three fiscal years ended March 31, in order to maintain applicable voluntary expense limitations. - --------------------------------------------------------------------------------------------------------------- EXPENSES REIMBURSED BY BSAM - --------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------- -------------------------- -------------------------- ---------------------------- Money Market $37,630 $85,804 - ---------------------------- -------------------------- -------------------------- ---------------------------- Income $315,187 $350,343 - ---------------------------- -------------------------- -------------------------- ---------------------------- High Yield $62,949 $27,552 - ---------------------------- -------------------------- -------------------------- ---------------------------- S&P STARS Opportunities Fund $19,592 - - - ---------------------------- -------------------------- -------------------------- ---------------------------- Insiders Select Fund $33,197 $134,452 $98,749 - ---------------------------- -------------------------- -------------------------- ---------------------------- Intrinsic (formerly, Large Cap) - $163,697 $205,073 - ---------------------------- -------------------------- -------------------------- ---------------------------- Small Cap - $0 $28,144 - ---------------------------- -------------------------- -------------------------- ---------------------------- Alpha Growth (formerly, Focus List) $128,938 $106,446 $158,778 - ---------------------------- -------------------------- -------------------------- ---------------------------- International Equity - $16,426 $94,639 - ---------------------------- -------------------------- -------------------------- ----------------------------
55 Investment Sub-Advisory Agreement. Marvin & Palmer Associates, Inc. (the "Sub-Adviser") provides investment advisory services to the International Equity Portfolio pursuant to an Amended and Restated Investment Sub-Advisory Agreement with BSAM approved by a majority of the Portfolio's shareholders on April 17, 2000. The Sub-Advisory Agreement had an initial term of two years from the date of execution and continues automatically for successive annual periods ending on April 17th of each year, provided such continuance is specifically approved at least annually by (i) the Board or (ii) a vote of a majority of the Portfolio's outstanding voting securities (as defined in the 1940 Act), provided that in either case its continuance also is approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust, BSAM or the Sub-Adviser, by vote cast in person at a meeting called for the purpose of voting on such approval. The Sub-Advisory Agreement may be terminated without penalty, (i) by BSAM upon 60 days' notice to the Sub-Adviser, (ii) by the Board or by vote of the holders of a majority of the Portfolio's shares upon 60 days' notice to the Sub-Adviser, or (iii) by the Sub-Adviser upon not less than 90 days' notice to the Trust and BSAM. The Sub-Advisory Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). As compensation for the Sub-Adviser's services, BSAM has agreed to pay the Sub-Adviser a monthly fee calculated on an annual basis equal to 0.20% of the Portfolio's total average daily net assets to the extent the Portfolio's average daily net assets are in excess of $25 million and below $50 million at the relevant month end, 0.45% of the Portfolio's total average daily net assets to the extent the Portfolio's average daily net assets are in excess of $50 million and below $65 million at the relevant month end, and 0.60% of the Portfolio's total average daily net assets to the extent the Portfolio's average daily net assets are in excess of $65 million at the relevant month end. On September 30, 1999, the SEC entered a Consent Order in In the Matter of Marvin & Palmer Associates, Inc. et al. (Admin. Proc. File No. 3-10072). Without admitting or denying the allegations, the Sub-Adviser and David F. Marvin, its Chairman and Chief Executive Officer, consented to the Order in which the SEC found that the Sub-Adviser, Mr. Marvin and two unrelated parties violated, or aided in the violation of Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940, as amended, in connection with the alleged failure of the Sub-Adviser to properly disclose a soft dollar arrangement with a third party. The Consent Order, among other things, censured the Sub-Adviser and Mr. Marvin and ordered the Sub-Adviser to pay disgorgement and prejudgment interest in the aggregate amount of $976,980. The Sub-Adviser and Mr. Marvin were ordered to pay civil money penalties in the amounts of $50,000 and $25,000, respectively. Neither the Sub-Adviser nor Mr. Marvin is prohibited from acting as, or being associated with, an investment adviser. Considerations of the Board of Trustees in Continuing the Advisory and Sub-Advisory Agreements. The Board of Trustees last approved the agreements on February 28, 2002. In determining whether it was appropriate to approve the agreements, the Board requested information, provided by the Adviser and Sub-Adviser, that it believed to be reasonably necessary to reach its conclusion. The Board carefully evaluated this information, and was advised by legal counsel to the Trust and by legal counsel to the Independent Trustees with respect to its deliberations. In considering the agreements, the Board reviewed numerous factors with respect to each Portfolio separately. The Board first reviewed each Portfolio's investment performance during the year. Although investment performance was a significant factor in determining that the agreements should be continued, the following additional factors, among others, were considered by the Board in evaluating the fairness and reasonableness of the compensation to be paid to the Adviser and Sub-Adviser: o Services provided under the agreements; o Requirements of the Portfolios for the services provided by the Adviser and Sub-Adviser; 56 Current management fees were reviewed in the context of the Adviser's profitability on a Portfolio by Portfolio basis. Based on its review of the information requested and provided, and following extended discussions concerning the same, the Board determined that the agreements were consistent with the best interests of the Portfolios and their shareholders, and the Board unanimously approved the agreements for additional annual periods on the basis of the foregoing review and discussions and the following considerations, among others: o The fairness and reasonableness of the investment advisory fee payable to the Adviser and Sub-Adviser under the agreements in light of the investment advisory services provided, the costs of these services, the profitability of the Adviser's relationship with the Portfolios, and the comparability of the fees paid to fees paid by other investment companies; o The nature, quality and extent of the investment advisory services provided by the Adviser, in light of the high quality services provided by the Adviser in its management of the Portfolios and the Portfolios' historic performance, including the success of the Portfolios in achieving stated investment objectives; o The Adviser's entrepreneurial commitment to the management of the Portfolios and the creation of a broad-based family of funds, which could entail a substantial commitment of the Adviser's resources to the successful operation of the Portfolios; o The Adviser's and, with respect to the International Equity Portfolio, the Sub-Adviser's representations regarding its staffing and capabilities to manage the Portfolios, including the retention of personnel with relevant portfolio management experience; and 57 o The overall high quality of the personnel, operations, financial condition, investment management capabilities, methodologies, and performance of the Adviser. Administration Agreement. BSFM provides certain administrative services to the Trust pursuant to the Administration Agreement with the Trust dated February 22, 1995, as revised April 11, 1995, June 2, 1997, September 8, 1997, February 4, 1998, July 29, 1999 and May 21, 2001. The Administration Agreement was last approved on February 28, 2002 and thereafter will be subject to annual approval by (i) the Board or (ii) vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Portfolio, provided that in either event its continuance also is approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement may be terminated without penalty on 60 days' notice by the Board or by vote of the holders of a majority of the Portfolio's shares or, upon not less than 90 days' notice, by BSFM. As to each Portfolio, the Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). For administrative services, the Trust has agreed to pay BSFM a monthly fee, on behalf of each Portfolio (other than the Money Market Portfolio), equal to an annual rate of 0.15% of the Portfolio's average daily net assets up to $1 billion, 0.12% of the next $1 billion, 0.10% of the next $3 billion and 0.08% of net assets above $5 billion, subject to a minimum annual fee of $150,000 per Portfolio (other than the Money Market Portfolio). The Trust has agreed to pay BSFM a monthly fee at the annual rate of 0.05% of the average daily net assets of the Money Market Portfolio. The following table shows the administration fees that the Portfolios paid to BSFM for the last three fiscal years ended March 31. - --------------------------------------------------------------------------- Administration Fees paid to BSFM - --------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------- Money Market $1,055,817 $607,003 $295,338 - --------------------------------------------------------------------------- Income $46,029 $23,345 $19,612 - --------------------------------------------------------------------------- High Yield $193,073 $141,113 $162,354 - --------------------------------------------------------------------------- S&P STARS $3,389,113 $3,253,700 $1,084,891 - --------------------------------------------------------------------------- S&P STARS $30,946 Opportunities Fund - --------------------------------------------------------------------------- Insiders Select $53,213 $44,316 $60,652 Fund - --------------------------------------------------------------------------- Intrinsic $74,754 $33,272 $29,667 (formerly, Large Cap) - --------------------------------------------------------------------------- Small Cap $105,085 $108,340 $95,666 - --------------------------------------------------------------------------- Alpha Growth $46,962 $49,519 $35,090 (formerly, Focus List) - --------------------------------------------------------------------------- International $124,249 $158,236 $48,520 Equity - --------------------------------------------------------------------------- Administrative Services Agreement. BISYS provides certain administrative services to the Portfolios pursuant to a Fund Accounting and Administrative Services Agreement with the Trust dated as of May 1, 2002. 58 For administrative and accounting services, the Trust has agreed to pay BISYS the following asset-based fees: Assets Fees* ------ ------ Portfolios other than the Money Market 3.50 Portfolio (as a complex) Assets $0 - $3 Billion Assets greater than $3 and up to $6 2.50 Billion Assets greater than $6 Billion 1.50 Money Market Portfolio (individually) Assets $0 - $150 Million 6.00 Assets greater than $150 and up to $300 4.00 Million Assets greater than $300 and up to $600 2.00 Million Assets greater than $600 Million and up 1.00 to $1 Billion Assets greater than $1 Billion .85 The asset-based fees set forth above are subject to an annual minimum fee of $1,120,000 for the entire U.S. fund complex, subject to certain adjustments. __________ * Fees are stated in basis points, and are applied as an annual rate based on average net assets to the respective asset levels indicated above. The following table shows the administrative services fees that the Portfolios paid to PFPC, the former fund accounting and sub-administrative agent for the Trust, for the last three fiscal years ended March 31. Administration Fees paid to PFPC - --------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------- Money Market $441,579 $323,159 $241,645 - --------------------------------------------------------------------------- Income $103,729 $73,037 $98,573 - --------------------------------------------------------------------------- High Yield $139,860 $134,135 $137,872 - --------------------------------------------------------------------------- S&P STARS $891,801 $823,384 $496,050 - --------------------------------------------------------------------------- S&P STARS $52,478 Opportunities Fund - --------------------------------------------------------------------------- Insiders Select $96,959 $91,860 $127,821 Fund - --------------------------------------------------------------------------- Intrinsic $122,437 $76,068 $91,804 (formerly, Large Cap) - --------------------------------------------------------------------------- Small Cap $130,018 $141,113 $145,164 - --------------------------------------------------------------------------- Alpha Growth $89,405 $86,997 $90,839 (formerly, Focus List) - --------------------------------------------------------------------------- International $147,865 $136,083 $108,251 Equity - --------------------------------------------------------------------------- 59 Distribution Plans. Rule 12b-1 adopted by the SEC under Section 12 of the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. On April 17, 2000, the Trust's shareholders approved amended and restated distribution plans with respect to Class A, Class B and Class C shares (the "Distribution Plans"). The Board believes that there is a reasonable likelihood that the Distribution Plans will benefit each Portfolio and the holders of its Class A, Class B and Class C shares. The Board reviews a quarterly report of the amounts expended under the Distribution Plans, and the purposes for which such expenditures were incurred. In addition, each Distribution Plan provides that it may not be amended to increase materially the costs which holders of a class of shares may bear pursuant to such Plan without approval of such affected shareholders and that other material amendments of the Plan must be approved by the Board, and by the Trustees who are neither "interested persons" (as defined in the 1940 Act) of the Trust nor have any direct or indirect financial interest in the operation of the Plan or in the related Plan agreements, by vote cast in person at a meeting called for the purpose of considering such amendments. In addition, because Class B shares automatically convert into Class A shares after eight years, the Trust is required by a SEC rule to obtain the approval of Class B as well as Class A shareholders for a proposed amendment to each Distribution Plan that would materially increase the amount to be paid by Class A shareholders under such Plan. Such approval must be by a "majority" of the Class A and Class B shares (as defined in the 1940 Act), voting separately by class. Each Distribution Plan and related agreement is subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on such Plan. Each Distribution Plan may be terminated at any time by vote of a majority of the Trustees who are not "interested persons" and who have no direct or indirect financial interest in the operation of the Plan or in the Plan agreements or by vote of holders of a majority of the relevant class' shares. A Plan agreement may be terminated without penalty, at any time, by such vote of the Trustees, upon not more than 60 days' written notice to the parties to such agreement or by vote of the holders of a majority of the relevant class' shares. A Plan agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). Each Plan provides that to the extent that any payments made by Bear Stearns, BSFM, BSAM or any sub-adviser, directly or through an affiliate (in each case, from its own resources), should be deemed to be indirect financing of any activity primarily intended to result in the sale of Portfolio shares within the context of Rule 12b-1, then such payments shall be deemed to be authorized by the Plan. The following tables show the amounts that each class of shares of each Portfolio paid for the fiscal year ended March 31, 2002 under the relevant Distribution Plan, including (i) amounts paid to broker-dealers, and (ii) amounts retained by Bear Stearns for commissions it advanced to dealers for fund share sales, and other distribution expenses including advertising, printing, mailing prospectuses to prospective shareholders, compensation to sales personnel, and interest, carrying, or other financing charges. These tables include amounts paid for personal services rendered to shareholders of the Portfolios.
RULE 12b-1 PAYMENTS Class A - -------------------------------------------------------------------------------------------------------------------- Total Compensation Compensation Advertising Payments to to Broker-dealers Underwriter - ------------------------------------------------------------------------------------------------------------------- Income $ 9,249 - $ 9,250 -- High Yield $ 70,095 - $ 54,804 $ 15,291 S&P STARS $3,050,568 - $ 311,574 $2,738,994 60 RULE 12b-1 PAYMENTS Class A - -------------------------------------------------------------------------------------------------------------------- Total Compensation Compensation Advertising Payments to to Broker-dealers Underwriter - ------------------------------------------------------------------------------------------------------------------- S&P STARS $ 23,453 - $ 14,345 $ 9,108 Opportunities The Insiders Select $ 44,458 - $ 8,018 $ 36,440 Fund Intrinsic (formerly, $ 41,240 -- $ 33,400 Large Cap) Small Cap $ 50,621 -- $ 50,562 Alpha Growth $ 47,985 - $ 8,868 $ 39,117 (formerly, Focus List) International Equity $ 105,598 - $ 6,303 $ 99,295
RULE 12b-1 PAYMENTS Class B - ------------------------------------------------------------------------- Total Compensation to Interest/ Payments Broker-dealers Amortization* - ------------------------------------------------------------------------- Income $49,757 - $49,757 - ------------------------------------------------------------------------- High Yield $217,213 - $217,213 - ------------------------------------------------------------------------- S&P STARS $5,126,699 - $5,126,699 - ------------------------------------------------------------------------- S&P STARS $42,282 - $42,282 Opportunities - ------------------------------------------------------------------------- The Insiders Select $67,606 - $67,606 Fund - ------------------------------------------------------------------------- Intrinsic (formerly, $55,208 - $55,208 Large Cap) - ------------------------------------------------------------------------- Small Cap $42,332 - $42,332 - ------------------------------------------------------------------------- Alpha Growth $52,917 - $52,917 (formerly, Focus List) - ------------------------------------------------------------------------- International Equity $70,963 $70,963 - ------------------------------------------------------------------------- * For advances of commissions paid to broker-dealers.
RULE 12b-1 PAYMENTS Class C - ------------------------------------------------------------------------------------------------------------------ Total Compensation to Advertising Payments Broker-dealers Compensation to Underwriter* - ------------------------------------------------------------------------------------------------------------------ Income $ 34,823 $ 12,199 $ 22,624 -- High Yield $ 179,546 $ 61,029 $ 80,327 $ 38,190 S&P STARS $4,402,378 $1,689,077 $2,531,228 $ 182,073 S&P STARS Opportunities $ 36,100 $ 31,570 $ 4,530 -- The Insiders Select $ 59,430 $ 14,881 $ 37,962 $ 6,587 Fund Intrinsic (formerly, $ 69,460 $ 30,991 $ 38,469 -- Large Cap) Small Cap $ 101,533 $ 30,094 $ 71,439 -- Alpha Growth $ 37,940 $ 6,014 $ 31,926 -- (formerly, Focus List) International Equity $ 171,462 $ 55,335 $ 83,878 $ 32,249
The asset-based sales charges on Class B and Class C shares allow investors to buy shares without a front-end sales charge while allowing the Distributor to compensate dealers that sell 61 those shares. The Trust pays the asset-based sales charges to the Distributor for its services rendered in distributing Class B and Class C shares. The payments are made to the Distributor in recognition that the Distributor: o pays sales concessions to authorized brokers and dealers at the time of sale and pays service fees as described below, o may finance payment of sales concessions and/or the advance of the service fee payment to recipients under the plans, or may provide such financing from its own resources or from the resources of an affiliate, o employs personnel to support distribution of Class B and Class C shares, and o bears the costs of sales literature, advertising and prospectuses (other than those furnished to current shareholders) and state "blue sky" registration fees and certain other distribution expenses. The Distributor's actual expenses in selling Class B and Class C shares may be more than the payments it receives from the contingent deferred sales charges collected on redeemed shares and from the Trust under the plans. If either the Class B or Class C plan is terminated by the Trust, the Board of Trustees may allow the Trust to continue payments of the asset-based sales charge to the Distributor for distributing shares before the plan was terminated. All payments under the Class B and Class C plans are subject to the limitations imposed by the Conduct Rules of the National Association of Securities Dealers, Inc. on payments of asset-based sales charges and service fees. Shareholder Servicing Plan. The Trust has adopted a shareholder servicing plan on behalf of Class A, Class B and Class C shares of the Portfolios (the "Shareholder Servicing Plan"). In accordance with the Shareholder Servicing Plan, the Trust may enter into agreements under which a Portfolio pays fees of up to 0.25% of the average daily net assets of a share Class for expenses incurred in connection with the personal service and maintenance of Portfolio shareholder accounts, responding to inquiries of, and furnishing assistance to, shareholders regarding ownership of the shares or their accounts or similar services not otherwise provided on behalf of the Portfolio. Expenses. The Trust bears all expenses incurred in its operation, except to the extent that BSAM specifically assumes them. The Trust bears the following expenses, among others: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees of Board members who are not officers, directors, employees or holders of 5% or more of the outstanding voting securities of BSAM or its affiliates, SEC fees, state Blue Sky qualification fees, advisory, administrative and Trust accounting fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the Trust's existence, costs of independent pricing services, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of shareholders' reports and meetings, costs of preparing and printing certain prospectuses and statements of additional information, and any extraordinary expenses. Expenses attributable to a particular Portfolio are charged against the assets of that Portfolio; other expenses of the Trust are allocated among the Portfolios on the basis determined by the Board, including, but not limited to, proportionately in relation to the net assets of each Portfolio. Expense Limitations. BSAM has agreed in writing to limit the expenses of each Portfolio to the amounts indicated in the Prospectus until July 31, 2003. These limits do not include any taxes, brokerage commissions, interest on borrowings and extraordinary expenses. 62 Activities of BSAM and its Affiliates and Other Accounts Managed by BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the management of, or their interests in, other accounts and other activities of BSAM and Bear Stearns may present conflicts of interest with respect to the Portfolios or limit the Portfolios' investment activities. BSAM, Bear Stearns and its affiliates engage in proprietary trading and advise accounts and funds which have investment objectives similar to those of the Portfolios and/or which engage in and compete for transactions in the same types of securities, currencies and instruments as the Portfolios. BSAM, Bear Stearns and its affiliates will not have any obligation to make available any accounts managed by them, for the benefit of the management of the Portfolios. The results of the Portfolios' investment activities, therefore, may differ from those of Bear Stearns and its affiliates and it is possible that the Portfolios could sustain losses during periods in which BSAM, Bear Stearns and its affiliates and other accounts achieve significant profits on their trading for proprietary and other accounts. From time to time, the Portfolios' activities may be limited because of regulatory restrictions applicable to Bear Stearns and its affiliates, and/or their internal policies designed to comply with such restrictions. Purchase and Redemption of Shares The following information supplements and should be read in conjunction with the sections in the Prospectus entitled "How to Buy Shares" and "How to Sell Shares." Distributor. Bear Stearns serves as the Portfolios' distributor on a best efforts basis pursuant to an agreement dated February 22, 1995, as revised September 8, 1997, February 4, 1998, July 29, 1999 and May 21, 2001, which is renewable annually. From time to time, Bear Stearns or its affiliates may pay, from its own resources, to broker-dealers or other financial institutions a fee related to the sale of the Portfolios' shares or the maintenance of shareholder accounts related to such shares. The following table shows the approximate amounts that Bear Stearns retained from front end sales loads ("FESL") on Class A shares and on contingent deferred sales charges ("CDSC") on Class A, B and C shares for the three fiscal years ended March 31. In some states, banks or other institutions effecting transactions in Portfolio shares may be required to register as dealers pursuant to state law. - --------------------------------------------------------------------------- SALES LOADS RETAINED BY BEAR STEARNS - --------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------- Income $47,500 $38,500 $26,800 FESL -- A $37,700 $5,800 $14,400 CDSC -- B $2,300 $5,300 $200 CDSC -- C - --------------------------------------------------------------------------- High Yield $202,100 $235,500 $235,700 FESL -- A $5,100 $0 $20,900 CDSC -- A $82,500 $95,400 $173,100 CDSC -- B $2,700 $7,000 $20,400 CDSC -- C - --------------------------------------------------------------------------- 63 - --------------------------------------------------------------------------- SALES LOADS RETAINED BY BEAR STEARNS - --------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------- S&P STARS $739,300 Opportunities $1,700 FESL -- A $8,700 CDSC -- A $2,500 CDSC -- B CDSC -- C - --------------------------------------------------------------------------- S&P STARS $7,546,000 $17,597,100 $6,677,300 FESL -- A $3,000 $2,300 $0 CDSC -- A $2,384,700 $1,180,700 $352,600 CDSC -- B $187,600 $143,000 $59,800 CDSC -- C - --------------------------------------------------------------------------- Insiders Select $108,700 $93,400 $71,400 Fund $600 $30,600 $91,900 FESL -- A $21,500 $2,300 $2,900 CDSC --A $1,900 CDSC -- B CDSC -- C - --------------------------------------------------------------------------- Intrinsic $257,900 $77,900 $52,500 (formerly Large $2,000 $11,500 $12,900 Cap) $19,700 $0 $500 FESL -- A $2,200 CDSC -- A CDSC -- B CDSC -- C - --------------------------------------------------------------------------- Small Cap $89,400 $67,000 $78,500 FESL -- A $15,300 $10,800 $16,700 CDSC -- B $3,600 $700 $1,700 CDSC -- C - --------------------------------------------------------------------------- Alpha Growth $42,300 $44,700 $271,400 (formerly, Focus $5,800 $26,600 $41,500 List) $42,800 $1,400 $2,200 FESL -- A $700 CDSC -- A CDSC -- B CDSC -- C - --------------------------------------------------------------------------- International $48,200 $268,700 $641,600 Equity $4,100 $4,300 $0 FESL -- A $75,400 $98,500 $19,900 CDSC -- A $22,300 $61,800 $4,200 CDSC -- B CDSC -- C - --------------------------------------------------------------------------- Purchase Order Delays. The effective date of a purchase order may be delayed if PFPC, the Portfolios' transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. 64 Redemption Fee. The International Equity Portfolio will impose a redemption fee of 1.00% of the total market value of shares redeemed or exchanged 60 days or less after you purchase them. The redemption fee, which is paid directly to each Portfolio, is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. For purposes of determining whether the redemption fee applies, the shares that you have held the longest will be redeemed first. The redemption fee will only apply to shares purchased on or after June 1, 2001. The redemption fee may not apply in cases of shareholder death or disability, or other circumstances in which the Portfolio would waive a Class A contingent deferred sales charge as discussed in greater detail in this SAI. Sales Loads-Class A. The sales charge may vary depending on the dollar amount invested in each Portfolio. The public offering price for Class A shares of each Portfolio is the NAV of that class plus a sales load, which is imposed in accordance with the following schedules. FRONT END SALES LOAD SCHEDULE AND DEALER CONCESSIONS Fixed Income Funds - -------------------------------------------------------------------------------- TOTAL SALES LOAD ----------------------------- Amount of Transaction As a % of As a % of Dealer offering price NAV concessions as per share a % of offering price - -------------------------------------------------------------------------------- Less than $50,000 4.50% 4.71% 4.25% $50,000 to less than $100,000 4.25 4.44 4.00 $100,000 to less than $250,000 3.25 3.36 3.00 $250,000 to less than $500,000 2.50 2.56 2.25 $500,000 to less than $1,000,000 2.00 2.04 1.75 $1,000,000 to less than $3,000,000* 0.00 0.00 1.25 $3,000,000 to less than $5,000,000 0.00 0.00 0.75 $5,000,000 and above 0.00 0.00 0.50 Equity Funds - -------------------------------------------------------------------------------- TOTAL SALES LOAD ----------------------------- Amount of Transaction As a % of As a % of Dealer offering price NAV concessions as per share a % of offering price - -------------------------------------------------------------------------------- Less than $50,000 5.50% 5.82% 5.25% $50,000 to less than $100,000 4.75 4.99 4.25 $100,000 to less than $250,000 3.75 3.90 3.25 $250,000 to less than $500,000 2.75 2.83 2.50 $500,000 to less than $1,000,000 2.00 2.04 1.75 $1,000,000 to less than $3,000,000* 0.00 0.00 1.25 $3,000,000 to less than $5,000,000 0.00 0.00 0.75 $5,000,000 and above 0.00 0.00 0.50 ________________ * There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares up to one year after the date of purchase, a CDSC of 1.00% will be imposed at the time of redemption. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. 65 The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. As described in the Prospectus, an investor may buy Class A shares of a Portfolio at NAV if the purchase is for $1,000,000 or more. In connection with such purchases, Bear Stearns will offer to pay dealers, from its own resources, up to 1.25% of the amount purchased. However, Bear Stearns will not pay this amount if the investor is a managed account over which BSAM has investment discretion, or if BSAM is responsible for the asset allocation with respect to such managed account. In addition, Class A shares of a Portfolio may be purchased at NAV by the following customers of a broker that operates a master account for purchasing and redeeming, and otherwise provides shareholder services in respect of Portfolio shares pursuant to agreements with the Trust or Bear Stearns: (i) investment advisers and financial planners who place trades for their own accounts or for the accounts of their clients and who charge a management, consulting or other fee, (ii) clients of such investment advisers and financial planners if such clients place trades through accounts linked to master accounts of such investment advisers or financial planners on the books and records of such broker, and (iii) plan participants of eligible employer-sponsored benefit plans qualified under the Code, provided, in each case, the purchase transaction is effected through such broker. The broker may charge a fee for transactions in Portfolio shares. In connection with such purchases, Bear Stearns will offer to pay dealers, from its own resources and at no cost to the Trust, the following percentages of the amount purchased: 1.25% for the first $3 million, 0.75% for the next $2 million and 0.50% thereafter. Set forth below is an example of the method of computing the offering price per share of the Class A shares of each Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the NAV of the Class A shares on March 31, 2002. COMPUTATION OF OFFERING PRICE Fixed Income Funds ---------------- --------- -------- Income High Yield ---------------- --------- -------- NAV $11.84 $8.36 ---------------- --------- -------- Sales Charge - $0.56 $0.39 4.50% (4.71% of NAV) ---------------- --------- -------- Offering Price $12.40 $8.75 ---------------- --------- -------- 66 Equity Funds - -------------- -------- ------------- -------- -------- ------ ----------- ----- S&P S&P STARS Insiders Small Alpha Int'l STARS Opportunities Select Intrinsic Cap Growth Equity - -------------- -------- ------------- -------- -------- ------ --------- ----- NAV $25.11 $14.27 $16.87 $20.04 $20.39 $18.81 $14.64 - -------------- -------- ------------- -------- -------- ------ --------- ------ Sales Charge $1.46 $0.83 $0.98 $1.17 $1.19 $1.13 $0.85 - - 5.50% (5.82% of NAV) - -------------- -------- ------------- -------- -------- ------ ---------- ----- Offering $26.57 $15.10 $17.65 $21.21 $21.58 $19.94 $15.94 Price - -------------- -------- ------------- -------- -------- ------ --------- ----- Redemption Commitment. Each Portfolio has committed itself to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or 1% of the value of the Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the SEC. In the case of requests for redemption in excess of such amount, the Board reserves the right to make payments in whole or in part in securities or other assets in case of an emergency or any time a cash distribution would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In this event, the securities would be valued in the same manner as the Portfolio is valued. If the recipient sold such securities, brokerage charges would be incurred. Waivers. The International Equity Portfolio will waive any redemption fee under the following circumstances: (1) the death or disability of a shareholder; (2) redemption by employees participating in eligible benefit plans, including separation of service, and (3) mandatory distribution under a tax-deferred retirement plan. These waivers may be changed at any time. Suspension of Redemption. The right of redemption may be suspended or the date of payment postponed when (a) trading on the New York Stock Exchange ("NYSE") is restricted, as determined by applicable rules and regulations of the SEC, (b) the NYSE is closed for other than customary weekend and holiday closings, (c) the SEC has by order permitted such suspension, or (d) an emergency, as determined by the SEC, exists making disposition of a Portfolio's securities or the valuation of the net assets of a Portfolio not reasonably practicable. Alternative Sales Arrangements - Class A, Class B, Class C and Class Y Shares. The availability of three classes of shares to individual investors permits an investor to choose the method of purchasing shares that is more beneficial to the investor depending on the amount of the purchase, the length of time the investor expects to hold shares and other relevant circumstances. Investors should understand that the purpose and function of the deferred sales charge and asset-based sales charge with respect to Class B and Class C shares are the same as those of the initial sales charge with respect to Class A shares. Any salesperson or other person entitled to receive compensation for selling Portfolio shares may receive different compensation with respect to one class of shares than the other. Bear Stearns will not accept any order of $500,000 or more of Class B shares or $1 million or more of Class C shares, on behalf of a single investor (not including dealer "street name" or omnibus accounts) because generally it will be more advantageous for that investor to purchase Class A shares of a Portfolio instead. A fourth class of shares may be purchased only by certain institutional investors at NAV (the "Class Y shares"). The four classes of shares each represent an interest in the same portfolio investments of a Portfolio. However, each class has different shareholder privileges and features. The net income attributable to Class A, Class B and Class C shares and the dividends payable on these shares will be 67 reduced by incremental expenses borne solely by that class, including the asset-based sales charge to which these Classes are subject. The methodology for calculating the NAV, dividends and distributions of each Portfolio's Class A, B, C and Y shares recognizes two types of expenses. Expenses that are directly attributable to a class are allocated equally to each outstanding share within that class. Such expenses include (a) Distribution Plan and Shareholder Servicing Plan fees, (b) printing and postage expenses related to preparing and distributing Portfolio materials, shareholder reports, prospectuses and proxies to current shareholders of a specific class; (c) SEC and state registration fees incurred by a specific class; (d) the expense of administrative personnel and services as required to support the shareholders of a specific class; (e) litigation or legal expenses relating solely to a specific class; and (f) Trustees' fees incurred as a result of issues relating to a specific class. Any expenses of a Portfolio not allocated to a particular class is allocated to each class of the Portfolio on the basis of the NAV of that class in relation to the net asset value of the Portfolio. The Adviser, Distributor, Administrator and any other provider of services to the Trust may waive or reimburse the expenses of a particular class or classes, as long as such waiver does not result in cross subsidization between the classes. None of the instructions described elsewhere in the Prospectus or SAI for the purchase, redemption, reinvestment, exchange, or transfer of shares of a Portfolio, the selection of classes of shares, or the reinvestment of dividends apply to Class Y shares. Money Market Portfolio. The regulations of the Comptroller of the Currency provide that funds held in a fiduciary capacity by a national bank approved by the Comptroller to exercise fiduciary powers must be invested in accordance with the instrument establishing the fiduciary relationship and local law. The Trust believes that the purchase of Money Market Portfolio shares by such national banks acting on behalf of their fiduciary accounts is not contrary to applicable regulations if consistent with the particular account and proper under the law governing the administration of the account. DETERMINATION OF NET ASSET VALUE The following information supplements and should be read in conjunction with the section in the Prospectus entitled "How to Buy Shares." A Portfolio's share price, or "NAV" is calculated by dividing the total assets of the Fund, less all liabilities, by the total number of shares outstanding. The net asset value of each Portfolio, other than the Money Market Portfolio, is determined as of the close of the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. Eastern time) on each day that the Exchange is open for trading. The net asset value of the Money Market Portfolio is determined each business day at 1:00 p.m. Eastern time and 4:00 p.m. Eastern time. A business day is a day on which the Exchange and the Federal Reserve Bank of New York are open. On any business day when the Bond Market Association ("BMA") recommends that the securities markets close early, the Money Market Portfolio reserves the right to close at or prior to the BMA recommended closing time. Portfolio securities for which market quotations are readily available (which include those securities listed on national securities exchanges, as well as those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales price on the day the valuation is made. A Portfolio's NAV is calculated separately for each class by dividing the total value of the assets belonging to the Portfolio attributable to a class, less the value of any class-specific liabilities charged to the Portfolio by the total number of the Portfolio's shares of that class outstanding. "Assets belonging to" a Portfolio consist of the consideration received upon the issuance of Portfolio shares together with all income, earnings, profits and proceeds derived from the investment thereof, including any proceeds from 68 the sale of such investments, any funds or payments derived from any reinvestment of such proceeds and a portion of any general assets of the Trust not belonging to a particular Portfolio. Assets belonging to a Portfolio are charged with the direct liabilities of the Portfolio and with a share of the general liabilities of the Trust allocated on a daily basis in proportion to the relative net assets of the Portfolio and the Trust's other portfolios. Determinations made in good faith and in accordance with generally accepted accounting principles by the Trust's Board of Trustees as to the allocation of any assets or liabilities with respect to a Portfolio are conclusive. All cash, receivables and current payables are carried on a Portfolio's books at their face value. Short-term debt instruments ("money market securities"). The Money Market Portfolio uses the amortized cost method of valuation to compute the NAV of its shares for purposes of sales and redemptions. Under this method, the Portfolio values each of its portfolio securities at cost on the date of purchase and thereafter assumes a constant proportionate amortization of any discount or premium until maturity of the security. As a result, the value of the portfolio security for purposes of determining NAV normally does not change in response to fluctuating interest rates. While the amortized cost method seems to provide certainty in portfolio valuation, it may result in valuations of the Portfolio's securities that are higher or lower than the market value of such securities. In connection with its use of amortized cost valuation, the Money Market Portfolio limits the dollar-weighted average maturity of its portfolio to not more than 90 days and does not purchase any instrument with a remaining maturity of more than thirteen months (397 days) (with certain exceptions). The Board has also established procedures pursuant to rules promulgated by the SEC that are intended to stabilize the Portfolio's NAV for purposes of sales and redemptions at $1.00. Such procedures include the determination, at such intervals as the Board deems appropriate, of the extent, if any, to which the Portfolio's NAV calculated by using available market quotations deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1%, the Board will consider promptly what action, if any, should be initiated. If the Board believes that the amount of any deviation from the Portfolio's $1.00 amortized cost price per share may result in material dilution or other unfair results to investors, it will take such steps as it considers appropriate to eliminate or reduce to the extent reasonably practicable any such dilution or unfair results. These steps may include selling portfolio instruments prior to maturity to realize capital gains or losses or shortening the Portfolio's average portfolio maturity, redeeming shares in kind, reducing or withholding dividends, or utilizing a net asset value per share determined by using available market quotations. Other Portfolios may value short-term instruments (those acquired with remaining maturities of 60 days or less) at cost, plus or minus any amortized discount or premium, which approximates market value. Fixed-income securities. Substantially all fixed-income securities (including short-term instruments that are not valued using the amortized cost method) are valued each business day as of the close of regular trading on the Exchange by one or more independent pricing services (the "Pricing Services") approved by the Trust's Board of Trustees. When quoted bid prices are readily available, the Pricing Services generally value fixed-income securities at the mean of the bid and ask prices, provided that the Pricing Service believes those prices to reflect the fair market value of the securities. Other instruments valued by Pricing Services are carried at fair value as determined by the Pricing Service, based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Pricing Services may take other factors into consideration in pricing securities, including institutional size transactions in similar groups of securities as well as developments related to specific securities. Securities that are not valued by a Pricing Service are valued at the average of the most recent bid and asked prices in the market in which such securities are primarily traded, or at the last sales price for 69 securities traded primarily on an exchange or the national securities market. In the absence of reported sales of securities traded primarily on an exchange or the national securities market, the average of the most recent bid and asked prices is used. Bid price is used when no asked price is available. Equity securities. Equity securities, including written covered call options, are valued each business day at the last sale price as of the close of regular trading on the Exchange by one or more Pricing Services approved by the Board of Trustees. 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. Foreign securities. Foreign securities are valued by Pricing Services at the last quoted sales price, according to the broadest and most representative market, available at the time the Portfolio is valued. In determining the Fund's net asset value per share, all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars using the officially quoted daily exchange rates used by Morgan Stanley Capital International in calculating various benchmarking indices. This officially quoted exchange rate may be determined prior to or after the close of a particular securities market. If such quotations are not available, the rate of exchange will be determined in accordance with policies established in good faith by the Board of Trustees. Occasionally, events affecting the value of foreign securities and such exchange rates occur between the time at which they are determined and the close of the Exchange. If events materially affecting the value of such securities or assets or currency exchange rates occurred during such time period, the securities or assets would be valued at their fair value as determined in good faith by or under the direction of the Trust's Board of Trustees. The foreign currency exchange transactions of a Portfolio conducted on a spot basis will be valued at the spot rate for purchasing or selling currency prevailing on the foreign exchange market. Forward currency contracts will be valued at the current cost of offsetting the contract. General. Other assets and securities for which no quotations are readily available or which are restricted as to sale (or resale) are valued by such methods as the Trust's Board of Trustees deems in good faith to reflect the fair value. Restricted securities, as well as securities or other assets for which market quotations are not readily available, or are not valued by a Pricing Service approved by the Trust's Board of Trustees, are valued at fair value as determined in good faith by BSAM's Valuation Committee, pursuant to procedures approved by the Trust's Board. The Board reviews the method of valuation quarterly. In making their good faith valuation of restricted securities, the Valuation Committee generally will take the following factors into consideration: (i) restricted securities which are, or are convertible into, securities of the same class of securities for which a public market exists usually will be valued at market value less the same percentage discount at which purchased (the Board will revise this discount periodically if it believes that the discount no longer reflects the value of the restricted securities); (ii) restricted securities not of the same class as securities for which a public market exists usually will be valued initially at cost; and (iii) any subsequent adjustment from cost will be based upon considerations deemed relevant by the Valuation Committee. New York Stock Exchange Closings. The holidays (as observed) on which the New York Stock Exchange is closed currently are: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. TAXES The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Dividends, Distributions and Taxes." 70 Information set forth in the Prospectus and this SAI that relates to federal taxation is only a summary of certain key federal tax considerations generally affecting purchasers of shares of the Portfolios. The following is only a summary of certain additional tax considerations generally affecting each Portfolio and its shareholders that are not described in the Prospectus. No attempt has been made to present a complete explanation of the federal tax treatment of the Portfolios or the implications to shareholders, and the discussions here and in each Portfolio's prospectus are not intended as substitutes for careful tax planning. Accordingly, potential purchasers of shares of the Portfolios are urged to consult their tax advisers with specific reference to their own tax circumstances. In addition, the tax discussion in the Prospectus and this SAI is based on tax law in effect on the date of the Prospectuses and this SAI; such laws and regulations may be changed by legislative, judicial, or administrative action, sometimes with retroactive effect. Special tax considerations may apply to certain types of investors subject to special treatment under the Code (including, for example, insurance companies, banks and tax-exempt organizations). Qualification as a Regulated Investment Company. Each Portfolio has elected to be taxed as a regulated investment company under Subchapter M of the Code. As a regulated investment company, a Portfolio is not subject to federal income tax on the portion of its net investment income (i.e., taxable interest, dividends, and other taxable ordinary income, net of expenses) and capital gain net income (i.e., the excess of capital gains over capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income (i.e., net investment income and the excess of net short-term capital gain over net long-term capital loss) and at least 90% of its tax-exempt income (net of expenses allocable thereto) for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. Distributions by a Portfolio made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year, will be considered distributions of income and gains for the taxable year and will therefore count toward satisfaction of the Distribution Requirement. If a Portfolio has a net capital loss (i.e., an excess of capital losses over capital gains) for any year, the amount thereof may be carried forward up to eight years and treated as a short-term capital loss which can be used to offset capital gains in such future years. As of March 31, 2002, the Portfolios had the following capital loss carryforwards:
-------------------------------------------------------------------------------------------- Portfolio Gross Capital AMOUNT AMOUNT AMOUNT EXPIRING AMOUNT Loss EXPIRING EXPIRING IN IN 2009 EXPIRING IN Carryforwards IN 2007 2008 2010 -------------------------------------------------------------------------------------------- S&P STARS $0 $0 $74,889,510 0 -------------------------------------------------------------------------------------------- Alpha Growth 393,572 0 1,828,927 0 (formerly, Focus List) -------------------------------------------------------------------------------------------- International 0 0 10,929,861 0 Equity -------------------------------------------------------------------------------------------- Income 291,562 0 0 291,562 0 Portfolio -------------------------------------------------------------------------------------------- High Yield 39,553,260 175,885 5,403,558 13,786,496 20,187,321 Portfolio --------------------------------------------------------------------------------------------
Under Code Sections 382 and 383, if a Portfolio has an ownership change, then the Portfolio's use of its capital loss carryforwards in any year following the ownership change will be limited to an amount equal to the net asset value of the Portfolio immediately prior to the ownership change multiplied by the long-term tax-exempt rate (which is published monthly by the Internal Revenue Service (the "IRS")) in effect for the month in which the ownership change occurs (the rate for July 2002 is ____%). The Portfolios will use their best efforts to avoid having an ownership change. However, because of circumstances which may be beyond the control or knowledge of a Portfolio, there can be no 71 assurance that a Portfolio will not have, or has not already had, an ownership change. If a Portfolio has or has had an ownership change, then the Portfolio will be subject to federal income taxes on any capital gain net income for any year following the ownership change in excess of the annual limitation on the capital loss carryforwards unless distributed by the Portfolio. Any distribution of such capital gain net income will be taxable to shareholders as described under "Portfolio Distributions," below. In addition to satisfying the Distribution Requirement, a regulated investment company must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies (the "Income Requirement"). In general, gain or loss recognized by a Portfolio on the disposition of an asset will be a capital gain or loss. In addition, gain will be recognized as a result of certain constructive sales, including short sales "against the box." However, gain recognized on the disposition of a debt obligation (including municipal obligations) purchased by a Portfolio at a market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount which accrued while the Portfolio held the debt obligation. In addition, under the rules of Code Section 988, gain or loss recognized on the disposition of a debt obligation denominated in a foreign currency or an option with respect thereto, and gain or loss recognized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, except for regulated futures contracts or non-equity options subject to Code Section 1256 (unless a Portfolio elects otherwise), generally will be treated as ordinary income or loss to the extent attributable to changes in foreign currency exchange rates. Further, the Code also treats as ordinary income a portion of the capital gain attributable to a transaction where substantially all of the expected return is attributable to the time value of a Portfolio's net investment in the transaction and: (1) the transaction consists of the acquisition of property by the Portfolio and a contemporaneous contract to sell substantially identical property in the future; (2) the transaction is a straddle within the meaning of Section 1092 of the Code; (3) the transaction is one that was marketed or sold to the Portfolio on the basis that it would have the economic characteristics of a loan but the interest-like return would be taxed as capital gain; or (4) the transaction is described as a conversion transaction in the Treasury Regulations. The amount of such gain that is treated as ordinary income generally will not exceed the amount of the interest that would have accrued on the net investment for the relevant period at a yield equal to 120% of the federal long-term, mid-term, or short-term rate, depending on the type of instrument at issue, reduced by the sum of: (1) prior inclusions of ordinary income items from the conversion transaction and (2) the capitalized interest on acquisition indebtedness under Code Section 263(g). However, if a Portfolio has a built-in loss with respect to a position that becomes a part of a conversion transaction, the character of such loss will be preserved upon a subsequent disposition or termination of the position. No authority exists that indicates that the character of the income treated as ordinary under this rule will not pass through to the Portfolios' shareholders. In general, for purposes of determining whether capital gain or loss recognized by a Portfolio on the disposition of an asset is long-term or short-term, the holding period of the asset may be affected (as applicable, depending on the type of the Portfolio involved) if (1) the asset is used to close a short sale (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Portfolio as part of a straddle (which term generally excludes a situation where the asset is stock and Portfolio grants a qualified covered call option 72 (which, among other things, must not be deep-in-the-money) with respect thereto), or (3) the asset is stock and the Portfolio grants an in-the-money qualified covered call option with respect thereto. In addition, a Portfolio may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position. Any gain recognized by a Portfolio on the lapse of, or any gain or loss recognized by a Portfolio from a closing transaction with respect to, an option written by the Portfolio will be treated as a short-term capital gain or loss. Certain transactions that may be engaged in by a Portfolio (such as regulated futures contracts, certain foreign currency contracts, and options on stock indexes and futures contracts) will be subject to special tax treatment as Section 1256 Contracts. Section 1256 Contracts are treated as if they are sold for their fair market value on the last business day of the taxable year, even though a taxpayer's obligations (or rights) under such Section 1256 Contracts have not terminated (by delivery, exercise, entering into a closing transaction, or otherwise) as of such date. Any gain or loss recognized as a consequence of the year-end deemed disposition of Section 1256 Contracts is taken into account for the taxable year together with any other gain or loss that previously was recognized upon the termination of Section 1256 Contracts during that taxable year. Any capital gain or loss for the taxable year with respect to Section 1256 Contracts (including any capital gain or loss arising as a consequence of the year-end deemed sale of such Section 1256 Contracts) generally is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. A Portfolio, however, may elect not to have this special tax treatment apply to Section 1256 Contracts that are part of a mixed straddle with other investments of the Portfolio that are not Section 1256 Contracts. A Portfolio may enter into notional principal contracts, including interest rate swaps, caps, floors, and collars. Treasury Regulations provide, in general, that the net income or net deduction from a notional principal contract for a taxable year is included in or deducted from gross income for that taxable year. The net income or deduction from a notional principal contract for a taxable year equals the total of all of the periodic payments (generally, payments that are payable or receivable at fixed periodic intervals of one year or less during the entire term of the contract) that are recognized from that contract for the taxable year and all of the non-periodic payments (including premiums for caps, floors, and collars) that are recognized from that contract for the taxable year. No portion of a payment by a party to a notional principal contract is recognized prior to the first year to which any portion of a payment by the counterparty relates. A periodic payment is recognized ratably over the period to which it relates. In general, a non-periodic payment must be recognized over the term of the notional principal contract in a manner that reflects the economic substance of the contract. A non-periodic payment that relates to an interest rate swap, cap, floor, or collar is recognized over the term of the contract by allocating it in accordance with the values of a series of cash-settled forward or option contracts that reflect the specified index and notional principal amount upon which the notional principal contract is based (or under an alternative method provided in the Treasury regulations). A Portfolio may purchase securities of certain foreign investment funds or trusts which constitute passive foreign investment companies ("PFICs") for federal income tax purposes. If a Portfolio invests in a PFIC, it has three separate options. First, it may elect to treat the PFIC as a qualified electing fund (a "QEF"), in which event the Portfolio will each year have ordinary income equal to its pro rata share of the PFIC's ordinary earnings for the year and long-term capital gain equal to its pro rata share of the PFIC's net capital gain for the year, regardless of whether the Portfolio receives distributions of any such ordinary earnings or capital gains from the PFIC. Second, a Portfolio that invests in stock of a PFIC may make a mark-to-market election with respect to such stock. Pursuant to such election, the Portfolio will include as ordinary income any excess of the fair market value of such stock at the close of any taxable year over the Portfolio's adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock 73 exceeds the fair market value of the stock at the end of a given taxable year, such excess will be deductible as ordinary loss in an amount equal to the lesser of the amount of such excess or the net mark-to-market gains on the stock that the Portfolio included in income in previous years. The Portfolio's holding period with respect to its PFIC stock subject to the election will commence on the first day of the next taxable year. If the Portfolio makes the mark-to-market election in the first taxable year it holds PFIC stock, it will not incur the tax described below under the third option. Finally, if a Portfolio does not elect to treat the PFIC as a QEF and does not make a mark-to-market election, then, in general, (1) any gain recognized by the Portfolio upon the sale or other disposition of its interest in the PFIC or any excess distribution received by the Portfolio from the PFIC will be allocated ratably over the Portfolio's holding period of its interest in the PFIC stock, (2) the portion of such gain or excess distribution so allocated to the year in which the gain is recognized or the excess distribution is received shall be included in the Portfolio's gross income for such year as ordinary income (and the distribution of such portion by the Portfolio to shareholders will be taxable as an ordinary income dividend, but such portion will not be subject to tax at the Portfolio level), (3) the Portfolio shall be liable for tax on the portions of such gain or excess distribution so allocated to prior years in an amount equal to, for each such prior year, (i) the amount of gain or excess distribution allocated to such prior year multiplied by the highest tax rate (individual or corporate) in effect for such prior year, plus (ii) interest on the amount determined under clause (i) for the period from the due date for filing a return for such prior year until the date for filing a return for the year in which the gain is recognized or the excess distribution is received, at the rates and methods applicable to underpayments of tax for such period, and (4) the distribution by the Portfolio to its shareholders of the portions of such gain or excess distribution so allocated to prior years (net of the tax payable by the Portfolio thereon) will be taxable to the shareholders as an ordinary income dividend. Treasury Regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) for any taxable year, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or any part of any net capital loss, any net long-term capital loss or any net foreign currency loss (including, to the extent provided in Treasury Regulations, losses recognized pursuant to the PFIC mark-to-market election) incurred after October 31 as if it had been incurred in the succeeding year. In addition to satisfying the requirements described above, a Portfolio must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of a Portfolio's taxable year, at least 50% of the value of the Portfolio's assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment companies, and securities of other issuers (provided that, as to each issuer, the Portfolio has not invested more than 5% of the value of the Portfolio's total assets in securities of each such issuer and the Portfolio does not hold more than 10% of the outstanding voting securities of each such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. government securities and securities of other regulated investment companies), or in two or more issuers which the Portfolio controls and which are engaged in the same or similar trades or businesses. Generally, an option (call or put) with respect to a security is treated as issued by the issuer of the security, not the issuer of the option. For purposes of asset diversification testing, obligations issued or guaranteed by certain agencies or instrumentalities of the U.S. government, such as the Federal Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, FNMA, GNMA, and the Student Loan Marketing Association, are treated as U.S. government securities. 74 If for any taxable year a Portfolio does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Portfolio's current and accumulated earnings and profits. Such distributions may be eligible for the dividends-received deduction ("DRD") in the case of corporate shareholders. Excise Tax on Regulated Investment Companies. A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of its ordinary taxable income for the calendar year and 98% of its capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year (a taxable year election )). (Tax-exempt interest on municipal obligations is not subject to the excise tax.) The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. For purposes of calculating the excise tax, a regulated investment company: (1) reduces its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year and (2) excludes foreign currency gains and losses and ordinary gains or losses arising as a result of a PFIC mark-to-market election (or upon the actual disposition of the PFIC stock subject to such election) incurred after October 31 of any year (or after the end of its taxable year if it has made a taxable year election) in determining the amount of ordinary taxable income for the current calendar year (and, instead, includes such gains and losses in determining the company's ordinary taxable income for the succeeding calendar year). Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that a Portfolio may in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability. Portfolio Distributions. Each Portfolio anticipates distributing substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income and treated as dividends for federal income tax purposes. Distributions attributable to dividends received by a Portfolio from domestic corporations will qualify for the 70% DRD for corporate shareholders only to the extent discussed below. Distributions attributable to interest received by a Portfolio will not, and distributions attributable to dividends paid by a foreign corporation generally should not, qualify for the DRD. Ordinary income dividends paid by a Portfolio with respect to a taxable year may qualify for the 70% DRD generally available to corporations (other than corporations such as S corporations, which are not eligible for the deduction because of their special characteristics, and other than for purposes of special taxes such as the accumulated earnings tax and the personal holding company tax) to the extent of the amount of dividends received by the Portfolio from domestic corporations for the taxable year. No DRD will be allowed with respect to any dividend (1) if it has been received with respect to any share of stock that the Portfolio has held for less than 46 days (91 days in the case of certain preferred stock) during the 90-day period (180-day period in the case of certain preferred stock) beginning on the date that is 45 days (90 days in the case of certain preferred stock) before the date on which such share becomes ex-dividend with respect to such dividend, excluding for this purpose, under the rules of Code section 246(c), any period during which the Portfolio has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or 75 otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such (or substantially identical) stock; (2) to the extent that the Portfolio is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property; or (3) to the extent the stock on which the dividend is paid is treated as debt-financed under the rules of Code Section 246A. Moreover, the DRD for a corporate shareholder may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the Portfolio or (2) by application of Code Section 246(b) which in general limits the DRD to 70% of the shareholder's taxable income (determined without regard to the DRD and certain other items). With respect to the Money Market Portfolio, International Equity Portfolio and the EMD Portfolio, only an insignificant portion of the Portfolio will be invested in stock of domestic corporations; therefore the ordinary dividends distributed by the Portfolio generally will not qualify for the DRD for corporate shareholders. A Portfolio may either retain or distribute to shareholders its net capital gain for each taxable year. Each Portfolio currently intends to distribute any such amounts. If net capital gain is distributed and designated as a capital gain dividend, it will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares or whether such gain was recognized by the Portfolio prior to the date on which the shareholder acquired his shares. The Code provides, however, that under certain conditions only 50% of the capital gain recognized upon a Portfolio's disposition of domestic qualified small business stock will be subject to tax. Conversely, if a Portfolio elects to retain its net capital gain, the Portfolio will be subject to tax thereon (except to the extent of any available capital loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain its net capital gain, it is expected that the Portfolio also will elect to have shareholders of record on the last day of its taxable year treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will be required to report his pro rata share of such gain on his tax return as long-term capital gain, will receive a refundable tax credit for his pro rata share of tax paid by the Portfolio on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit. Alternative Minimum Tax ("AMT") is imposed at the applicable rates in addition to, but only to the extent it exceeds, the regular income tax on the excess of the taxpayer's alternative minimum taxable income (AMTI) over an exemption amount. For purposes of the corporate AMT, the corporate DRD is not itself an item of tax preference that must be added back to taxable income or is otherwise disallowed in determining a corporation's AMTI. However, corporate shareholders generally will be required to take the full amount of any dividend received from a Portfolio into account (without a DRD) in determining their adjusted current earnings. Investment income that may be received by a Portfolio from sources within foreign countries may be subject to foreign taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle the Portfolio to a reduced rate of, or exemption from, taxes on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Portfolio's assets to be invested in various countries is not known. If more than 50% of the value of the Portfolio's total assets at the close of its taxable year consist of the stock or securities of foreign corporations, the Portfolio may elect to pass through to the Portfolio's shareholders the amount of foreign taxes paid by the Portfolio. If the Portfolio so elects, each shareholder would be required to include in gross income, even though not actually received, his pro rata share of the foreign taxes paid by the Portfolio, but would be treated as having paid his pro rata share of such foreign taxes and would therefore be allowed to either deduct such amount in computing taxable income or use such amount (subject to various Code limitations) as a foreign tax credit against federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each shareholder would treat as foreign 76 source income his pro rata share of such foreign taxes plus the portion of dividends received from the Portfolio representing income derived from foreign sources. No deduction for foreign taxes could be claimed by an individual shareholder who does not itemize deductions. Each shareholder should consult his own tax adviser regarding the potential application of foreign tax credit rules. Distributions by a Portfolio that do not constitute ordinary income dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any excess will be treated as gain from the sale of his shares, as discussed below. Distributions by a Portfolio will be treated in the manner described above regardless of whether such distributions are paid in cash or reinvested in additional shares of the Portfolio (or of another fund). Shareholders receiving a distribution in the form of additional shares will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date. In addition, if the net asset value at the time a shareholder purchases shares of a Portfolio reflects undistributed net investment income, recognized net capital gain, or unrealized appreciation in the value of the assets of the Portfolio, distributions of such amounts will be taxable to the shareholder in the manner described above, although such distributions economically constitute a return of capital to the shareholder. Ordinarily, shareholders are required to take distributions by a Portfolio into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such a month will be deemed to have been received by the shareholders (and paid by a Portfolio) on December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised annually as to the U.S. federal income tax consequences of distributions made (or deemed made) during the year. Each Portfolio will be required in certain cases to withhold and remit to the U.S. Treasury backup withholding taxes at the applicable rate on ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has failed to provide a correct taxpayer identification number, (2) who is subject to backup withholding for failure to report the receipt of interest or dividend income properly, or (3) who has failed to certify to the Portfolio that it is not subject to backup withholding or is an exempt recipient (such as a corporation). Sale or Redemption of Shares. The Money Market Portfolio seeks to maintain a stable net asset value of $1.00 per share; however, there can be no assurance that the Portfolio will be able to maintain such value. If the net asset value varies from $1.00 per share, and for all the Portfolios other than the Money Market Portfolio, a shareholder will recognize gain or loss on the sale or redemption of shares of a Portfolio (including an exchange of shares of a Portfolio for shares of another Portfolio) in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of the same Portfolio within 30 days before or after the sale or redemption. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of a Portfolio will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on such shares. For this purpose, the special holding period rules of Code Section 246(c)(3) and (4) (discussed above in connection with the DRD for corporations) generally will apply in determining the holding period of shares. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income. 77 If a shareholder (1) incurs a sales load in acquiring shares of a Portfolio, (2) disposes of such shares less than 91 days after they are acquired and (3) subsequently acquires shares of the Portfolio or another fund at a reduced sales load pursuant to a right acquired in connection with the acquisition of the shares disposed of, then the sales load on the shares disposed of (to the extent of the reduction in the sales load on the shares subsequently acquired) shall not be taken into account in determining gain or loss on such shares but shall be treated as incurred on the acquisition of the subsequently acquired shares. Foreign Shareholders. Taxation of a shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ( foreign shareholder ), depends on whether the income from a Portfolio is effectively connected with a U.S. trade or business carried on by such shareholder. If the income from a Portfolio is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends paid to such foreign shareholder will be subject to U.S. withholding tax at the applicable rate (or lower applicable treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign shareholder in the International Equity Portfolio, S&P STARS Portfolio, S&P STARS Opportunities Portfolio or Alpha Growth Portfolio may be subject to U.S. withholding tax at the applicable rate (or lower applicable treaty rate) on the gross income resulting from the Portfolio's election to treat any foreign taxes paid by it as paid by its shareholders, but may not be allowed a deduction against such gross income or a credit against the U.S. withholding tax for the foreign shareholder's pro rata share of such foreign taxes which it is treated as having paid. Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Portfolio, capital gain dividends, and amounts retained by the Portfolio that are designated as undistributed capital gains. If the income from a Portfolio is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends, and any gains realized upon the sale of shares of the Portfolio will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. In the case of foreign noncorporate shareholders, a Portfolio may be required to withhold U.S. federal income tax at the applicable rate on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Portfolio with proper notification of their foreign status. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Portfolio, including the applicability of foreign taxes. Effect of Future Legislation, State and Local Tax Considerations. The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this SAI. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect. Rules of state and local taxation of ordinary income dividends and capital gain dividends from regulated investment companies may differ from the rules for U.S. federal income taxation described above. Shareholders are urged to consult their tax advisers as to the consequences of these and other state and local tax rules affecting investment in the Portfolios. 78 DIVIDENDS -- MONEY MARKET PORTFOLIO The Money Market Portfolio's net investment income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Portfolio's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Portfolio and the general expenses (e.g. legal, accounting and trustees' fees) of the Trust prorated to the Portfolio on the basis of its relative net assets. Any realized short-term capital gains may also be distributed as dividends to Portfolio investors. The Trust uses its best efforts to maintain the NAV of the Money Market Portfolio at $1.00. As a result of a significant expense or realized or unrealized loss incurred by the Portfolio, the Portfolio's NAV may fall below $1.00. PORTFOLIO TRANSACTIONS Money Market Portfolio. Subject to the general control of the Board, the Adviser is responsible for, makes decisions with respect to, and places orders for all purchases and sales of portfolio securities for the Money Market Portfolio. The Adviser purchases portfolio securities for the Portfolio either directly from the issuer or from dealers who specialize in money market instruments. Such purchases are usually without brokerage commissions. In making portfolio investments, the Adviser seeks to obtain the best net price and the most favorable execution of orders. To the extent that the execution and price offered by more than one dealer are comparable, the Adviser may, in its discretion, effect transactions in portfolio securities with dealers who provide the Trust with research advice or other services. The Adviser may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from the Money Market Portfolio prior to their maturity at their original costs plus interest (interest may sometimes be adjusted to reflect the actual maturity of the securities) if the Adviser believes that the Portfolio's anticipated need for liquidity makes such action desirable. Certain dealers (but not issuers) have charged and may in the future charge a higher price for commercial paper where they undertake to repurchase prior to maturity. The payment of a higher price in order to obtain such an undertaking reduces the yield which might otherwise be received by the Portfolio on the commercial paper. The Board has authorized the Adviser to pay a higher price for commercial paper where it secures such an undertaking if the Adviser believes that the prepayment privilege is desirable to assure the Portfolio's liquidity and such an undertaking cannot otherwise be obtained. Investment decisions for the Money Market Portfolio are made independently from those for another of the other Portfolios or other investment company series or accounts managed by the Adviser. Such other accounts may also invest in the same securities as the Portfolio. When purchases or sales of the same security are made at substantially the same time on behalf of such other accounts, transactions are averaged as to price, and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each account, including the Portfolio. In some instances, this investment procedure may adversely affect the price paid or received by the Portfolio or the size of the position obtainable for the Portfolio. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Portfolio with those to be sold or purchased for such other accounts in order to obtain best execution. The Money Market Portfolio will not execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase agreements with Bear 79 Stearns or the Adviser or any of their affiliated persons (as defined in the 1940 Act), except as permitted by the SEC. In addition, with respect to such transactions, securities, deposits and agreements, the Portfolio will not give preference to service providers with which the Portfolio enters into agreements. The Money Market Portfolio may seek profits through short-term trading. The Portfolio's annual portfolio turnover will be relatively high, but brokerage commissions are normally not paid on money market instruments and the Portfolio turnover is not expected to have a material effect on its net income. The Portfolio's turnover rate is expected to be zero for regulatory reporting purposes. Fixed Income Funds. BSAM assumes general supervision over placing orders on behalf of each Portfolio for the purchase or sale of investment securities. Purchases and sales of portfolio securities usually are principal transactions. Fixed Income Fund portfolio securities ordinarily are purchased directly from the issuer or from an underwriter or a market maker for the securities. Usually no brokerage commissions are paid by the Fixed Income Funds for such purchases. Purchases of portfolio securities from underwriters include a commission or concession paid by the issuer to the underwriter and the purchase price paid to market makers for the securities may include the spread between the bid and asked price. Fixed Income Fund portfolio transactions are allocated to various dealers by its portfolio managers in their best judgment. Equity Funds. BSAM assumes general supervision over placing orders on behalf of each Equity Portfolio for the purchase or sale of investment securities, except that the Sub-Adviser assumes primary responsibility over placing orders on behalf of the International Equity Portfolio. Allocation of brokerage transactions, including their frequency, is made in the Advisers' best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by the Advisers and the Advisers' fees are not reduced as a consequence of the receipt of such supplemental information. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the applicable Adviser determines in good faith that such commission is reasonable in terms of the transaction or the overall responsibility of the Adviser to a Portfolio and its other clients and that the total commissions paid by the Portfolio will be reasonable in relation to the benefits to the Portfolio over the long-term. Such supplemental information may be useful to the applicable Adviser in serving each Equity Portfolio and the other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to each Equity Portfolio. Brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. In allocating brokerage commissions, BSAM may also take into consideration, consistent with applicable rules adopted by the NASD, the brokers' attitudes toward and interest in the sale of Portfolio shares in general and the marketing and sales support provided by such brokers to the Portfolios in particular. In such cases, BSAM may execute Portfolio trades (and trades for other accounts managed by BSAM) directly through broker-dealers that sell shares of the Portfolios or through other broker-dealers with which such selling broker-dealers have clearing arrangements. Large block trades may, in certain cases, result from two or more funds advised or administered by BSAM (including proprietary accounts) being engaged simultaneously in the purchase or sale of the same security. BSF has adopted policies and procedures to ensure that block trades are 80 allocated to various accounts in an equitable manner. Certain of BSAM's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to each Equity Portfolio for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, each Portfolio will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Foreign exchange transactions of each Equity Portfolio are made with banks or institutions in the interbank market at prices reflecting a mark-up or mark-down and/or commission. Allocation of Initial Public Offerings ("IPOs"). The International Equity Portfolio participates in the market for IPOs opportunistically. With respect to investment in large capitalization companies, the other Equity Funds do not generally participate in the market for IPOs because the portfolio management teams follow a disciplined screening process that excludes securities that do not meet stringent operating history, market capitalization, liquidity, price/earnings ratio, cash flow, position size and investment horizon criteria. Equity Funds that invest in small capitalization companies do occasionally participate in the IPO market, but the portfolio management team generally prefers companies with earnings histories and acceptable price multiples. The vast majority of IPOs allocated to BSAM are likely to be acquired by BSAM's private investment funds, which pay BSAM performance fee as well as asset-based fees for advisory services. These accounts are designed for aggressive investors seeking above-market returns who can tolerate virtually unrestricted investment strategies and the market risks, volatility, illiquidity, turnover and limited availability associated with IPOs. Additional Information About Portfolio Transactions. Prior to each quarterly meeting of the Board of Trustees of the Funds, BSAM will ascertain from the Bear Stearns block desk whether any transaction (other than agency cross trades) was executed during the quarter at a commission rate of less than 3(cent) a share for a customer other than the Funds and will report to the Funds' Board of Trustees the reason for such reduced commission rate. BSAM's head equity trader, in conjunction with the Funds' equity portfolio managers, continually reviews the performance of all of the broker-dealers who execute agency and over-the-counter transactions in equity securities for the Funds. The review criteria applicable to each broker-dealer include an appraisal of the execution capability of such broker-dealer based on the actual trades executed and the prices obtained therefor; the willingness of the broker-dealer to commit its own capital to complete transactions where necessary; the commissions charged by the broker-dealer relative to the commissions charged by other broker-dealers for similar transactions; the extent, timeliness and value of research and market information provided by the broker-dealer to BSAM's head equity trader and the portfolio managers of the Funds; the financial soundness of the broker-dealer; and the general responsiveness of the broker-dealer to BSAM's trading requirements. Each quarter, BSAM's head equity trader will record the results of the brokerage review in a report to BSAM's Best Execution Committee. BSAM's Best Execution Committee will pre-approve all soft-dollar arrangements with broker-dealers, including trial programs, BSAM may also execute trader through broker-dealer approval by the head trader. Each quarter, a comprehensive list of brokers used by BSAM will be presented for approval to the Best Execution Committee. The Board of Trustees of the Trust has considered the possibility of seeking to recapture for the benefit of the Portfolios brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Trust on behalf of a Portfolio to the Adviser. After considering all factors deemed relevant, the Board of Trustees made a determination not to seek such recapture. The Board will reconsider this matter from time to time. Portfolio Turnover. The portfolio turnover rate is a measure of the average buying and selling activity in a Portfolio. It refers to the percentage of the Portfolio that is bought and sold each year. 81 Portfolio turnover may vary from year to year as well as within a year. The following table shows the portfolio turnover rate for each Portfolio for the last three fiscal years ended March 31. PORTFOLIO TURNOVER RATES (LAST THREE FISCAL YEARS) - ---------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------- Income 241% 174% 158% - ---------------------------------------------------------------------------- High Yield 213% 123% 71% - ---------------------------------------------------------------------------- S&P STARS 111% 43% 55% - ---------------------------------------------------------------------------- S&P STARS 67% Opportunities - ---------------------------------------------------------------------------- Insiders Select 21% 99% 76% Fund - ---------------------------------------------------------------------------- Intrinsic 21% 60% 56% (formerly, Large Cap) - ---------------------------------------------------------------------------- Small Cap 76% 65% 66% - ---------------------------------------------------------------------------- Alpha Growth 82% 81% 56% (formerly Focus List) - ---------------------------------------------------------------------------- International 168% 168% 96% Equity - ---------------------------------------------------------------------------- In periods in which extraordinary market conditions prevail, the Advisers will not be deterred from changing investment strategy as rapidly as needed, in which case higher portfolio turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by the Advisers based upon their knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the SEC thereunder, the Board has determined that transactions for each Portfolio may be executed through Bear Stearns if, in the judgment of BSAM, the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in the transaction, Bear Stearns charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. In addition, Bear Stearns may directly execute such transactions for each Portfolio on the floor of any national securities exchange, provided (i) the Board has expressly authorized Bear Stearns to effect such transactions, and (ii) Bear Stearns annually advises the Board of the aggregate compensation it earned on such transactions. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. The following table shows the total brokerage commissions that each Portfolio paid during the last three fiscal years ended March 31 (including the amount paid to Bear Stearns) For the fiscal year ended March 31, 2002, the table also shows the percentage of total commissions paid to Bear Stearns and the percentage of total transactions effected through Bear Stearns. No brokerage commissions were paid by the Money Market or Income Portfolios for the following periods. 82 BROKERAGE COMMISSIONS - -------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------
% of total Total paid % paid to transactions Total paid Bear through Bear Total paid Stearns Stearns - ------------------------------------------------------------------------------------- S&P STARS Total $2,054,831 $3,481,189 $1,710,365 (Paid to Bear ($935,562) ($711,620) Stearns) - ------------------------------------------------------------------------------------- S&P STARS $44,874 Opportunities Total (Paid to Bear Stearns) - ------------------------------------------------------------------------------------- Insiders Select $25,681 Total $84,199 $127,168 (Paid to Bear ($7,771) ($26,124) Stearns) - ------------------------------------------------------------------------------------- Intrinsic $18,619 (formerly, $47,665 $42,449 Large Cap) ($5,039) ($996) Total (Paid to Bear Stearns) - ------------------------------------------------------------------------------------- Small Cap $199,937 Total $135,121 $88,939 (Paid to Bear ($30) ($4,560) Stearns) - ------------------------------------------------------------------------------------- Alpha Growth $32,355 (formerly, Focus List) Total $58,110 $58,642 (Paid to Bear ($36,494) ($58,642) Stearns) - ------------------------------------------------------------------------------------- International $0 Equity $711,560 $196,972 Total ($0) ($0) (Paid to Bear Stearns) - -------------------------------------------------------------------------------------
The following information shows the percentage of commissions for which a Portfolio received research services during the fiscal year ended March 31, 2002: S&P STARS Portfolio: __%; S&P STARS Opportunities Portfolio: __%; Insiders Select Fund: __%;Intrinsic (formerly Large Cap) Portfolio: __%; Small Cap Portfolio: __%; Alpha Growth (formerly, Focus List) Portfolio: __%; International Equity Portfolio: 96.70%. 83 PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Risk/Return Summary - -- Performance." Money Market Portfolio. The "yield" and "effective yield" of the Money Market Portfolio are calculated separately for each class of shares and in accordance with the formulas prescribed by the SEC. The seven-day yield for each class of shares in the Portfolio is calculated by determining the net change in the value of a hypothetical preexisting account in the Portfolio having a balance of one share of the class involved at the beginning of the period, dividing the net change by the value of the account at the beginning of the period to obtain the base period return, and multiplying the base period return by 365/7. The net change in the value of an account in the Portfolio includes the value of additional shares purchased with dividends from the original share and dividends declared on the original share and any such additional shares, net of all fees charged to all shareholder accounts in proportion to the length of the base period and the Portfolio's average account size, but does not include gains and losses or realized appreciation and depreciation. In addition, the effective annualized yield may be computed on a compounded basis (calculated as described above) with respect to each class of a Portfolio's shares by adding 1 to the base period return, raising the sum to a power equal to 365/7, and subtracting 1 from the result, according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1 Similarly, based on calculations described above, 30-day (or one-month) yields and effective yields may also be calculated. From time to time, in advertisements or in reports to investors, the Money Market Portfolio's yield may be quoted and compared to that of other money market funds or accounts with similar investment objectives and to stock or other relevant indices. For example, the yield of the Portfolio may be compared to the iMoneyNet Money Fund Average, which is an average compiled by iMoney Net Money Fund Report(R), One Research Drive, Westborough, Massachusetts 01581, a widely-recognized independent publication that monitors the performance of money market funds, or to the average yields reported by the Bank Rate Monitor from money market deposit accounts offered by the 50 leading banks and thrift institutions in the top five standard metropolitan statistical areas. The Money Market Portfolio's yield will fluctuate, and any quotation of yield should not be considered as indicative of its future performance. Since yields fluctuate, yield data cannot necessarily be used to compare an investment in Portfolio shares with bank deposits, savings accounts and similar investment alternatives which often provide an agreed or guaranteed fixed yield for a stated period of time. Investors should remember that performance and yield are generally functions of the kind and quality of the investments held in a portfolio, portfolio maturity, operating expenses net of waivers and expense reimbursements, and market conditions. Any fees charged by banks with respect to customer accounts investing in shares of the Portfolio will not be included in yield calculations; such fees, if charged, would reduce the actual yield from that quoted. Current Yield. The current yield for each class reflects the waiver and reimbursement of certain fees and expenses by the investment adviser. The current yield of a Fixed Income Fund is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: 84 YIELD =2[(a - b + 1)6 - 1] cd Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. The following table shows the current yield for the 30-day period ended March 31, 2002 for each class of shares of the Fixed Income Funds, with and without the fee waivers and expense reimbursements described in this SAI under "Management Arrangements -- Investment Advisory Agreement." CURRENT YIELD FOR THE 30-DAY PERIOD ENDED MARCH 31, 2002 - ------------------------------------------------------ Income High Yield - ------------------------------------------------------ With Without With Without waivers waivers waivers waivers - ------------------------------------------------------ Class A 4.47% 2.97% 8.08% 7.71% - ------------------------------------------------------ Class B 4.12% 2.53% 7.81% 7.41% - ------------------------------------------------------ Class C 4.11% 2.52% 7.82% 7.42% - ------------------------------------------------------ Class Y 5.17% 3.56% 8.82% 8.43% - ------------------------------------------------------ Average annual total return of each Portfolio for the 1-, 5-, and 10-year periods (or for periods of the Portfolio's operations) would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1+T)n = ERV Where P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion). A class' average annual total return figures calculated in accordance with such formula assume that in the case of Class A the maximum sales load has been deducted from the hypothetical initial investment at the time of purchase or in the case of Class B the maximum applicable CDSC has been paid upon redemption at the end of the period. Total return of each Portfolio is calculated by subtracting the amount of the Portfolio's NAV (maximum offering price in the case of Class A) per share at the beginning of a stated period from 85 the NAV at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the NAV (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the NAV at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class B and C shares. In such cases, the calculation would not reflect the deduction of the sales load with respect to Class A shares or any applicable CDSC with respect to Class B and C shares, which, if reflected, would reduce the performance quoted. Average Annual Total Returns After Taxes on Distributions. The "average annual total return after taxes on distributions" of a Portfolio is an average annual compounded return for each year in a specified number of years after taxes on fund distributions in each year. It is the rate of return ("T") based on the change in value of a hypothetical initial investment of $1,000 ("P") held for the number of years ("n") to achieve the ending value after taxes on distributions ("ATVD"), according to the following formula: P(1+T)n = ATVD The cumulative "total return after taxes on distributions" calculation measures the change in value of a hypothetical investment of $1,000 over an entire period greater than one year. Its calculation uses some of the same factors as average annual total return after taxes on distributions, but it does not average the rate of return on an annual basis. Total return after taxes on distributions is determined as follows: ATVD - P = Total Return After Taxes on Distributions P Total Returns After Taxes on Distributions and Redemptions. The "average annual total return after taxes on distributions and redemptions" of a Portfolio is an average annual compounded rate of return after taxes on distributions and redemption for each year in a specified number of years. It is the rate of return based on the change in value of a hypothetical initial investment of $1,000 ("P") held for a number of years ("n") to achieve an ending value at the end of the periods shown ("ATVDR"), according to the following formula: P(1+T)n = ATVDR The cumulative "total return after taxes on distributions and redemptions" calculation measures the change in value of a hypothetical investment of $1,000 over an entire period greater than one year. Its calculation uses some of the same factors as average annual total return after taxes on distributions and redemptions, but it does not average the rate of return on an annual basis. Total return after taxes on distributions is determined as follows: ATVDR - P = Total Return After Taxes on Distributions and Redemptions P CODE OF ETHICS Each of BSAM, the Sub-Adviser (collectively the "Advisers") and the Trust, on behalf of each Portfolio, has adopted a Code of Ethics, that establishes standards by which certain access persons of the Trust must abide relating to personal securities trading conduct. Under each Adviser's Code of Ethics, 86 access persons which include, among others, trustees and officers of the Trust and employees of the Advisers, are prohibited from engaging in certain conduct, including: (1) the purchase or sale of any security for his or her account or for any account in which he or she has any direct or indirect beneficial interest, without prior approval by the Trust or the applicable Adviser, as the case may be, or without the applicability of certain exemptions; (2) the recommendation of a securities transaction without disclosing his or her interest in the security or issuer of the security; (3) the commission of fraud in connection with the purchase or sale of a security held by or to be acquired by each Portfolio; and (4) the purchase of any securities in an initial public offering or private placement transaction eligible for purchase or sale by each Portfolio without prior approval by the Trust or the applicable Adviser, as the case may be. Certain transactions are exempt from item (1) of the previous sentence, including: (1) in the case of BSAM's Code of Ethics, any securities transaction, or series of related transactions, involving 500 or fewer shares of (i) an issuer with an average monthly trading volume of 100 million shares or more, or (ii) an issuer that has a market capitalization of $1 billion or greater; and (2) transactions in exempt securities or the purchase or sale of securities purchased or sold in exempt transactions. Each Code of Ethics specifies that access persons shall place the interests of the shareholders of each Portfolio first, shall avoid potential or actual conflicts of interest with each Portfolio, and shall not take unfair advantage of their relationship with each Portfolio. Under certain circumstances, the Adviser to each Portfolio may aggregate or bunch trades with other clients provided that no client is materially disadvantaged. Access persons of BSAM and the Sub-Adviser are required by the Code of Ethics to file quarterly reports of personal securities investment transactions. Access persons of the Sub-Adviser are required to preclear securities transactions for all non-exempt securities and transactions. An access person is not required to report a transaction over which he or she had no control. Furthermore, a trustee of the Trust who is not an "interested person" (as defined in the 1940 Act) of the Trust is not required to report a transaction if such person did not know or, in the ordinary course of his duties as a Trustee of the Trust, should have known, at the time of the transaction, that, within a 15-day period before or after such transaction, the security that such person purchased or sold was either purchased or sold, or was being considered for purchase or sale, by each Portfolio. Each Code of Ethics specifies that certain designated supervisory persons and/or designated compliance officers shall supervise implementation and enforcement of the Code of Ethics and shall, at their sole discretion, grant or deny approval of transactions required by the Code of Ethics. INFORMATION ABOUT THE TRUST S&P STARS and S&P STARS Opportunities Portfolios. BSAM has the right to use the S&P, Standard & Poor's and STARS trademarks for a fee in connection with the management of mutual funds and access to STARS through S&P's publicly available subscription service. Bear Stearns and S&P entered into a License Agreement that, among other things, (i) grants Bear Stearns the non-exclusive right to use certain of S&P's proprietary trade names and trademarks for investment companies based, in whole or in part, on the STARS System, (ii) gives S&P the right to terminate the Agreement if Bear Stearns breaches its material terms, S&P ceases to publish STARS, legislative or regulatory changes negatively affect S&P's ability to license its trade names or trademarks, or certain litigation, (iii) provides that Bear Stearns will pay to S&P annual license fees based on a percentage of the net assets of any investment companies subject to the Agreement and (iv) provides for a partial reduction of the license fees to offset certain marketing expenses incurred by Bear Stearns in connection with the Portfolio. STARS is the centerpiece of OUTLOOK, S&P's flagship investment newsletter that has a high net worth readership of 25,000 weekly subscribers. STARS reaches more than 74,000 brokers and investment professionals on their desktop computers through MarketScope, S&P's on-line, real-time equity evaluation service, which is accessed more than one million times daily. S&P has more than 130 87 years' experience in providing financial information and analysis, offers more than 60 products and employs more than 50 experienced equity analysts. These analysts consider fundamental factors that are expected to impact growth, including industry and macroeconomic conditions and a company's operations, balance sheet, ability to finance growth, competitive market advantages, earnings per share growth and strength of management. [UPDATE NUMBERS] "Standard & Poor's(R)," "S&P(R)," and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear Stearns. The S&P STARS and S&P STARS Opportunities Portfolios are not sponsored, managed, advised, sold or promoted by S&P. General. The Trust was organized as a business trust under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994, and commenced operations on or about April 3, 1995. The Trust is authorized to issue an unlimited number of shares of beneficial interest, par value $0.001 per share. Each Portfolio's shares are classified into four classes-Class A, B, C and Y. Each Portfolio share has one vote and, when issued and paid for in accordance with the terms of the offering, is fully paid and non-assessable. Shareholders will vote in the aggregate and not by class, except as otherwise required by law. Portfolio shares have no preemptive, subscription or conversion rights and are freely transferable. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Portfolio of which they are shareholders. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the relevant Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or a Trustee. The Trust Agreement provides for indemnification from the respective Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of a Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the Portfolio itself would be unable to meet its obligations, a possibility which the Adviser believes is remote. Upon payment of any liability incurred by a Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of such Portfolio. The Trustees intend to conduct the operations of each Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio. As discussed under "Management of the Trust," each Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Board has authorized the creation of eleven Portfolios. All consideration received by the Trust for shares of a Portfolio and all assets in which such consideration is invested will belong to that Portfolio (subject only to the rights of creditors of the Trust) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, a Portfolio (and as to classes within the Portfolio) are treated separately from those of the other Portfolios (and classes). The Trust has the ability to create, from time to time, new Portfolios without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Trust, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a Portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect 88 any interest of such portfolio. However, Rule 18f-2 exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of Rule 18f-2. The term "majority of the outstanding shares" of a Portfolio means the vote of the lesser of (i) 67% or more of the shares of the Portfolio present at a meeting, if the holders of more than 50% of the outstanding shares of the Portfolio are present or represented by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio. The Trust will send annual and semi-annual financial statements to all its shareholders. As of July __, 2002, the following shareholders owned, directly or indirectly, 5% or more of the indicated class of Portfolio shares. Unless otherwise noted, the Trust believes that the following information reflects record ownership only. - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- Alpha Growth The Bear Stearns Co Inc 29.01% (formerly Focus Cash Or Deferred Compensation Plan List) -- Class A Custodial Trust Co Attn Jonathan Brown Acct Ctrl 101 Carneige Ctr Princeton NJ 085406231 - -------------------------------------------------------------------------------- Alpha Growth Ed Blakey Investments LLC 5.52% (formerly Focus 1314 Bay Ridge Dr List) -- Class B Benton LA 71006-3482 - -------------------------------------------------------------------------------- High Yield Total Bear Stearns Securities Corp. 5.93% Return -- Class A FBO 030-46670-17 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 7.05% FBO 036-83982-10 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Fiserv Securities Inc 7.22% Fao 58900014 Attn Mutual Funds One Commerce Square 2005 Market St Ste 1200 Philadelphia PA 19103-7008 - -------------------------------------------------------------------------------- The Bear Stearns Co Inc 7.60% Cash Or Deferred Compensation Plan Custodial Trust Co Attn Jonathan Brown Acct Ctrl 101 Carneige Ctr Princeton NJ 085406231 - -------------------------------------------------------------------------------- 89 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- High Yield Total Bear Stearns Securities Corp 5.10% Return -- Class B FBO 062-20481-14 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- High Yield Total Bear Stearns Securities Corp 8.01% Return -- Class C FBO 030-46668-11 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- High Yield Total Bear Stearns Securities Corp 7.46% Return -- Class Y FBO 049-40312-14 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 8.15% FBO 049-41283-17 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 9.43% FBO 049-41550-13 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 28.50% FBO 049-41646-19 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Income -- Class A Bear Stearns Securities Corp 5.28% FBO 051-29339-12 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Raymond James & Assoc Inc 6.77% FBO Kaplan Mtd Part Bin# 16649148 880 Carillon Pkwy St Petersburg FL 33716 - -------------------------------------------------------------------------------- A G Edwards Sons Inc FBO 10.18% Consolidated Anti Aging Foundation Robin Ross A C 0125-239013 1 N Jefferson Ave Saint Louis MO 63103-2205 - -------------------------------------------------------------------------------- Income -- Class Y Bear Stearns Securities Corp. 5.11% FBO 051-37549-11 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- 90 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.35% FBO 051-39742-12 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 6.21% FBO 049-41474-16 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 6.37% FBO 049-41433-16 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 6.57% FBO 049-41549-17 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 6.70% FBO 049-41015-12 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 7.15% FBO 049-40715-17 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 7.40% FBO 049-41038-15 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Insider Select -- Bear Stearns Securities Corp. 6.73% Class Y FBO 051-90166-12 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.58% FBO 051-37353-16 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 8.84% FBO 748-51683-19 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- 91 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 14.29% FBO 722-90359-15 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 17.86% FBO 025-06755-19 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 18.83% FBO 048-33878-17 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp. 9.69% - -- Class A FBO 037-13145-19 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- The Bear Stearns Co Inc 27.56% Cash Or Deferred Compensation Plan Custodial Trust Co Attn Jonathan Brown Acct Ctrl 101 Carneige Ctr Princeton NJ 085406231 - -------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp. 7.07% - -- Class C FBO 028-62996-15 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 15.17% FBO 031-19222-15 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 20.01% FBO 062-30317-13 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp. 5.15% - -- Class Y FBO 049-40880-16 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.91% FBO 049-41550-13 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- 92 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- Wabanc Co 7.55% Div Cap Gain Reinv Attn Trust Operations PO Box 2127 Spokane WA 99210-2127 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 9.98% FBO 049-40311-15 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp 21.77% FBO 049-40312-14 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Wabanc Co 23.62% Div Cap Gain Reinv Attn Trust Operations PO Box 2127 Spokane WA 99210-2127 - -------------------------------------------------------------------------------- Intrinsic Value Bear Stearns Securities Corp. 5.11% (formerly Large Cap FBO 049-41433-16 Value) -- Class Y 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- The Bear Stearns Co Inc 60.17% FBO Profit Sharing Plan Custodial Trust Co Effective 5/1/94 115 S Jefferson Rd Whippany NJ 07981-1029 - -------------------------------------------------------------------------------- Prime Money Market Bear Stearns Securities Corp 5.19% FBO FBO 102-22708-29 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Louisiana Teachers Retirement 7.65% System C/O Custodial Trust Co 101 Carnegie Ctr Princeton NJ 08540-6231 - -------------------------------------------------------------------------------- S&P STARS -- Class A Charles Schwab & Co Inc 8.16% Spec A/C For Benefit Of Customers Attn Mutual Funds 101 Montgomery St San Francisco CA 94104-4122 - -------------------------------------------------------------------------------- 93 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- S&P STARS -- Class Y The Northern Trust Co 9.52% Trst The Mcgraw Hill Co Savings Plan Clt-Dv Dtd 03/01/1997 PO Box 92956 Chicago IL 60675-2956 - -------------------------------------------------------------------------------- The Bear Stearns Co Inc 11.03% FBO Profit Sharing Plan Custodial Trust Co Effective 5/1/94 115 S Jefferson Rd Whippany NJ 07981-1029 - -------------------------------------------------------------------------------- Custodial Trust Company 55.46% Attn Jonathan Brown Acct Ctrl 101 Carnegie Ctr Princeton NJ 08540-6231 - -------------------------------------------------------------------------------- S&P STARS Bear Stearns Securities Corp. 7.92% Opportunities -- FBO 049-40283-19 Class Y 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 9.43% FBO 037-01556-16 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 9.43% FBO 040-11498-10 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 19.16% FBO 049-41044-17 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 21.25% FBO 049-40887-19 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Small Cap Value -- Bear Stearns Securities Corp 5.83% Class Y FBO 049-41550-13 1 Metrotech Ctr North Brooklyn NY 11201-3870 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 6.84% FBO 049-40880-16 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- 94 - -------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - -------------------------------------------------------------------------------- Portfolio and Class Name and Address Percentage owned - -------------------------------------------------------------------------------- Fidelity Investments Inst'l Oper Co 8.29% Agent For Certain Employee Benefit Plans 100 Magellan Way Covington KY 41015-1987 - -------------------------------------------------------------------------------- Bear Stearns Securities Corp. 8.32% FBO 049-41297-11 1 Metrotech Center North Brooklyn NY 11201-3859 - -------------------------------------------------------------------------------- Robert Morris College 12.73% Endowment Account 724035728 Attn Ronald Arnold CFO 401 S State St Chicago IL 60605-1229 - -------------------------------------------------------------------------------- CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodian -- General. CTC, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the custodian for each Portfolio . Under a custody agreement, CTC holds each Portfolio's securities and keeps all necessary accounts and records. For its services, each Portfolio pays CTC an annual fee of the greater of 0.01% of $0 to $1 billion, 0.08% of $1 billion to $2 billion, 0.07% of $2 billion to $5 billion and 0.05% of the domestic assets over $5 billion held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges that are payable monthly. Foreign Custody. Rule 17f-5 under the 1940 Act, which governs the custody of investment company assets outside the United States, allows a mutual fund's board of directors to delegate to "Foreign Custody Managers" the selection and monitoring of foreign sub-custodian arrangements for the Trust's assets. Accordingly, the Board delegated these responsibilities to CTC pursuant to foreign custody manager agreements dated May 21, 2001. As Foreign Custody Manager, CTC will select the foreign subcustodians, contract with such foreign custodians and monitor the appropriateness of maintaining the Portfolios' assets with such foreign subcustodians. CTC must a) provide reports notifying the Board of the placement of a Portfolio's assets with a particular custodian of any material change in the Portfolio's arrangements and b) exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of Portfolio assets would exercise, or to adhere to a higher standard of care, in performing the delegated responsibilities. Transfer and Dividend Disbursing Agent. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC, nor PFPC participates in determining the investment policies of any Portfolio or which securities are to be purchased or sold by any Portfolio. 95 Counsel. Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022, is counsel for the Trust. Independent Auditors. Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281, independent auditors, are the independent auditors of the Trust. 96 FINANCIAL STATEMENTS The Trust's annual reports to shareholders for the fiscal year ended March 31, 2002 are separate documents supplied with this SAI, and the financial statements, accompanying notes and reports of independent auditors appearing therein are incorporated by reference into this SAI. Shareholders will also receive a copy of the Trust's unaudited semi-annual reports to shareholders on the Portfolios' overall performance, their current holdings and their investing strategies. 97 Appendix The following describes ratings assigned to money market funds by S&P and Moody's and to debt securities by S&P, Moody's, Fitch and Thomson BankWatch. S&P Money Market Fund Ratings Money market fund ratings assess the safety of invested principal. AAAm. Safety is excellent. Superior capacity to maintain principal value and limit exposure to loss. AAm. Safety is very good. Strong capacity to maintain principal value and limit exposure to loss. Am. Safety is good. Sound capacity to maintain principal value and limit exposure to loss. BBBm. Safety is fair. Adequate capacity to maintain principal value and limit exposure to loss. BBm. Safety is uncertain. Vulnerable to loss of principal value. Bm. Safety is limited. Very vulnerable to loss of principal value. CCCm. Extremely vulnerable to loss of principal value. Dm. Fund has failed to maintain principal value; realized or unrealized losses exceed 0.5% of net asset value. G. The letter "G" follows the rating symbol when a fund's portfolio consists primarily of direct U.S. government securities. Plus (+) or minus (-). The ratings may be modified by the addition of a plus or minus sign to show relative standing within the rating categories. A money market fund rating is not directly comparable with an S&P issue-specific rating due to differences in investment characteristics, rating criteria, and creditworthiness of portfolio investments. For example, a money market fund portfolio provides greater liquidity, price stability, and diversification than a long-term bond, but not necessarily the credit quality that would be indicated by the corresponding issue rating. Ratings are not commentaries on yield levels. A money market fund rating is not a recommendation to buy, sell, or hold any security held or issued by the fund, inasmuch as it does not comment as to yield or suitability for a particular investor. Further, the rating may be changed, suspended, or withdrawn as a result of changes in or unavailability of information relating to the fund. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. A-1 Moody's Money Market Fund Ratings Credit Quality Rating Definitions Moody's Money Market Fund Ratings are opinions of the investment quality of shares in mutual funds and similar investment vehicles which principally invest in short-term fixed income obligations. As such, these ratings incorporate Moody's assessment of a fund's published investment objectives and policies, the creditworthiness of the assets held by the fund, as well as the management characteristics of the fund. The ratings are not intended to consider the prospective performance of a fund with respect to appreciation, volatility of net asset value, or yield. The rating definitions are as follows: Aaa. Money market funds rated Aaa are judged to be of an investment quality similar to Aaa-rated fixed income obligations, that is, they are judged to be of the best quality. Aa. Money market funds rated Aa are judged to be of an investment quality similar to Aa-rated fixed income obligations, that is, they are judged to be of high quality by all standards. A. Money market funds rated A are judged to be of an investment quality similar to A-rated fixed income obligations, that is, they are judged to possess many favorable investment attributes and are considered as upper-medium-grade investment vehicles. Baa. Money market funds rated Baa are judged to be of an investment quality similar to Baa-rated fixed income obligations, that is, they are considered as medium-grade investment vehicles. Ba. Money market funds rated Ba are judged to be of an investment quality similar to Ba-rated fixed income obligations, that is, they are judged to have speculative elements. B. Money market funds rated B are judged to be of an investment quality similar to B-rated fixed income obligations, that is, they generally lack characteristics of desirable investment. S&P Bond Ratings AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA. Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A. Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. BBB. Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB, B, CCC, CC and C. Debt rated in these categories is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation, and C the highest degree of speculation. While such debt likely will have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. A-2 CI. The rating CI is reserved for income bonds on which no interest is being paid. D. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. S&P's letter ratings may be modified by the addition of a plus (+) or minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. S&P Commercial Paper Ratings A-1. The designation A-1 indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus sign (+) designation. A-2. Capacity for timely payment on issues with an A-2 designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. Moody's Bond Ratings Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa. Bonds rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what generally are known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A. Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa. Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba. Bonds that are rated Ba are judged to have speculative elements. Their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. A-3 B. Bonds that are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. Moody's Commercial Paper Ratings P-1. The rating Prime-1 (P-1) is the highest commercial paper rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of short-term promissory obligations, and ordinarily will be evidenced by leading market positions in well established industries, high rates of return on funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well established access to a range of financial markets and assured sources of alternate liquidity. P-2. Issuers (or relating supporting institutions) rated Prime-2 (P-2) have a strong capacity for repayment of short-term promissory obligations. This ordinarily will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Fitch Credit Ratings Long-Term Debt -- Investment Grade AAA. Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA. Very high credit quality. "AA" ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A. High credit quality. "A" ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB. Good credit quality. "BBB" ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. A-4 Long-Term Debt -- Speculative Grade BB. Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B. Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, CC, C. High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A "CC" rating indicates that default of some kind appears probable. "C" ratings signal imminent default. DDD, DD, D. Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. "DDD" obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. "DD" indicates potential recoveries in the range of 50%-90%, and "D" the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated "DDD" have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated "DD" and "D" are generally undergoing a formal reorganization or liquidation process; those rated "DD" are likely to satisfy a higher portion of their outstanding obligations, while entities rated "D" have a poor prospect for repaying all obligations. Short-Term Debt F1. Highest credit quality. Indicates the best capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature. F2. Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. F3. Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. B. Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions. C. High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment. D. Default. Denotes actual or imminent payment default. Notes: A-5 "+" or "--" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the "AAA" long-term rating category, to categories below "CCC" or to short-term ratings other than "F1." "NR" indicates that Fitch does not rate the issuer or issue in question. "Withdrawn": A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced. Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive," indicating a potential upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Thomson BankWatch Bond Ratings Thomson BankWatch assesses the likelihood of an untimely repayment of principal or interest over the term to maturity of long-term debt and preferred stock which are issued by U.S. commercial banks, thrifts and non-bank banks; non-U.S. banks; and broker-dealers. The following summarizes the two highest rating categories used by Thomson BankWatch for long-term debt ratings: AAA. This designation represents the highest category assigned by Thomson BankWatch to long-term debt and indicates that the ability to repay principal and interest on a timely basis is very high. AA. This designation indicates a superior ability to repay principal and interest on a timely basis with limited incremental risk versus issues rated in the highest category. A. The designation indicates the ability to repay principal and interest is strong. Issues rated "A" could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BBB. The lowest investment-grade category; indicates an acceptable capacity to repay principal and interest. "BBB" issues are more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BB. While not investment grade, the "BB" rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. B. Issues rated "B" show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis. CCC. Issues rated "CCC" clearly have a high likelihood of default, with little capacity to address further adverse changes in financial circumstances. CC. "CC" is applied to issues that are subordinate to other obligations rated "CCC" and are afforded less protection in the event of bankruptcy or reorganization. D. In default. A-6 PLUS (+) or MINUS (-). The ratings may include a plus or minus sign designation which indicates where within the respective category the issue is placed. Thomson BankWatch Short-Term Ratings Thomson BankWatch short-term ratings assess the likelihood of an untimely payment of principal or interest of debt having a maturity of one year or less. The following summarizes the two highest ratings used by Thomson BankWatch: TBW-1. This designation represents Thomson BankWatch's highest rating category and indicates a very high degree of likelihood that principal and interest will be paid on a timely basis. TBW-2. This designation indicates that while the degree of safety regarding timely payment of principal and interest is strong, the relative degree of safety is not as high as for issues rated TBW-1. A-7 THE BEAR STEARNS FUNDS PART C. OTHER INFORMATION Item 23. Exhibits (a)(1) Agreement and Declaration of Trust of Registrant dated September 29, 1994. (1) (a)(2) Amendment to Agreement and Declaration of Trust dated October 5, 1994. (1) (a)(3) Amendment to Agreement and Declaration of Trust dated May 4, 2000. (2) (b) By-Laws of Registrant dated March 24, 1995. (1) (c) The rights of holders of the securities being registered are set out in Articles III, V, VI, VII and VIII of the Agreement and Declaration of Trust, as amended, referenced in Exhibit (a) above, and in Article 11 of the By-Laws referenced in Exhibit (b) above. (d)(1) Amended and Restated Investment Advisory Agreement dated April 17, 2000 between Registrant and Bear Stearns Asset Management Inc. ("BSAM"). (2) (d)(2) Schedule I to Amended and Restated Investment Advisory Agreement, revised as of May 6, 2002. (d)(3) Amended and Restated Sub-Investment Advisory Agreement dated April 17, 2000 between BSAM and Marvin & Palmer Associates, Inc. ("Marvin & Palmer"), with respect to the International Equity Portfolio. (2) (e)(1) Distribution Agreement dated April 11, 1995 between Registrant and Bear, Stearns & Co. Inc. ("Bear Stearns").(3) (e)(2) Schedule I to the Distribution Agreement, as revised May 6, 2002. (f) None. (g)(1) Custody Agreement dated December 22, 1997 between Registrant and Custodial Trust Company ("CTC") (Exhibit B revised as of May 4, 2000). (2) (g)(2) Exhibit A to Custody Agreement, revised as of May 6, 2002. (g)(3) Amendment No. 1 to Custody Agreement dated as of May 3, 2001. (4) - --------------- (1) Incorporated by reference to Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. (2) Incorporated by reference to Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A filed electronically on July 20, 2000, accession number 0000950130-00-003961. (3) Incorporated by reference to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A filed electronically on July 28, 1998, accession number 0000922423-98-000722. (4) Incorporated by reference to Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A filed electronically on July 27, 2001, accession number 0000950130-01-503304. C-1 (g)(4) Amended and Restated Foreign Custody Manager Agreement with CTC dated May 3, 2001. (4) (g)(5) Exhibit A to Foreign Custody Agreement, as revised May 6, 2002. (h)(1) Form of Dealer Agreement. (h)(2) Form of Financial Institution Agency Agreement. (2) (h)(3) Administration Agreement dated February 22, 1995 between Registrant and BSAM, as revised April 11, 1995. (1) (h)(4) Schedule I to the BSAM Administration Agreement, as revised May 6, 2002. (h)(5) Fund Accounting and Administrative Services Agreement dated May 1, 2002 between Registrant and BISYS Fund Services Ohio, Inc. (i)(1) Opinion of Kramer Levin Naftalis & Frankel LLP regarding S&P STARS Opportunities Portfolio. (5) (i)(2) Opinion of Kramer Levin Naftalis & Frankel LLP regarding all Funds other than S&P STARS Portfolio. (2) (j)(1) Consent of Kramer Levin Naftalis & Frankel LLP. (j)(2) Consent of Deloitte & Touche LLP. (k) None. (l) None. (m)(1) Amended and Restated Distribution Plans dated April 17, 2000 for Class A, B and C shares of each Portfolio of Registrant, other than the Prime Money Market Portfolio. (2) (m)(2) Schedules I to Amended and Restated Distribution Plans, revised as of May 6, 2002. (m)(3) Form of Amended and Restated Shareholder Servicing Plan dated February 10, 1999 for Class A, B and C shares of each Portfolio of Registrant, other than the Prime Money Market Portfolio.(6) (m)(4) Schedule I to Amended and Restated Shareholder Servicing Plan, as of May 6, 2002. (n)(1) Rule 18f-3 Plan, as revised February 10, 1999. (3) (n)(2) Schedules A, B, and E to the Rule 18f-3 Plan, as revised May 6, 2002. - --------------- (5) Incorporated by reference to Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A filed electronically on June 6, 2001, accession number 0000922423-01-500306. (6) Incorporated by reference to Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A filed electronically on May 14, 1999, accession number 0000950130-99-002992. C-2 (p)(1) Code of Ethics of Registrant dated November 12, 1998 as revised August 3, 2000. (p)(2) Code of Ethics of BSAM dated November 12, 1998, as revised February 28, 2002. (p)(3) Code of Ethics of Marvin & Palmer, as revised August 2001. Certificate of Corporate Secretary. (1) Powers of Attorney of Peter M. Bren, Jr., Michael Minikes and M.B. Oglesby, Jr. (3) Powers of Attorney of Doni L. Fordyce, John S. Levy and Robert E. Richardson. (2) Item 24. Persons Controlled by or Under Common Control with the Trust Not Applicable Item 25. Indemnification Reference is made to Article VIII of Registrant's Agreement and Declaration of Trust (filed as an exhibit to Post-Effective Amendment No. 7 filed electronically on November 9, 1995). The application of these provisions is limited by Article 10 of Registrant's By-Laws (filed as Exhibit 2 to Registrant's Post-Effective Amendment No. 7 filed electronically on November 9, 1995, accession number 0000950130-95-002359 and incorporated herein by reference) and by the following undertaking set forth in the rules promulgated by the Securities and Exchange Commission: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Reference also is made to the Distribution Agreement previously filed as an exhibit to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A filed electronically on July 28, 1998. Item 26. Business and Other Connections of Investment Adviser Registrant is fulfilling the requirement of this Item 26 to provide a list of the officers and directors of BSAM, the investment adviser of Registrant, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by BSAM or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by BSAM (SEC File No. 801-29862). C-3 Item 27. Principal Underwriters (a) Bear Stearns also acts as principal underwriter or depositor for Managed Securities Plus Fund, Inc. (b) Set forth below is a list of each executive officer and director of Bear Stearns. All Directors and Executive Officers are also Senior Managing Directors. The principal business address of each such person is 383 Madison Avenue, New York, New York 10179, except as set forth below. Name Positions and Offices with Bear Stearns - ----- ---------------------------------------- Executive Officers - ------------------- James K. Casper Broker-Officer, Assistant Secretary Allen B. Holeman Chief Compliance Officer Mark E. Lehman General Counsel, Chief Legal Officer, Executive Vice President James E. Cayne Chairman of the Board, Chief Executive Officer E. John Rosenwald Jr. Vice-Chairman of the Board Michael L. Tarnopol Vice-Chairman of the Board Bruce E. Geismar Chief Operations Officer Alan D. Schwartz Co-President, Co-Chief Operating Officer Warren J. Spector Co-President, Co-Chief Operating Officer Samuel L. Molinaro Jr. Chief Financial Officer Michael J. Abatemarco* Controller Samuel L. Molinaro Jr. Executive Vice President Kenneth L. Edlow Secretary Michael Minikes Treasurer Jeffrey M. Lipman Assistant Secretary Marc H. Feuer Assistant Treasurer Robert J. Schwartz Assistant Treasurer Directors - --------- Steven L. Begleiter Kathryn R. Booth Denis A. Bovin James E. Cayne Peter D. Cherasia Ralph R. Cioffi Barry J. Cohen Bruce E. Geismar Alan C. Greenberg Daniel L. Keating Mark E. Lehman David A. Liebowitz Richard R. Lindsey Bruce M. Lisman Ronald N. Livney Jeffrey Mayer Steven D. Meyer Michael Minikes Samuel L. Molinaro Jr. Fares D. Noujaim Craig M. Overlander Aldo Parcesepe Stephen E. Raphael E. John Rosenwald Jr. Alan D. Schwartz Warren J. Spector Robert M. Steinberg Donald Wei Tang Michael L. Tarnopol Michael J. Urfirer Jeffrey H. Urwin Eli Wachtel
Director Emeritus - ----------------- John H. Slade - --------------- * Mr. Abatemarco's principal address is 1 Metrotech Center North, Brooklyn, New York 11201-3859 C-4 Item 28. Location of Accounts and Records 1. Bear Stearns Funds Management Inc 383 Madison Avenue New York, New York 10179 (records relating to operations of Registrant) 2. The Bear Stearns Funds 383 Madison Avenue New York, New York 10179 (records relating to Registrant) 3. Bear Stearns Asset Management Inc. 383 Madison Avenue New York, New York 10179 (advisory records) 4. Custodial Trust Company 101 Carnegie Center Princeton, New Jersey 08540 (records of Registrant and BSAM) 5. PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, Delaware 19809 (certain shareholder records) 6. Marvin & Palmer Associates, Inc. 1201 North Market Street, Suite 2300 Wilmington, Delaware 19801-2545 (records relating to its function as investment sub-adviser for the International Equity Portfolio) 7. BISYS Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, Ohio 43219 (certain accounting and financial records) Item 29. Management Services Not Applicable Item 30. Undertakings None. C-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this post-effective amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 29th day of May, 2002. THE BEAR STEARNS FUNDS (Registrant) By:/s/ Doni L. Fordyce ----------------------------------- Doni L. Fordyce President and Trustee Pursuant to the requirements of the Securities Act of 1933, this post-effective amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated. /s/ Doni L. Fordyce President and Trustee - --------------------------- Doni L. Fordyce /s/ Frank J. Maresca Vice President and - --------------------------- Treasurer Frank J. Maresca (Principal Financial and Accounting Officer) * Trustee - --------------------------- Peter M. Bren * Trustee - --------------------------- John S. Levy * Trustee - --------------------------- Michael Minikes * Trustee - --------------------------- Robert E. Richardson * Trustee - --------------------------- M.B. Oglesby, Jr. * Trustee - --------------------------- Robert M. Steinberg By: /s/ Frank J. Maresca - --------------------------- Frank J. Maresca, Attorney-in-Fact C-6 THE BEAR STEARNS FUNDS INDEX TO EXHIBITS EX-99.d Schedule I to Amended and Restated Investment Advisory Agreement, revised as of May 21, 2001. EX-99.e Schedule I to the Distribution Agreement, as revised May 6, 2002. EX-99.g(1) Exhibit A to Custody Agreement, revised as of May 6, 2002. EX-99.g(2) Exhibit A to Foreign Custody Agreement, as revised May 6, 2002. EX-99.h(1) Form of Dealer Agreement. EX-99.h(2) Schedule I to the BSAM Administration Agreement, as revised May 6, 2002. EX-99.h(3) Fund Accounting and Administrative Services Agreement dated May 1, 2002 between Registrant and BISYS Fund Services Ohio, Inc. EX-99.j(1) Consent of Kramer Levin Naftalis & Frankel LLP. EX-99.j(2) Consent of Deloitte & Touche LLP. EX-99.m(1) Schedules 1 to Amended and Restated Distribution Plans, revised as of May 6, 2002. EX-99.m(2) Schedule I to Amended and Restated Shareholder Servicing Plan, as of May 6, 2002. EX-99.n Schedules A, B, and E to the Rule 18f-3 Plan, as revised May 6, 2002. EX-99.p(1) Code of Ethics of Registrant dated November 12, 1998 as revised August 3, 2000. EX-99.p(2) Code of Ethics of BSAM dated November 12, 1998, as revised February 28, 2002. EX-99.p(3) Code of Ethics of Marvin & Palmer, as revised August 2001. EX-99.D 4 kl05044_ex99d.txt SCHEDULE 1 TO INVESTMENT ADVISORY AGREEMENT SCHEDULE 1 To Amended and Restated Investment Advisory Agreement dated April 17, 2000 between The Bear Stearns Funds and Bear Stearns Asset Management Inc. Annual Fee as a Percentage Name of Series of Average Daily Net Assets - ------------------------------------ ---------------------------- Alpha Growth Portfolio 0.65% High Yield Total Return Portfolio 0.60% Income Portfolio 0.45% International Equity Portfolio 1.00% Intrinsic Value Portfolio 0.75% Prime Money Market Portfolio 0.20% S&P STARS Opportunities Portfolio 0.75% S&P STARS Portfolio 0.75% Small Cap Value Portfolio 0.75% The Insiders Select Fund See Schedule 2 Amended as of May 6, 2002 EX-99.E 5 kl05044_ex99e.txt SCHEDULE I TO DISTRIBUTION AGREEMENT SCHEDULE I TO DISTRIBUTION AGREEMENT DATED FEBRUARY 22, 1995 (AS REVISED APRIL 11 1995) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. Must be Name of Series Last Approved Approved By - --------------------------- ------------- --------------- Alpha Growth Portfolio February 28, 2002 March 31, 2003 High Yield Total Return Portfolio February 28, 2002 March 31, 2003 Income Portfolio February 28, 2002 March 31, 2003 Intrinsic Value Portfolio February 28, 2002 March 31, 2003 International Equity Portfolio February 28, 2002 March 31, 2003 Prime Money Market Portfolio February 28, 2002 March 31, 2003 S&P STARS Opportunities Portfolio February 28, 2002 March 31, 2003 S&P Stars Portfolio February 28, 2002 March 31, 2003 Small Cap Value Portfolio February 28, 2002 March 31, 2003 The Insiders Select Portfolio February 28, 2002 March 31, 2003 As amended May 6, 2002. EX-99.G(1) 6 kl05044_ex99g1.txt EXHIBIT A TO CUSTODY AGREEMENT. EXHIBIT A TO THE CUSTODY AGREEMENT DATED DECEMBER 22, 1997 BETWEEN THE BEAR STEARNS FUNDS AND CUSTODIAL TRUST COMPANY The Bear Stearns Funds Portfolios Alpha Growth Portfolio High Yield Total Return Portfolio Income Portfolio International Equity Portfolio Intrinsic Value Portfolio Prime Money Market Portfolio S&P STARS Opportunities Portfolio S&P Stars Portfolio Small Cap Value Portfolio The Insiders Select Portfolio Amended as of May 6, 2002 EX-99.G (2) 7 kl05044_ex99g2.txt EXHIBIT A TO FOREIGN CUSTODY MANAGER AGREEMENT. EXHIBIT A TO FOREIGN CUSTODY MANAGER AGREEMENT DATED NOVEMBER 12, 1998 BETWEEN THE BEAR STEARNS FUNDS AND CUSTODIAL TRUST COMPANY Name of Fund Custody Agreement dated Alpha Growth Portfolio June 23, 1997 High Yield Total Return Portfolio December 22, 1997 Income Portfolio December 22, 1997 International Equity Portfolio December 22, 1997 Intrinsic Value Portfolio February 22, 1995 S & P STARS Portfolio December 22, 1997 S&P STARS Opportunities Portfolio December 22, 1997 Small Cap Value Portfolio December 22, 1997 The Insiders Select Portfolio June 7, 1995 As revised May 6, 2002. EX-99.H(1) 8 kl05044_ex99h1.txt FORM OF DEALER AGREEMENT THE BEAR STEARNS FUNDS DEALER AGREEMENT ___________________ Bear, Stearns & Co. Inc. ("Bear Stearns") has entered into a distribution agreement (the "Distribution Agreement"), dated February 22, 1995, as amended, with The Bear Stearns Funds (the "Trust") in which Bear Stearns has agreed to act as distributor (the "Distributor") of shares of each series ("Series") of the Trust. For purposes of this Agreement, the term ("Shares") shall mean the authorized shares of the relevant Series (or "Class" thereof) of the Trust. This Dealer Agreement shall herein be referred to as the "Agreement." For purposes of this Agreement, "Bear Stearns" shall mean Bear, Stearns & Co. Inc. in our capacity as Distributor. 1. Role of Bear Stearns. Pursuant to the Distribution Agreement, we have agreed to use our best efforts to make arrangements for securities dealers ("Authorized Dealers") which can make the representation set forth in Section 6 of this Agreement to solicit from the public orders to purchase Shares. This will confirm our mutual agreement as to the terms and conditions applicable to your participation as an Authorized Dealer. You understand (a) that we may, at any time at our option, act as an Authorized Dealer, (b) that we are seeking to enter into this Agreement in counterparts with you and certain other securities dealers, which also may act as Authorized Dealers, (c) that, except as we may otherwise agree with you, we may enter into agreements (which may or may not be the same as this Agreement) with other Authorized Dealers, (d) that the Trust and we may modify, suspend, terminate or withdraw entirely the offering of Shares at any time without giving notice to you pursuant to Section 16 and without incurring any liability or obligation to you, (e) that we may, upon notice, change the public offering price, sales load, or dealer allowance or modify, cancel or change the terms of this Agreement, and (f) we shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. All purchases of Shares from, and redemptions of Shares by, the Trust shall be effected through us acting on behalf of the Trust. You understand that we shall have no obligation to sell Shares to you at such times as we are not acting as Distributor for the Shares. 2. Role of Authorized Dealers. (a) As an Authorized Dealer, you shall have no obligation to purchase or sell or to solicit the purchase or sale of Shares. As, when and if you determine to purchase Shares or you receive a customer order for the purchase of Shares and you determine to accept such order, you shall comply with the procedures for the purchase of Shares set forth in the relevant Prospectus and Statement of Additional Information (the "SAI") as most currently amended or supplemented. The procedure relating to the handling of orders shall be subject to such further instructions as we shall forward to you in writing from time to time. (b) You agree to offer Shares to the public at the then-applicable public offering price and subject to the minimum investment amount set forth in the relevant Prospectus and SAI, subject to any waivers or reductions of sales load (the "Sales Load") or dealer allowances (the "Dealer Allowances") as described in the relevant Prospectus and SAI as amended from time to time. Any amendment to a Prospectus and SAI which affects the Sales Load, Dealer Allowances, waivers or discounts shall not affect the Sales Load, Dealer Allowances, discounts or waivers with respect to sales on which orders have been accepted by us prior to the date of notice of such amendment. Your placement of an order for Shares after the date of any notice of such amendment shall conclusively evidence your agreement to be bound thereby. The Trust and Bear Stearns reserve the right to modify any minimum investment requirements, subsequent investment requirements, the manner in which Shares are offered and the Sales Load rates applicable to future purchase of Shares. You also acknowledge that the amounts charged to the public upon purchase or redemption of Shares may include such transaction fees ("Transaction Fees") as may be described in the relevant Prospectus and SAI. In addition, you may make available Shares through a "no transaction fee" program, to the extent permitted in the relevant Prospectus and SAI. Bear Stearns shall make a reasonable effort to notify you of any redetermination or suspension of the public offering price of any shares, but Bear Stearns shall be under no liability for failure to do so. Reduced Sales Loads also may be available as a result of a cumulative discount or pursuant to a right of accumulation as set forth in the relevant Prospectus and SAI. You agree to advise us promptly as to the amounts of any sales made by you to the public qualifying for reduced Sales Loads. (c) You agree to purchase Shares from us only to cover purchase orders already received from your customers, or for your own bona fide investment. You will not withhold placing with us orders received from your customers so as to profit yourself or your customers as a result of such withholding. All orders for Shares are subject to acceptance or rejection by Bear Stearns or the Trust in the sole discretion of either. (d) In purchasing Shares through us, you shall rely solely on the representations contained in the relevant Prospectus and SAI and any advertising or supplemental sales material that we provide to you. You agree not to use other advertising or sales material relating to the Series, unless approved in writing by us in advance of such use. We will indemnify you and hold you harmless as to any representations made in the then-current Prospectus, SAI and any other supplemental material which we supply to you and you have not altered. You will not furnish to any person any information relating to the Shares, the Trust, any Series or us that is inconsistent with information contained in the relevant Prospectus and SAI, or any printed information issued by the Trust or us as information supplemental to such Prospectus and SAI or cause any advertisement to be published or posted without our consent and the consent of the Trust. (e) In all sales of Shares to the public, you shall act as dealer for your own account, whether as agent or principal. Nothing herein shall be deemed to constitute you or any other Authorized Dealer as agent for the Trust, us, or any other Authorized Dealer. You agree not to act as our agent and not to claim to act as our agent or as agent of any of the foregoing. You shall be deemed to be an independent contractor and you shall have no authority to act for or represent the Trust. You will not act as an "underwriter" or "distributor" of Shares, as those terms are used in the Investment Company Act of 1940, as amended (the "Investment Company Act"), the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder. You agree to buy Shares only through us and not from any other source and to sell Shares only to us, as the Trust's redemption agent, and not to any other purchaser. 2 (f) You agree to accept orders for the redemption of Shares and to transmit to the Trust such orders and all additional material required to complete the redemption as described in the relevant Prospectus and SAI. (g) You agree that we shall have full authority to act upon your express instructions to repurchase or exchange Shares through us on behalf of your customers under the terms and conditions provided in the relevant Prospectus and SAI. You agree to hold us, our parent company, subsidiaries, affiliates and their respective officers, directors, employees and agents harmless as a result of any action taken with respect to authorized repurchases or exchanges upon your express instructions. (h) Neither we, our affiliates nor any of the Series shall be liable for any loss, expense, damages, costs or other claim arising out of any redemption or exchange pursuant to telephone instructions from any person or our refusal to execute such instructions for any reason. 3. Compensation. (a) You will be entitled to receive that portion of the Sales Load allocated to Authorized Dealers as set forth in the relevant Prospectus and SAI in connection with purchases of Shares effected by or through you. You acknowledge that the relevant Prospectus and SAI will set forth a description of waivers or reduction of the Sales Load in certain cases and you hereby waive such portion of the Sales Load otherwise allocated to you. We will promptly remit or cause to be remitted to you, by wire transfer of same day funds to an account you shall designate, that portion of the Sales Load or Transaction Fees, if any, to which you are entitled, after deduction of the portion allocated to us, which was received by us and not yet paid to you. (b) If payment in Federal Funds is not received by the third business day after the execution of the order, Bear Stearns reserves the right, without any notice, to cancel the sale and to hold you responsible for any loss, including loss of profits, suffered by Bear Stearns or by the Trust resulting from such failure. 4. Orders and Payment for Shares. Upon receipt from you of any order to purchase Shares and, if a new account, receipt of a fully executed Account Information Form, we shall confirm such order to you in writing or by wire to be followed by a confirmation in writing. If any such orders are faxed to the Transfer Agent, they must be transmitted no later than 4:00 p.m. Eastern Time. Any faxes sent to the Transfer Agent must be followed with a phone call to confirm receipt. Additional instructions may be forwarded to you from time to time. Payment for Shares ordered from us shall be made in Federal Funds and must be received by the Trust's Transfer Agent, within three business days of a receipt and acceptance by us of an order. You agree that before transmitting investors' funds, you will comply with Rule 15c2-4 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 5. Blue Sky Registration. The Trust has registered an indefinite number of Shares under the Securities Act. Upon application by you, we shall inform you as to any advice received by us concerning the jurisdictions in which the Shares have been registered for offer or sale or are exempt under the securities or blue sky laws of such jurisdictions, but we assume no obligation or responsibility as to your right to offer or sell Shares in any jurisdiction (other than under the federal laws of the United States). You agree to offer shares only in those states in 3 which the Shares are registered for offer or sale or exempt under the securities or blue sky laws of such state. You acknowledge that you will not offer or sell Shares outside the United States, its territories or its possessions, in contravention of the laws of such foreign jurisdictions. 6. Representations, Warranties and Undertakings. You represent and warrant to and undertake that: (a) You are familiar with Securities Act Release No. 4968 (April 24, 1969), Rule 15c2-8 under the Exchange Act, Section 4(3) of Securities Act and Section 24(d) of the Investment Company Act relating to the distribution and delivery of preliminary and final prospectuses and will comply therewith. You will deliver thereafter to any customer whose Shares you are holding as record holder copies of the annual and interim reports and proxy solicitation materials relating to the Shares. (b) You agree to keep an accurate record of distributions (including dates, number of copies and persons to whom sent) of copies of any Prospectus (and any SAI) for each Series of the Trust (or any amendment or supplement) and, promptly upon request by Bear Stearns, to bring all subsequent changes to such Prospectus to the attention of anyone to whom such material shall have been distributed. You further agree to furnish to persons who receive a confirmation of sale of shares of any Series of the Trust a copy of the relevant Prospectus for such Series of the Trust filed pursuant to Rule 497 under the Securities Act. You further agree to furnish a copy of the relevant SAI to anyone who requests it within three business days of your receipt of the request. (c) You will make all reasonable efforts to obtain proxies from such purchasers whose Shares you are holding as record holder. Additional copies of a Series' Prospectuses, SAI, annual or interim reports, proxy solicitation materials and any other printed information supplemental to such material will be supplied as reasonably requested. (d) You are a broker-dealer registered with the Securities and Exchange Commission (the "SEC") and a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or, in the alternative, you are a foreign dealer or bank, not required to be registered as a broker-dealer with the SEC and not required or eligible to be a member of the NASD. (e) You agree that in making sales of one or more Classes of Shares of each Series of the Trust, you will take full responsibility for the suitability and proper supervision of mutual fund recommendations, solicitations and sales to your customers and to ensure that your customers are aware of the advantages and disadvantages of selecting one class of Shares over other classes of Shares and are aware of the different methods of mutual fund financing. If you are an NASD member, you will comply with all applicable rules of the NASD, including without limitation, rules pertaining to the opening, approval, supervision and monitoring of customer accounts, the NASD's Interpretation with Respect to Free-Riding and Withholding and Sections 2730, 2740 and 2750 of the NASD's Conduct Rules. If you are an unregistered foreign dealer or bank, you agree not to offer or sell, or to agree to offer or sell, directly or indirectly, any shares to any party to whom such shares may not be sold (unless the seller is so registered and a member of the NASD), and in making sales of such shares you agree to comply with the NASD's 4 Interpretation with Respect to Free-Riding and Withholding and Sections 2730, 2740 and 2750 of the NASD's Conduct Rules as though you were a member in good standing of the NASD and to comply with Section 2420 of such Conduct Rules as it applies to a nonmember broker or dealer in a foreign country. You agree to abide by all other Rules and Regulations of the NASD, including Section 2830 of its Conduct Rules, and all applicable state and federal laws, rules and regulations. Your acceptance also constitutes a representation that you have been duly authorized by proper corporate or partnership action to enter into this Agreement and to perform your obligations hereunder. You will not accept any orders from any broker, dealer or financial institution that is purchasing Shares from you with a view toward distribution unless you have obtained such person's or entity's written consent to be bound by the terms of this Agreement. (f) You shall not directly or indirectly offer, adopt, implement, conduct or participate in (or permit any of your affiliates or any officer, director, employee, partner or shareholder of you or any affiliate to directly or indirectly offer, adopt, implement, conduct or participate in) any program, plan, arrangement, advice or strategy that we or the Trust deem to be harmful to the shareholders of a Series or potentially disruptive to the management of the Series, including without limitation, any activity involving market timing, programmed transfer, frequent transfer and similar investment programs, whether involving a single investor or group of investors and whether conducted under powers of attorney or otherwise (as the case may be, a "Disruptive Activity.") We reserve the right to cancel any order for Shares, or, at out option, sell the Shares ordered back to a Series if we determine in our sole discretion that such transaction may have been undertaken pursuant to a Disruptive Activity without any responsibility or liability on our part or on the part of the Series, and you will be responsible for any loss, including loss of profit, suffered by the Series resulting therefrom. No concessions will be due and payable in connection with any such transaction, and upon demand you will promptly remit to us any concessions previously paid in connection with such transaction. You will use your best efforts to cooperate with us to identify and prevent Disruptive Activities. (g) You undertake to comply, with respect to your offering of Shares to the public pursuant to this Agreement, with all applicable provisions of the Securities Act, the Exchange Act, the Investment Company Act, the rules and regulations under these Acts, any applicable state laws and with applicable rules of the NASD. (h) You represent, warrant and undertake that any compensation payable to you hereunder (i) will be disclosed to your customers; (ii) will be authorized by your customers; (iii) will not result in an excessive fee to you; and (iv) will not result in any "prohibited transaction" under the Employee Retirement Income Security Act of 1974, as amended. In addition, if an issue relating to a Class' 12b-1 Plan (as defined below) is submitted for shareholder approval, you will vote any Shares held for your own account in the same proportion as the vote of the Shares held by your customers on such issue. You further represent that in effecting the purchase or redemption of Shares in accordance with the terms of this Agreement: (i) you shall act solely as agent for the account of your customer; (ii) purchases or redemptions of Shares shall be initiated solely upon the instruction and order of your customer; (iii) the customer will have full beneficial ownership of any Shares purchased upon its authorization and order; and (iv) all transactions shall be for the account of the customer and under no circumstances for your account, and shall be without recourse to you. Under no circumstances will you make any oral or written representations to the contrary. 5 (i) You agree that you will maintain adequate policies and procedures in compliance with applicable laws and regulations to protect against money laundering. At least annually, you will send us a written certification that you are in compliance with such policies procedures. 7. l2b-1 Plan. Those Series or Classes set forth as having a l2b-1 Plan have adopted a plan pursuant to Rule l2b-1 under the Investment Company Act (a "12b-1 Plan") as described in the relevant Prospectus and SAI. To the extent you provide services of the type contemplated by a 12b-1 Plan, you may be entitled to receive compensation from us as set forth in that Plan. To the extent that you are entitled to receive compensation under this Agreement pursuant to a 12b-1 Plan, such compensation shall be payable to you only to the extent that we receive funds therefor from the Trust. We shall provide quarterly reports to the Trust's Board of Trustees reports of the amounts expended pursuant to the 12b-1 Plans and the purposes for which such expenditures were made. In addition, you shall furnish us with such other information as shall reasonably be requested by the Board of Trustees of the Trust with respect to the fees paid to you pursuant to this Agreement. 8. Shareholder Servicing Plan. Those Series or Classes set forth as having a Shareholder Servicing Plan have adopted such plan as described in the relevant Prospectus and SAI. To the extent that you provide services of the type contemplated by the Shareholder Servicing Plan, you may be entitled to receive compensation from us as set forth in that Plan. Such services may include: (i) establishing and maintaining accounts and records relating to shareholders; (ii) processing dividend and distribution payments from the Trust on behalf of shareholders; (iii) providing information periodically to shareholders showing their positions in shares and integrating such statements with those of other transactions and balances in shareholders' other accounts serviced by such financial institution; (iv) arranging for bank wires; (v) responding to shareholder inquiries relating to the services performed; (vi) responding to routine inquiries from shareholders concerning their investments; (vii) providing sub-accounting with respect to shares beneficially owned by shareholders, or the information to the Trust necessary for sub-accounting; (viii) if required by law, forwarding shareholder communications from the Trust (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to shareholders; (ix) assisting in processing purchase, exchange and redemption requests from shareholders and in placing such orders with our service contractors; (x) assisting shareholders in changing dividend options, account designations and addresses; (xi) providing shareholders with a service that invests the assets of their accounts in shares pursuant to specific or pre-authorized instructions; and (xii) providing such other similar services as the Trust or the Distributor may reasonably request to the extent you are permitted to do so under applicable statutes, rules and regulations. To the extent that you are entitled to receive compensation under this Agreement pursuant to a Shareholder Servicing Plan, such compensation shall be payable to you only to the extent that we receive funds therefor from the Trust. 6 9. Indemnification. (a) We agree to indemnify and hold harmless you, your officers, directors, employees and agents, and any of their control persons, from and against any losses, claims, damages and liabilities or expenses (including reasonable fees of counsel) to which any such person or entity may become subject insofar as such losses, claims, damages, liabilities or expense (or actions in respect thereof) arise out of or are based on upon (a) any untrue statement or alleged untrue statement of material fact contained in the registration statement of any Series (including any Prospectus or SAI) or any amendment or supplement thereto or in any sales material, or to the extent it arises out of or is based on the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. (b) You agree to indemnify and hold harmless us, the Trust, and any of their officers, directors, employees and agents, and any of their control persons, from and against any losses, claims, damages and liabilities or expenses (including reasonable attorneys fees) to which any such person or entity may become subject insofar as such losses, claims, damages, liabilities or expense (or actions in respect thereof) arise out of or are based on upon (i) any breach of any representation, warranty or undertaking contained in this Agreement; or (ii) any negligent or willful act or omission in connection with your services under this Agreement. (c) This paragraph shall survive the termination of this agreement. 10. NSCC Indemnity - Shareholder and House Accounts. (a) In consideration of the Distributor liquidating, exchanging and/or transferring uncertificated Shares for your customers without the use of original or underlying documentation supporting such instructions (e.g. a signed stock power or signature guaranty), you hereby agree to indemnify the Distributor and the Trust against any losses, including reasonable attorney's fees, that may arise from such liquidation, exchange and/or transfer of uncertificated Shares upon your direction. This indemnification shall apply only to the liquidation, exchange and/or transfer of uncertificated Shares in shareholder and house accounts executed as wire orders transmitted via NSCC's Fund/SERV system. You represent and warrant to the Trust and the Distributor that all such transactions shall be authorized by your customers. (b) This indemnification shall not apply to any losses (including attorneys fees) caused by the Distributor or the Trust to comply with any of your instructions governing any of the above transactions, or any negligent act or omission of the Distributor or the Trust, or any of their directors, trustees, officers, employees or agents. All transactions shall be settled upon your confirmation through NSCC transmission to the Distributor. (c) This paragraph shall survive the termination of this Agreement. 11. Continuation and Termination. (a) The provisions of this Agreement relating to 12b-1 Plans and Shareholder Servicing Plans shall continue in effect for a period of more than one year from the date hereof only so long as such continuance of the form of this agreement is specifically approved at least 7 annually in a manner prescribed in Rule 12b-1 or in such 12b-1 Plan or Shareholder Servicing Plan. (b) This Agreement may be terminated, with respect to one or more Series, without penalty, by either of us, upon written notice to the other party. Such cancellation shall be effective upon receipt of such notice. (c) This Agreement may also be terminated without payment of any penalty by the vote of (i) a majority of the "outstanding voting securities" (as defined in the Investment Company Act), or (ii) a majority of the Trustees of the Trust who are not "interested persons" of the Trust (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the 12b-1 Plans. (d) The portions of this Agreement relating to payment under 12b-1 Plans or Shareholder Servicing Plans shall terminate with respect to any Series by any act that terminates the Series' 12b-1 Plan or Shareholder Servicing Plan, respectively. (e) This Agreement shall terminate automatically in the event of its assignment or if our Distribution Agreement with the Trust terminates. 12. Insurance. You shall maintain appropriate insurance and fidelity bond coverage as shall be reasonably necessary in light of your obligations under this Agreement. 13. Representations to Survive. The agreements, representations, warranties and other statements set forth in or made pursuant to this Agreement will remain in full force and effect, to the extent permitted by applicable law, regardless of any investigation made by or on behalf of us or any Authorized Dealer. The provisions of Sections 6 and 9 of this Agreement shall survive the offer and sale of the Shares and the termination or cancellation of this Agreement, to the extent permitted by applicable law. 14. No Association. Nothing herein contained constitutes an agreement to become partners with you or with any other Authorized Dealer, but you shall be liable for your proportionate share of any tax, liability or expense based on any claim arising from the sale of Shares under this Agreement. We and you hereby agree that there is no intent to form a partnership, and agree not to take any position inconsistent with that intent. We shall not be under any liability to you, except for obligations expressly assumed by us in this Agreement and liabilities under Section 11(f) of the Securities Act, and no obligations on our part shall be implied or inferred herefrom. 15. Recordkeeping. You will maintain all records required by law to be kept by you relating to transactions in the Shares and, upon request by the Trust, promptly make such of these records available to the Trust as the Trust may reasonably request in connection with its operations. 16. Notices. Notices hereunder shall be deemed to have been duly given if delivered by hand or facsimile (a) if to you, at your address or facsimile number set forth below and (b) if to us, to Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, New York 10179, 8 Attention: Frank J. Maresca or, in each case, such other address as may be notified to the other party. 17. Amendments. We may modify this Agreement at any time by written notice to you. The first order placed by you subsequent to the giving of such notice shall be deemed to be acceptance by you of the modification described in such notice. 18. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 19. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration in accordance with the Rules of the New York Stock Exchange, Inc. Such arbitration shall be commenced within one year after the cause of action forming the basis of the controversy or claim accrued. The arbitration shall be conducted in New York, New York before three arbitrators, all of whom shall be from the securities industry. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 20. Privacy. We shall consider nonpublic personal financial information relating to your consumers or customers that you provided to us, or that we retain to perform our duties as the Distributor, to be confidential information. We shall not disclose or otherwise use nonpublic personal financial information relating to present or former shareholders of the Trust other than for purposes for which that information was disclosed to us, including use under an exception contained in Section 248.14 or Section 248.15 of Securities and Exchange Commission Regulation S-P, in the ordinary course of business to carry out those purposes. We shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of records and information relating to consumers. 21. Severability. If any provision of this Agreement is or becomes inconsistent with any applicable law or rule, the provision will be deemed rescinded or modified to the extent necessary to comply with such law or rule. In all other respects, this agreement will continue in full force and effect. 22. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same document. 9 Please confirm your agreement by signing and returning to us the two enclosed duplicate copies of this Agreement. Upon our acceptance hereof, the Agreement shall constitute a valid and binding contract between us. After our acceptance, we will deliver to you one fully executed copy of this Agreement. Very truly yours, BEAR, STEARNS & CO. INC. By:___________________________ Name: __________________ Title: ___________________ Confirmed: ______________________________ (Name of Authorized Dealer) Date: By:___________________________ (Authorized Signature) Name: ____________________ Title: _____________________ ______________________________ Street Address ______________________________ City State Zip ______________________________ Facsimile No. ______________________________ Telephone No. ______________________________ Telex No. ______________________________ Firm Taxpayer Identification No. 10 BEAR STEARNS FUNDS DEALER PROFILE SHEET - -------------------------------------------------------------------------------- 1. Has signed dealer agreement been sent to distributor? Yes __or No __ Date Sent:______ - -------------------------------------------------------------------------------- 2. Dealer name:_____________________________________________________________ - -------------------------------------------------------------------------------- 3. Dealer address:__________________________________________________________ - -------------------------------------------------------------------------------- 4. Dealer contact:__________________________________________________________ - -------------------------------------------------------------------------------- 5. Dealer phone number & fax number:________________________________________ - -------------------------------------------------------------------------------- QUESTIONS PRECEDED BY ** RELATE TO FUND\SERV IF NOT A FUND\SERV PARTICIPANT, PLEASE SKIP TO QUESTION #10 - -------------------------------------------------------------------------------- **6. Is the dealer using Fund\Serv? Yes ____ or No____ - -------------------------------------------------------------------------------- **7. Is the dealer using networking? Yes ____ or No____ If yes, when would they like to receive position files? Choices are: ____ 1st & 3rd Friday ____ 2nd & 4th Friday ____ 1st & 3rd Thursday ____ 2nd & 4th Thursday Please note: Any additional position files are on an as requested basis. Please contact Broker services at the 800 number listed below. - -------------------------------------------------------------------------------- **8. If using networking, indicate network level:_____________________________________________ - -------------------------------------------------------------------------------- **9. If another dealer is clearing for them, what is the other dealer's name: ________________________________________________ Address: ________________________________________________ ________________________________________________ ________________________________________________ NSCC number:_____________________________________________________________ Alpha indicator:_______________________________________________________________ Network level:___________________________________________________________________ Contact name:____________________________________________________________________ Contact phone: Area Code:(_____) ___________________ - -------------------------------------------------------------------------------- 10. What is the address of the main office for mailing purposes of commission checks? (MAIN OFFICE ONLY) - -------------------------------------------------------------------------------- 11. Will statements go to main office or branch? Main Office ____ Branch - -------------------------------------------------------------------------------- 12. Omnibus account? Yes _________ or No_________ - -------------------------------------------------------------------------------- Completed fact sheet to be forwarded with signed Selected Dealer Agreement to: Bear Stearns Asset Management Inc. 27th Floor 383 Madison Avenue New York, NY 10179 Any questions regarding the completion of this form, please contact Eric Tepper at (212) 272-2782 - -------------------------------------------------------------------------------- EX-99.H (2) 9 kl05044_ex99h2.txt SCHEDULE I TO ADMINISTRATION AGREEMENT SCHEDULE I TO ADMINISTRATION AGREEMENT DATED FEBRUARY 22, 1995 (AS REVISED APRIL 11, 1995) BETWEEN THE BEAR STEARNS FUNDS AND BEAR STEARNS FUNDS MANAGEMENT INC. Annual Fees as a Percentage of Average Daily Must be Name of Series Net Assets Last Approved Approved By - --------------------------- ------------- --------------- -------------- Alpha Growth Portfolio .15 of 1% February 28, 2002 March 31, 2003 High Yield Total Return Portfolio .15 of 1% February 28, 2002 March 31, 2003 Income Portfolio .15 of 1% February 28, 2002 March 31, 2003 International Equity Portfolio .15 of 1% February 28, 2002 March 31, 2003 Intrinsic Value Portfolio .15 of 1% February 28, 2002 March 31, 2003 Prime Money Market Portfolio .15 of 1% February 28, 2002 March 31, 2003 S&P STARS Opportunities Portfolio .15 of 1% February 28, 2002 March 31, 2003 S&P Stars Portfolio .15 of 1%* February 28, 2002 March 31, 2003 Small Cap Value Portfolio .15 of 1% February 28, 2002 March 31, 2003 The Insiders Select Portfolio .15 of 1% February 28, 2002 March 31, 2003 As revised May 6, 2002. - -------- * Bear Stearns Funds Management Inc. will be paid an annual fee equal to an annual rate of 0.15% of the Portfolio's average daily net assets up to $1 billion, 0.12% of the next $1 billion, 0.10% of the next $3 billion and 0.08% of net assets above $5 billion. The Bear Stearns Funds has agreed to pay Bear Stearns Management Inc. a monthly fee at the annual rate of 0.05% of the average daily net assets of the Money Market Portfolio. EX-99.H (3) 10 kl05044_ex99h3.txt FUND ACCOUNTING & SERVICES AGT. WITH BISYS FORM OF FUND ACCOUNTING AND ADMINISTRATIVE SERVICES AGREEMENT AGREEMENT effective as of the 1st day of May, 2002, between The Bear Stearns Funds (the "Trust"), a Massachusetts business trust having its principal place of business at 383 Madison Avenue, New York, NY 10179 and BISYS FUND SERVICES OHIO, INC. ("BISYS"), a Delaware corporation having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219. WHEREAS, pursuant to an Administration Agreement dated February 22, 1995, as revised April 11, 1995 (the "Administration Agreement"), Bear Stearns Funds Management Inc. serves as the administrator to the Trust (the "Administrator"); WHEREAS, the Trust desires that BISYS perform fund accounting & sub-administrative services for the Trust and each investment portfolio of the Trust (individually and not jointly), as now in existence and listed on Schedule A, or as hereafter may be established from time to time (each individually referred to herein as a "Fund" and collectively as the "Funds"); WHEREAS, BISYS is willing to perform such services on the terms and conditions set forth in this Agreement; and WHEREAS, BISYS and Trust wish to set forth the terms under which BISYS will perform the fund accounting and sub-administrative services set forth herein for the Trust. NOW, THEREFORE, in consideration of the covenants hereinafter contained, the Trust and BISYS hereby agree as follows: 1. Services as Fund Accountant. (a) Maintenance of Books and Records. BISYS will keep and maintain the following books and records of each Fund pursuant to Rule 31a-1 (the "Rule") under the Investment Company Act of 1940, as amended (the 1940 Act"): (i) Journals containing an itemized daily record in detail of all purchases and sales of securities, all receipts and disbursements of cash and all other debits and credits, as required by subsection (b)(1) of the Rule; (ii) General and auxiliary ledgers reflecting all asset, liability, reserve, capital, income and expense accounts, including interest accrued and interest received, as required by subsection (b)(2)(i) of the Rule; 1 (iii) Separate ledger accounts required by subsections (b)(2)(ii) and (iii) of the Rule; and (iv) A monthly trial balance of all ledger accounts (except shareholder accounts) as required by subsection (b)(8) of the Rule. (b) Performance of Daily Accounting Services. In addition to the maintenance of the books and records specified above, Fund Accountant shall perform the following accounting services daily for each Fund: (i) Calculate the net asset value and public offering price per share utilizing prices obtained from the sources described in subsection 1(b)(ii) below; (ii) Obtain security prices from independent pricing services approved by the Trust's Board of Trustees, or if such quotes are unavailable, then obtain such prices from each Fund's investment adviser or its designee, as approved by the Trust's Board of Trustees (hereafter referred to as the "Board"); (iii) Verify and reconcile with each Fund's custodian and investment adviser all daily trade activity; and holdings; and resulting balances for each fund and its respective class; (iv) Compute, as appropriate, each Fund's net income and capital gains, dividend payables, dividend factors, standard yields (7-day yields, 7-day effective yields, 30-day yields) and other yields as requested, total return data, and weighted average maturity; (v) Review daily the net asset value calculation and dividend factor (if any) for each Fund prior to release to shareholders, check and confirm the net asset values and dividend factors for reasonableness and deviations, and distribute net asset values and yields to NASDAQ, the Fund's transfer agent and client locations requested by the Trust; (vi) Calculate and report to the Trust the daily market pricing of securities in any money market Funds, and provide a comparison of the marked- to market valuation to the valuation determined by the amortized cost basis; (vii) Determine unrealized appreciation and depreciation on securities held in variable net asset value Funds; 2 (viii)Amortize premiums and accrete discounts on securities purchased at a price other than face value; (ix) Update fund accounting system to reflect rate changes, as received from a Fund's investment adviser, on variable interest rate instruments; (x) Post Fund transactions to appropriate general ledger categories; (xi) Accrue expenses (including fees payable to service providers) of each Fund according to instructions received from the Administrator; (xii) Monitor and report to the Trust and its custodian the outstanding receivables and payables for all (1) security trades, (2) Fund share transactions and (3) income and expense accounts; and (xiii)Post summary shareholder activity received from the Funds' transfer agent and reconcile share balances, including receivables and payables, with the Funds' transfer agent. (c) Special Reports and Services. (i) BISYS may provide additional special reports upon the request of the Trust or a Fund's investment adviser, which may result in an additional charge, the amount of which shall be agreed upon between the parties. (ii) BISYS may provide such other similar services with respect to a Fund as may be reasonably requested by the Trust, which may result in an additional charge, the amount of which shall be agreed upon between the parties. (d) Additional Accounting & Financial Administration Services. BISYS shall also perform the following additional accounting and administrative services for each Fund, without additional compensation: (i) Provide monthly a hard copy of the unaudited financial statements described below, upon request of the Trust. The unaudited financial statements will include the following items: Unaudited Statement of Investments Unaudited Statement of Assets and Liabilities, Unaudited Statement of Operations, 3 Unaudited Statement of Changes in Net Assets (ii) Provide and prepare accounting information for the following: (A) Federal and state income tax returns and federal excise tax returns; (B) registration statements on Form N-1A and other filings relating to registration of shares; (C) the Administrator's monitoring of the Trust's status as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended; (D) the annual audit by the Trust's auditors; (E) examinations performed by the SEC; and (F) Supplemental tax letters and IRS Form 1099 or equivalent to trustees and fund vendors. (iii) Provide accounting reports in connection with the Trust's regular annual audit and other audits and examinations by regulatory agencies; (iv) Prepare and monitor fund expense budgets and coordinate cash disbursements for fund expenses; (v) Provide such periodic reports as the parties shall agree upon, at such times that the parties agree upon, as set forth in a separate writing, including without limitation reports used in preparation of financial reports, regulatory fillings, compliance reporting, total return and tax reporting; (vi) Respond to surveys from industry publications and rating agencies including, but not limited to, Lipper, Morningstar, IMoneyNet, Weisenberger, DALBAR, Standard & Poors's, Moody's and the Investment Company Institute; (vii) Prepare and file semi-annual and annual financial statements; and any related filings such as N-30D, and prepare versions of the relevant financial statements using FundSmith or equivalent systems; (viii)Prepare and file Form N-SAR and required notices pursuant to Rule 24f-2; (ix) Calculate and distribute all standard performance information including after-tax return calculations; 4 (x) Register Fund portfolios with NASDAQ; (xi) Prepare financial materials for Board books; (xii) Calculate income and capital gain distributions in compliance with income tax and excise tax distribution requirements; (xiii)Review all dividend declarations to ensure that such distributions are not "preferential" under the Internal Revenue Code; and (xiv) Prepare and sign Form 1120-RIC, Form 8613 and any required state tax filings, and make such filings within the statutory deadlines. Trust officers are also responsible for signing above-mentioned forms. (e) Additional Services as Sub-Administrator (i) Compliance Services. Assist in developing compliance procedures and compliance checklists for each Fund, and provide compliance monitoring services incorporating certain of those procedures, which will include, among other matters, compliance with each Fund's investment objective, defined investment policies, restrictions, tax diversification, distribution and income requirements as are determinable based upon the fund's accounting records, and prepare and maintain a fund-specific compliance manual. (ii) Blue Sky Services. Utilizing a data feed from the Funds' transfer agent containing gross sales information, prepare such reports, applications and documents as may be necessary or desirable to register the shares of the Funds with state securities authorities; monitor the sale of shares for compliance with state securities laws, and file with the appropriate state securities authorities the registration statements and reports for the Funds and the shares and all amendments thereto, as may be necessary or convenient to register and keep effective the registration of the Funds and the shares with state securities authorities; (iii) Additional Legal & Sub-Administration Services. BISYS shall also perform upon request by the Administrator, the following additional legal and administration services without additional compensation. In 5 each case, the Administrator shall notify BISYS in writing of the scope of the specific services to be provided; the commencement date (and, if applicable, termination date) for rendering such services; and the location (i.e. whether at the offices of the Administrator or BISYS) where the books and records related thereto shall be maintained: (A) Coordinate, prepare and file with the Securities and Exchange Commission (the "SEC") the annual update to the Trust's registration statement on Form N-1A; receive and coordinate comments from the SEC and other parties on N-1A filings and prepare and coordinate responses to all such comments; (B) Coordinate, prepare and file with the SEC supplements to the Funds' Prospectus or Prospectus, and statement of Additional Information or, as agreed upon by the parties hereto, review such supplements that are prepared by counsel to the Trust; (C) Coordinate, prepare and file as necessary, notices of annual or special meetings of shareholders and proxy materials relating thereto; (D) Coordinate the solicitation and tabulation of proxies in connection with meetings of shareholders; (E) Coordinate the printing and distribution of prospectuses, supplements and proxy materials; (F) Prepare, produce and distribute board meeting materials, including but not limited to agendas, proposed resolutions, and relevant sections of the board materials pertaining to the responsibilities of BISYS; (G) Provide appropriate personnel to attend board meetings and record the minutes of such meetings; (H) Administer contracts on behalf of the Trust with, among others, the Trust's investment adviser, distributor, custodian, transfer agent and fund accountant; (I) Maintain corporate records on behalf of the Trust, including, but not limited to, minute books, Declaration of Trust and By-Laws; 6 (J) Assist with the design, development, and operation ofFunds, including new classes, investment objectives, policies and expense structure; (K) Advise the Trust and the Board on matters concerning the Trust and its affairs; and notify the Board or the Administrator of issues requiring consideration by the Board; (L) Provide individuals reasonably acceptable to the Board to serve as officers of the Trust in such capacity as may be agreed to by BISYS, who will be responsible for the management of certain of the Trust's affairs as determined by the Board; and (M) Obtain and keep in effect fidelity bonds and directors and officers/errors and omissions insurance policies for the Trust in accordance with the requirements of Rules 17g-1 and 17d-1(7) under the 1940 Act as such bonds and policies are approved by the Board, and file such notices and copies of such bonds as required under the 1940 Act. 2. Subcontracting. BISYS may, at its expense, subcontract with any entity or person concerning the provision of certain services (a "Subcontractor"); provided, however, that BISYS shall obtain the express consent of the Trust for any Subcontractor to act as a sub-fund accountant or sub-fund administrator hereunder (a "Sub-Fund Accountant"); and provided, further, that BISYS shall not be relieved of any of its duties and obligations under this Agreement by the appointment of a Subcontractor (whether or not acting as a Sub-Fund Accountant) and, that BISYS shall be responsible, to the extent provided in Section 5 hereof, for all acts of such Subcontractor as if such acts were its own. 7 3. Compensation. The Trust shall pay BISYS compensation for the services to be provided by BISYS under this Agreement in accordance with, and in the manner set forth in Schedule B attached hereto. 4. Reimbursement of Expenses and Miscellaneous Service Fees. (A) In addition to paying BISYS the fees provided in Section 3 and Schedule B, the Trust agrees to reimburse BISYS for its reasonable out-of-pocket expenses in providing services hereunder, including without limitation the following: (a) All freight and other delivery and bonding charges incurred by BISYS in delivering materials to and from the Trust; (b) The cost of microfilm or microfiche of records or other materials; (c) All systems-related expenses associated with the provision of special reports and services pursuant to Section 1(c) herein; (d) Any expenses BISYS shall incur at the written direction of an officer of the Trust (other than an employee of BISYS) thereunto duly authorized; and (e) Any additional expenses reasonably incurred by BISYS in the performance of its duties and obligations under this Agreement, except as otherwise provided in this Agreement. Pricing of portfolio securities shall not be charged to the Funds as an out-of-pocket expense, so long as the asset classes and costs of pricing are substantially similar to the asset classes and the costs of pricing applicable as of the date hereof. (B) In addition, BISYS shall be entitled to receive the following fees: (a) Systems development fees billed at an hourly rate of $150 per hour, as approved by the Trust; and (b) Ad hoc reporting fees billed at an agreed upon rate (forty (40) hours per year of BISYS time preparing ad hoc reports shall be without charge). 5. Standard of Care; Uncontrollable Events; Limitation of Liability. BISYS shall use reasonable professional diligence to ensure the accuracy of all services performed under this Agreement, but shall not be liable to the Trust for any action taken or omitted by BISYS in the absence of bad faith, willful misfeasance, negligence or reckless disregard 8 by it of its obligations and duties. The duties of BISYS shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against BISYS hereunder. BISYS shall maintain adequate and reliable computer and other equipment necessary or appropriate to carry out its obligations under this Agreement. Upon the Trust's reasonable request, BISYS shall provide supplemental information concerning the aspects of its disaster recovery and business continuity plan that are relevant to the services provided hereunder. Notwithstanding the foregoing or any other provision of this Agreement, BISYS assumes no responsibility hereunder, and shall not be liable for, any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. Events beyond BISYS' reasonable control include, without limitation, force majeure events. Force majeure events include natural disasters, actions or decrees of governmental bodies, and communication lines failures that are not the fault of either party. In the event of force majeure, computer or other equipment failures or similar events beyond its reasonable control, BISYS shall follow applicable procedures in its disaster recovery and business continuity plan and use all commercially reasonable efforts to minimize any service interruption. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL BISYS, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE FOR CONSEQUENTIAL DAMAGES, REGARDLESS OF WHETHER BISYS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 6. Term. This Agreement shall become effective as of the date first written above and shall continue in effect for two (2) years, until April 30, 2004 (the "Initial Term"). Thereafter, unless otherwise terminated as provided herein, this Agreement shall be renewed automatically for successive one (1) year periods ("Rollover Periods"). This Agreement may be terminated only (i) by provision of a notice of non-renewal in the manner set forth below, (ii) by mutual agreement of the parties or (iii) for "cause," as defined below, upon the provision of sixty (60) days advance written notice by the party alleging cause. Written notice of non-renewal must be provided at least ninety (90) days prior to the end of the Initial Term or any Rollover Period, as the case may be. For purposes of this Agreement, "cause" shall mean (a) a material breach of this Agreement that has not been remedied for thirty (30) days following written notice of such breach from the non-breaching party; (b) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (c) financial difficulties on the part of the party to be terminated which are evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent or acquiescence in, a voluntary or involuntary case under Title 11 of the United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the 9 rights of creditors. BISYS shall not terminate this Agreement pursuant to clause (a) above based solely upon the Trust's failure to pay an amount to BISYS which is the subject of a good faith dispute, if (i) the Trust is attempting in good faith to resolve such dispute with as much expediency as may be possible under the circumstances, and (ii) the Trust continues to perform its obligations hereunder in all other material respects (including paying all fees and expenses not subject to reasonable dispute hereunder). Notwithstanding the foregoing, following any such termination, in the event that BISYS in fact continues to perform any one or more of the services contemplated by this Agreement (or any Schedule or exhibit hereto) with the consent of the Trust, the provisions of this Agreement, including without limitation the provisions dealing with indemnification, shall continue in full force and effect. Fees and out-of-pocket expenses incurred by BISYS but unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. BISYS shall be entitled to collect from the Trust, in addition to the fees and disbursements provided by Sections 3 and 4 hereof, the amount of all of BISYS' cash disbursements in connection with BISYS' activities in effecting such termination, including without limitation, the delivery to the Trust and/or its distributor or investment adviser and/or other parties of the Trust's property, records, instruments and documents. If, for any reason other than (i) nonrenewal, (ii) mutual agreement of the parties or (iii) termination of BISYS for "cause" hereunder, BISYS's services are terminated hereunder, BISYS is replaced as fund accountant, or if a third party is added to perform all or a part of the services provided by BISYS under this Agreement (excluding any Sub-Fund Accountant appointed as provided in Section 1 hereof), then the Trust shall make a one-time cash payment, in consideration of the fee structure and services to be provided under this Agreement, and not as a penalty, to BISYS equal to the balance that would be due BISYS for its services hereunder during (x) the next twelve (12) months or (y) if less than twelve (12), the number of months remaining in the then-current term of this Agreement, assuming for purposes of the calculation of the one-time payment that the fees that would be earned by BISYS for each month shall be based upon the average assets, number of Funds and share classes, and corresponding fees payable to BISYS, during the twelve (12) months prior to the date that services terminate, BISYS is replaced or a third party is added. In the event the Trust or any Fund is merged into another legal entity in part or in whole pursuant to any form of business reorganization or is liquidated in part or in whole prior to the expiration of the then-current term of this Agreement, the parties acknowledge and agree that the liquidated damages provision set forth above shall be applicable in those instances in which BISYS is not retained to provide fund accounting services consistent with this Agreement, including the number of Funds subject to such services. The one-time cash payment referenced above shall be due and payable on the day prior to the first day in which services are terminated, BISYS is replaced or a third party is added. The parties further acknowledge and agree that, in the event services are terminated, BISYS is replaced, or a third party is added, as set forth above, (i) a determination of actual damages 10 incurred by BISYS would be extremely difficult, and (ii) the liquidated damages provision contained herein is intended to adequately compensate BISYS for damages incurred and is not intended to constitute any form of penalty. 7. Indemnification. The Trust agrees to indemnify and hold harmless BISYS, its employees, agents, directors, officers and nominees from and against any and all claims, demands, actions and suits, and from and against any and all judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character arising out of or in any way relating to BISYS' actions taken or omissions with respect to the performance of services under this Agreement or based, if applicable, upon reasonable reliance on information, records, instructions or requests given or made to BISYS by the Trust, the investment adviser, administrator or custodian thereof; provided that this indemnification shall not apply to actions or omissions of BISYS in cases of its own bad faith, willful misfeasance, negligence or reckless disregard by it of its obligations and duties; and further provided that prior to confessing or settling any claim against it which may be the subject of this indemnification, BISYS shall give the Trust written notice of and reasonable opportunity to defend against said claim in its own name or in the name of BISYS. BISYS shall indemnify, defend, and hold the Trust , its affiliates, and their officers, directors, trustees, employees and agents harmless from and against any and all claims, actions and suits and all losses, damages, costs, charges, reasonable counsel fees and disbursements, payments, expenses and liabilities (including reasonable investigation expenses) resulting directly and proximately from (a) the breach of an express representation or warranty made by BISYS under Section 13 (b) of this Agreement, or (b) BISYS' willful misfeasance, bad faith or negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. The indemnification rights hereunder shall include the right to reasonable advances of defense expenses in the event of any pending or threatened litigation with respect to which indemnification hereunder may ultimately be merited. In order that the indemnification provisions contained herein shall apply, however, it is understood that if in any case a party may be asked to indemnify or hold the other party harmless, the indemnifying party shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the indemnified party will use all reasonable care to identify and notify the indemnifying party promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the indemnifying party, but failure to do so in good faith shall not affect the rights hereunder except to the extent the indemnifying party is materially prejudiced thereby. The indemnifying party shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If the indemnifying party elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by it and reasonably satisfactory to the indemnified party, whose approval shall not be unreasonably withheld. In the event that the indemnifying party elects to 11 assume the defense of any suit and retain counsel, the indemnified party shall bear the fees and expenses of any additional counsel retained by it. If the indemnifying party does not elect to assume the defense of suit, it will reimburse the indemnified party for the reasonable fees and expenses of any counsel retained by the indemnified party. The indemnity and defense provisions set forth herein shall indefinitely survive the termination of this Agreement. 8. Record Retention and Confidentiality. BISYS shall keep and maintain on behalf of the Trust all books and records which the Trust and BISYS is, or may be, required to keep and maintain pursuant to any applicable statutes, rules and regulations, including without limitation Rules 31a-1 and 31a-2 under the 1940 Act, relating to the maintenance of books and records in connection with the services to be provided hereunder. Any records required to be maintained and preserved pursuant to Rules 31a-1 and 31a-2 under the 1940 Act which are prepared or maintained by BISYS on behalf of the Trust shall be prepared and maintained at the expense of BISYS, but shall be the property of the Trust and will be surrendered promptly to the Trust on request, and made available for inspection by the Trust or by the Commission at reasonable times. In case of any request or demand for the inspection of such records by another party, BISYS shall notify the Trust and follow the Trust's instructions as to permitting or refusing such inspection; provided that BISYS may exhibit such records in any case where (i) disclosure is required by law, (ii) BISYS is advised by counsel that it may incur liability for failure to make a disclosure, (iii) BISYS is requested to divulge such information by duly-constituted authorities or court process, or (iv) BISYS is requested to make a disclosure by the Trust. BISYS shall provide the Trust with reasonable advance notice of disclosure pursuant to items (i) - (iii) of the previous sentence, to the extent reasonably practicable. 9. Activities of BISYS. The services of BISYS rendered to the Trust hereunder are not to be deemed to be exclusive. BISYS is free to render such services to others and to have other businesses and interests. It is understood that Trustees, officers, employees and Shareholders of the Trust are or may be or become interested in BISYS, as officers, employees or otherwise and that partners, officers and employees of BISYS and its counsel are or may be or become similarly interested in the Trust as a shareholder or otherwise. 12 10. Reports. BISYS shall furnish to the Trust and to its properly authorized auditors, investment advisers, examiners, distributors, dealers, underwriters, salesmen, insurance companies and others designated by the Trust in writing, such reports and at such times as are prescribed pursuant to the terms and the conditions of this Agreement to be provided or completed by BISYS, or as subsequently agreed upon by the parties pursuant to an amendment hereto. The Trust agrees to examine each such report or copy promptly and will report or cause to be reported any errors or discrepancies therein. In the event that errors or discrepancies, except such errors and discrepancies as may not reasonably be expected to be discovered by the recipient after conducting a diligent examination, are not so reported promptly, a report will for all purposes be accepted by and binding upon the Trust and any other recipient, and, BISYS shall have no liability for errors or discrepancies therein and shall have no further responsibility with respect to such report. 11. Rights of Ownership. All computer programs and procedures employed or developed by or on behalf of BISYS to perform services required to be provided by BISYS under this Agreement are the property of BISYS. All records and other data except such computer programs and procedures are the exclusive property of the Trust and all such other records and data shall be furnished to the Trust in appropriate form as soon as practicable after termination of this Agreement for any reason. 12. Return of Records. BISYS may at its option at any time, and shall promptly upon the Trust's demand, turn over to the Trust and cease to retain BISYS's files, records and documents created and maintained by BISYS pursuant to this Agreement which are no longer needed by BISYS in the performance of its services or for its legal protection. If not so turned over to the Trust, such documents and records will be retained by BISYS for six years from the year of creation. At the end of such six-year period, such records and documents will be turned over to the Trust unless the Trust authorizes in writing the destruction of such records and documents. 13. Representations and Warranties. (a) The Trust represents and warrants that: (1) as of the close of business on the effective date of this Agreement, each Fund that is in existence as of the effective date has authorized unlimited shares, and (2) this Agreement has been duly authorized by the Trust and, when executed and delivered by the Trust, will constitute a legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 13 (b) BISYS represents and warrants that: (1) the various procedures and systems which BISYS has implemented with regard to safeguarding from loss or damage attributable to fire, theft, or any other cause the records, and other data of the Trust and BISYS's records, data, equipment facilities and other property used in the performance of its obligations hereunder are adequate and that it will make such changes therein from time to time as are reasonably required for the secure performance of its obligations hereunder, and (2) this Agreement has been duly authorized by BISYS and, when executed and delivered by BISYS, will constitute a legal, valid and binding obligation of BISYS, enforceable against BISYS in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 14. Insurance. BISYS shall maintain a fidelity bond covering larceny and embezzlement and an insurance policy with respect to directors and officers errors and omissions coverage in amounts that are appropriate in light of its duties and responsibilities hereunder. Upon the request of the Trust, BISYS shall provide evidence that coverage is in place. BISYS shall notify the Trust should its insurance coverage with respect to professional liability or errors and omissions coverage be canceled. Such notification shall include the date of cancellation and the reasons therefore. BISYS shall notify the Trust of any material claims against it with respect to services performed under this Agreement, whether or not they may be covered by insurance, and shall notify the Trust should the total outstanding claims made by BISYS under its insurance coverage materially impair, or threaten to materially impair, the adequacy of its coverage. 15. Information Furnished by the Trust. The Trust has furnished to BISYS the following, as amended and current as of the effective date of this Agreement: (a) Copies of the Declaration of Trust of the Trust and of any amendments thereto, certified by the proper official of the state in which such Declaration has been filed. (b) Copies of the following documents: 1. The Trust's Bylaws and any amendments thereto; 2. Certified copies of resolutions of the Trustees covering the following matters: A. Approval of this Agreement and authorization of a specified officer of the Trust to execute and deliver this Agreement and authorization for specified officers of the Trust to instruct 14 BISYS hereunder; and B. Authorization of BISYS to act as fund accountant for the Trust. (c) A list of all officers of the Trust and any other persons (who may be associated with the Trust or its investment advisor), together with specimen signatures of those officers and other persons, who are authorized to instruct BISYS in all matters. (d) Two copies of the Prospectuses and Statement of Additional Information of each Fund. (e) The Administration Agreement. 16. Information Furnished by BISYS. BISYS has furnished to the Trust evidence of the following: (a) Approval of this Agreement by BISYS, and authorization of a specified officer of BISYS to execute and deliver this Agreement; (b) Authorization of BISYS to act as fund accountant for the Trust. 17. Amendments to Documents. The Trust shall furnish BISYS written copies of any amendments to, or changes in, any of the items referred to in Section 15 hereof forthwith upon such amendments or changes becoming effective. In addition, the Trust agrees that no amendments will be made to the Prospectuses or Statements of Additional Information of the Trust which might have the effect of changing the procedures employed by BISYS in providing the services agreed to hereunder or which amendment might affect the duties of BISYS hereunder unless the Trust first obtains BISYS's approval of such amendments or changes, which approval shall not be withheld unreasonably. 18. Legal Advice; Reliance on Prospectus and Instructions. BISYS shall notify the Trust at any time BISYS believes that it is in need of the advice of counsel to the Trust with regard to BISYS' responsibilities and duties pursuant to this Agreement. The Trust shall authorize counsel to the Trust to give such advice to BISYS, however, this Agreement shall not obligate counsel to the Trust to give such advice. BISYS may rely upon the advice of counsel to the Trust or any other counsel authorized by the Trust, and shall in no event be liable to the Trust or any Fund or any shareholder or beneficial owner of the Trust for any action reasonably taken pursuant to such advice. 15 As to the services to be provided hereunder, BISYS may rely conclusively upon the terms of the Prospectuses and Statement of Additional Information of the Trust relating to the relevant Funds to the extent that such services are described therein, as well as the minutes of Board meetings (if applicable) and other records of the Trust unless BISYS receives written instructions to the contrary in a timely manner from the Trust or the Administrator. As to any matter covered by the Administration Agreement, BISYS shall be authorized to act upon any instructions provided to it by the Administrator that are not clearly inconsistent with the terms of this Agreement. Also, BISYS shall be protected in acting upon any document, which it reasonably believes to be genuine and to have been signed or presented by the proper person or persons. BISYS will not be held to have notice of any change of the Administrator's authority under the Administration Agreement, or any change of authority of any officers, employees or agents of the Trust or the Administrator until receipt of written notice thereof from the Trust or the Administrator. 19. Compliance with Law. Except for the obligations of BISYS set forth in Section 8 hereof, the Trust assumes full responsibility for the preparation, contents and distribution of each prospectus of the Trust as to compliance with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the 1940 Act and any other laws, rules and regulations of governmental authorities having jurisdiction. BISYS shall have no obligation to take cognizance of any laws relating to the sale of the Trust's shares. BISYS will comply with all laws applicable to BISYS in connection with the rendering of services under this Agreement. 20. Notices. Any notice provided hereunder shall be sufficiently given when sent by registered or certified mail to the party required to be served with such notice at the following address: if to the Trust, to Bear Stearns Funds Management, Inc., 383 Madison Avenue, 23rd Floor, New York, NY 10179, Attn: Mr. Frank Maresea, with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, NY 10022, Attn: Jay G. Baris, Esq.; and if to BISYS, to it at 3435 Stelzer Road, Columbus, Ohio 43219; Attn: President, or at such other address as such party may from time to time specify in writing to the other party pursuant to this Section. 21. Assignment. This Agreement and the rights and duties hereunder shall not be assignable with respect to a Fund by either of the parties hereto except by the specific written consent of the other party. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. 16 22. Governing Law and Matters Relating to the Trust as a Massachusetts Business Trust. This Agreement shall be governed by and provisions shall be construed in accordance with the laws of the State of New York, subject to any applicable provisions of the 1940 Act. It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Board, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Trust's Declaration of Trust. 23. Privacy. Nonpublic personal financial information relating to consumers or customers of the Trust provided by, or at the direction of the Trust to BISYS, or collected or retained by BISYS to perform its duties shall be considered confidential information. BISYS shall not give, sell or in any way transfer such confidential information to any person or entity, other than affiliates of BISYS except at the direction of the Trust or as required or permitted by law. BISYS shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of records and information relating to consumers or customers of the Trust. The Trust represents to BISYS that it has adopted a Statement of its privacy policies and practices as required by the Commission's Regulation S-P and agrees to provide BISYS with a copy of that statement annually. 24. Miscellaneous. (a) Paragraph headings in this Agreement are included for convenience only and are not to be used to construe or interpret this Agreement. (b) This Agreement constitutes the complete agreement of the parties hereto as to the subject matter covered by this Agreement, and supercedes all prior negotiations, understandings and agreements bearing upon the subject matter covered herein. (c) This Agreement may be executed in counterparts, each of which shall be an original but all of which, taken together, shall constitute one and the same agreement. (d) No amendment to this Agreement shall be valid unless made in writing and executed by both parties hereto. The parties hereto may amend such procedures as may be set forth herein by written agreement as may be 17 appropriate or practical under the circumstances, and BISYS may conclusively assume that any special procedure which has been approved by an executive officer of the Trust (other than an officer or employee of BISYS) does not conflict with or violate any requirements of the Trust's Declaration of Trust, By-Laws or then-current prospectuses, or any rule, regulation or requirement of any regulatory body. (e) Every reference to a Fund will be deemed a reference solely to the particular Fund (as set forth in Schedule A as may by amended from time to time). Under no circumstances shall the rights, obligations or remedies with respect to a particular Fund constitute a right, obligation or remedy applicable to any other Fund. In particular, and without otherwise limiting the scope of this paragraph, BISYS shall not have any right to set off claims of a Fund by applying the property of any other Fund. * * * * * 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written. THE BEAR STEARNS FUNDS By: _________________________________ Title: ________________________________ BISYS FUND SERVICES OHIO, INC. By: ________________________________ Title: ________________________________ The Administrator hereby agrees to the provisions set forth in Section 1 (e) of this Agreement pertaining to Sub-Administration services to be rendered by BISYS: BEAR STEARNS FUNDS MANAGEMENT INC. BY: ____________________________________ Name: __________________________________ Title: ___________________________________ 19 SCHEDULE A TO THE FUND ACCOUNTING AGREEMENT BETWEEN THE BEAR STEARNS FUNDS AND BISYS FUND SERVICES OHIO, INC. FUNDS Prime Money Market Portfolio Income Portfolio High Yield Total Return Portfolio Emerging Markets Debt Portfolio Balanced Portfolio International Equity Portfolio Small Cap Value Portfolio Large Cap Value Portfolio Focus List Portfolio The Insider Select Fund S&P STARS Portfolio S&P STARS Opportunity Portfolio 20 SCHEDULE B TO THE FUND ACCOUNTING AGREEMENT BETWEEN THE BEAR STEARNS FUND AND BISYS FUND SERVICES OHIO, INC. Administration/Fund Accounting Fees a. Asset-Based Fees Asset Levels Fees* ------------ ------ Funds other than Money Market Funds (as a complex) Assets $0 - $3 Billion 3.50 Assets > $3 - $6 2.50 - Billion Assets > $6 Billion 1.50 Money Market Funds (individually) Assets $0 - $150 6.00 Million Assets > $150 - $300 4.00 - Million Assets > $300 - $600 2.00 - Million Assets > $600 Million 1.00 - $1 Billion .85 Assets > $1 Billion ______________ *Fees are stated in basis points, and are applied as an annual rate based on average net assets to the respective asset levels indicated above. b. Minimum Fees The asset-based fees set forth above are subject to an annual minimum fee of $1,120,000 for the entire U.S. fund complex, which is subject to adjustment as follows. 21 In the event the total number of Funds and share classes subject to this Agreement increases, the annual complex minimum shall increase by $88,500 for each additional Fund and by $5,000 for each additional class of shares added to a Fund, in each case which causes the total number of Funds or share classes to exceed the existing totals of 12 Funds and 41 share classes. By way of example, if a new Fund with two additional share classes is added (so that the Fund has a total of three classes of shares), the minimum complex fee would increase by $98,500, to $1,218,500. In the event the total number of Funds and share classes subject to this Agreement decreases, the complex minimum shall decrease by $88,500 for each Fund removed from the complex and by $5,000 for any additional class of shares that is removed from a Fund, in each case which causes the total number of Funds or share classes to be reduced below the existing totals of 12 Funds and 43 share classes; provided, however, that under no circumstances (regardless of the total number of Funds and share classes) shall the complex-wide annual minimum fee be reduced to less than $810,000. Out-of-Pocket Expenses In addition to the above fees, BISYS shall be entitled to the reimbursement of certain out-of-pocket expenses incurred in connection with its services, as provided in Section 4 of this Agreement. 22 EX-99.J(1) 11 kl05044_ex99j.txt CONSENT OF COUNSEL. KRAMER LEVIN NAFTALIS & FRANKEL LLP 919 THIRD AVENUE NEW YORK, N.Y. 10022 - 3852 TEL (212) 715-9100 47, Avenue Hoche FAX (212) 715-8000 75008 Paris France May 29, 2002 The Bear Stearns Funds 575 Lexington Avenue New York, New York 10022 Re: The Bear Stearns Funds Registration No. 33-84842 Post-Effective Amendment to Registration Statement on Form N-1A --------------------------------------- Gentlemen: We consent to the reference to our Firm as counsel in Post-Effective Amendment No. 30 to the Registration Statement on Form N-1A. Very truly yours, /s/ Kramer Levin Naftalis & Frankel LLP EX-99.J (2) 12 kl05044_ex99i.txt CONSENT OF AUDITORS. INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post-Effective Amendment No. 30 to Registration Statement File No. 33-84842, on Form N-1A of our reports dated May 10, 2002 appearing in the March 31, 2002 Annual Reports to Shareholders for the Bear Stearns Funds (Equity Funds Annual Report, Fixed Income Funds Annual Report and the Prime Money Market Portfolio Annual Report) and to the references to us under the heading "Financial Highlights - Prime Money Market Portfolio, Income Portfolio, High Yield Total Return Portfolio, S&P STARS Portfolio, S&P STARS Opportunities Portfolio, The Insiders Select Fund, Intrinsic Value Portfolio (formerly known as the Large Cap Portfolio), Small Cap Portfolio, Alpha Growth Portfolio (formerly know as the Focus List Portfolio), and International Equity Portfolio" in their Prospectuses and under the heading "Custodians, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors" in the Statement of Additional Information, all of which are a part of such Registration Statement. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP New York, New York May 29, 2002 EX-99.M (1) 13 kl05044_ex99m1.txt SCHEDULES 1 TO DISTRIBUTION PLANS. SCHEDULE 1 TO DISTRIBUTION PLAN (CLASS "A" SHARES) DATED SEPTEMBER 8, 1997 (AS REVISED FEBRUARY 10, 1999 AND APRIL 17, 2000) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. Class "A" Must be Name of Series Shares Last Approved Approved by - -------------- --------- ------------- ----------- Alpha Growth Portfolio 0.25% February 28, 2002 March 31, 2003 High Yield Total Return Portfolio 0.10% February 28, 2002 March 31, 2003 Income Portfolio 0.10% February 28, 2002 March 31, 2003 International Equity Portfolio 0.25% February 28, 2002 March 31, 2003 Intrinsic Value Portfolio 0.25% February 28, 2002 March 31, 2003 S&P STARS Opportunities Portfolio 0.25% February 28, 2002 March 31, 2003 S&P STARS Portfolio 0.25% February 28, 2002 March 31, 2003 Small Cap Value Portfolio 0.25% February 28, 2002 March 31, 2003 The Insiders Select Fund 0.25% February 28, 2002 March 31, 2003 ________________________ Schedule 1 amended and restated as of May 6, 2002. * Annual Fee as a Percentage of Average Daily Net Assets. SCHEDULE 1 TO DISTRIBUTION PLAN (CLASS "B" SHARES) DATED SEPTEMBER 8, 1997 (AS REVISED FEBRUARY 10, 1999 AND APRIL 17, 2000) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. Class "B" Must be Name of Series Shares Last Approved Approved by - -------------- -------- ------------- ----------- Alpha Growth Portfolio 0.75% February 28, 2002 March 31, 2003 High Yield Total Return 0.75% February 28, 2002 March 31, 2003 Portfolio Income Portfolio 0.75% February 28, 2002 March 31, 2003 International Equity Portfolio 0.75% February 28, 2002 March 31, 2003 Intrinsic Value Portfolio 0.75% February 28, 2002 March 31, 2003 S&P STARS Opportunities 0.75% February 28, 2002 March 31, 2003 Portfolio S&P STARS Portfolio 0.75% February 28, 2002 March 31, 2003 Small Cap Value Portfolio 0.75% February 28, 2002 March 31, 2003 The Insiders Select Fund 0.75% February 28, 2002 March 31, 2003 ________________________ Schedule 1 amended and restated as of May 6, 2002. * Annual Fee as a Percentage of Average Daily Net Assets. SCHEDULE 1 TO DISTRIBUTION PLAN (CLASS "C" SHARES) DATED SEPTEMBER 8, 1997 (AS REVISED FEBRUARY 10, 1999 AND APRIL 17, 2000) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. Class "C" Must be Name of Series Shares Last Approved Approved by - --------------- --------- ------------ ------------- Alpha Growth Portfolio 0.75% February 28, 2002 March 31, 2003 High Yield Total Return 0.75% February 28, 2002 March 31, 2003 Portfolio Income Portfolio 0.75% February 28, 2002 March 31, 2003 International Equity Portfolio 0.75% February 28, 2002 March 31, 2003 Intrinsic Value Portfolio 0.75% February 28, 2002 March 31, 2003 S&P STARS Opportunities 0.75% February 28, 2002 March 31, 2003 Portfolio S&P STARS Portfolio 0.75% February 28, 2002 March 31, 2003 Small Cap Value Portfolio 0.75% February 28, 2002 March 31, 2003 The Insiders Select Fund 0.75% February 28, 2002 March 31, 2003 ________________________ Schedule 1 amended and restated as of May 6, 2002. * Annual Fee as a Percentage of Average Daily Net Assets. EX-99.M(2) 14 kl05044_ex99m2.txt SCHEDULE I TO SHAREHOLDR SERVICING PLAN. SCHEDULE I TO THE AMENDED AND RESTATED SHAREHOLDER SERVICING PLAN ADOPTED SEPTEMBER 8, 1997 AND AMENDED FEBRUARY 10, 1999 BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. This Shareholder Servicing Plan shall be adopted with respect to the following Portfolios of The Bear Stearns Funds: FUND Class A Class B Class C - ---- ------- ------- ------- Alpha Growth Portfolio .25% .25% .25% High Yield Total Return Portfolio .25% .25% .25% Income Portfolio .25% .25% .25% International Equity Portfolio .25% .25% .25% Intrinsic Value Portfolio .25% .25% .25% S&P STARS Opportunities Portfolio .25% .25% .25% S&P STARS Portfolio .25% .25% .25% Small Cap Value Portfolio .25% .25% .25% The Insiders Select Fund .25% .25% .25% Reapproved February 4, 1998 to be reapproved no later than March 31, 1999 Reapproved February 10, 1999 to be reapproved no later than March 31, 2000 Reapproved February 7, 2000 to be reapproved no later than March 31, 2001 Reapproved February 5, 2001 to be reapproved no later than March 31, 2002 Reapproved May 21, 2001 to be reapproved no later than March 31, 2002 Reapproved February 28, 2002 to be reapproved no later than March 31, 2003 EX-99.N 15 kl05044_ex99n.txt SCHEDULES A, B & E TO RULE 18F-3 PLAN. SCHEDULE A TO THE BEAR STEARNS FUNDS RULE 18F-3 PLAN DATED MARCH 24, 1995 (REVISED AS OF MAY 6, 2002) Portfolios Alpha Growth Portfolio High Yield Total Return Portfolio Income Portfolio International Equity Portfolio Intrinsic Value Portfolio S&P STARS Opportunities Portfolio S&P STARS Portfolio Small Cap Value Portfolio The Insiders Select Fund SCHEDULE B TO THE BEAR STEARNS FUNDS RULE 18F-3 PLAN DATED MARCH 24, 1995 (REVISED AS OF MAY 6, 2002) Front-End Sales Charge--Class A Shares--The public offering price for Class A shares shall be the net asset value per share of that Class plus a sales load as shown below: (a) For S&P STARS Portfolio, S&P STARS Opportunities Portfolio, Intrinsic Value Portfolio, Small Cap Value Portfolio, The Insiders Select Fund, Alpha Growth Portfolio and International Equity Portfolio: Total Sales Load --------------------------------- Amount of Transaction As a % of As a % of offering net asset price per value per share share --------------- -------------- Less than $50,000.......................... 5.50% 5.82% $50,000 to less than $100,000.............. 4.75 4.99 $100,000 to less than $250,000............. 3.75 3.90 $250,000 to less than $500,000............. 2.75 2.83 $500,000 to less than $1,000,000........... 2.00 2.04 $1,000,000 and above....................... 0.00 0.00 (b) For Income Portfolio and High Yield Total Return Portfolio: Total Sales Load --------------------------------- Amount of Transaction As a % of As a % of offering net asset price per value per share share --------------- -------------- Less than $50,000.......................... 4.50% 4.71% $50,000 to less than $100,000.............. 4.25% 4.44% $100,000 to less than $250,000............. 3.25% 3.36% $250,000 to less than $500,000............. 2.50% 2.56% $500,000 to less than $1,000,000........... 2.00% 2.04% $1,000,000 and above....................... 0.00% 0.00% Contingent Deferred Sales Charge--Class A Shares--A CDSC of 1.00% shall be assessed at the time of redemption of Class A shares purchased without an initial sales charge as part of an investment of at least $1,000,000 and redeemed within one year after purchase. A CDSC of .50% shall be assessed at the time of redemption of Class A shares purchased without a sales charge with the proceeds from the redemption of shares of an investment company sold with a sales charge or commission and not distributed by the Portfolio's Distributor. The terms contained in Schedule D pertaining to the CDSC assessed on redemptions of Class C shares, including the provisions for waiving the CDSC, shall be applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation shall apply to such purchases of Class A shares. SCHEDULE E TO THE BEAR STEARNS FUNDS RULE 18F-3 PLAN DATED MARCH 24, 1995 (REVISED AS OF MAY 6, 2002) Amount of Distribution Plan--Each of the following Series shall pay a fee based on the value of the average daily net assets of the respective Class as follows: Name of Series Class A Class B Class C - -------------- ------- ------- ------- Alpha Growth Portfolio .25% .75% .75% High Yield Total Return Portfolio .10% .75% .75% Income Portfolio .10% .75% .75% International Equity Portfolio .25% .75% .75% Intrinsic Value Portfolio .25% .75% .75% S&P STARS Opportunities Portfolio .25% .75% .75% S&P STARS Portfolio .25% .75% .75% Small Cap Value Portfolio .25% .75% .75% The Insiders Select Fund .25% .75% .75% Amount of Shareholder Servicing Plan--Each of the following Series shall pay a fee based on the value of the average daily net assets of the respective Class as follows: Name of Series Class A Class B Class C - -------------- ------- ------- ------- Alpha Growth Portfolio .25% .25% .25% High Yield Total Return Portfolio .25% .25% .25% Income Portfolio .25% .25% .25% International Equity Portfolio .25% .25% .25% Intrinsic Value Portfolio .25% .25% .25% S&P STARS Opportunities Portfolio .25% .25% .25% S&P STARS Portfolio .25% .25% .25% Small Cap Value Portfolio .25% .25% .25% The Insiders Select Fund .25% .25% .25% EX-99.P(1) 16 kl05044_ex99p1.txt CODE OF ETHICS OF REGISTRANT. THE BEAR STEARNS FUNDS MANAGED INCOME SECURITIES PLUS FUND, INC. CODE OF ETHICS A. Legal Requirements. Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the "1940 Act"), makes it unlawful for any officer or Trustee(1) (as well as other persons) of The Bear Stearns Funds and Managed Income Securities Plus Fund, Inc. (collectively, the "Funds"), in connection with the purchase or sale by such person of a security "held or to be acquired" by any investment portfolio of the Funds (each, a "Portfolio" and collectively, the "Portfolios"). (1) To employ any device, scheme or artifice to defraud a Fund or Portfolio; (2) To make any untrue statement of a material fact to a Fund or Portfolio or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made to the Fund or Portfolio, not misleading; (3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Fund or Portfolio; or (4) To engage in any manipulative practice with respect to a Fund or Portfolio. B. Certain Definitions. (1) "Access Person" means: (a) all directors, officers and employees of a Fund or a Portfolio's investment adviser or sub-adviser. (b) any director or officer of a Fund's principal underwriter (the "Distributor") who, in the ordinary course of his or her regular functions and duties, makes, participates in or obtains information regarding the purchase or sale of Covered Securities for the Funds for which the Distributor acts as principal underwriter or whose functions or duties as part of the ordinary course of his or her business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities; (c) any director or officer of the Fund's Administrator who, in the ordinary course of his or her regular functions and duties, makes, participates in or obtains information concerning the purchase or sale of securities for the - --------------- (1) In this Code of Ethics, "trustees" also refers to "directors" and "Board of Trustees" also refers to "Board of Directors." Funds and whose functions or duties as part of the ordinary course of his or her business relate to the making of any recommendation to the Fund regarding the purchase or sale of securities; and (d) any other person designated by the Compliance Officer to be an Access Person. (2) "Beneficial Ownership" means (a) the receipt of benefits substantially equivalent to those of ownership through relationship, understanding, agreement, contract or other arrangements; or (b) the power to vest benefits substantially equivalent to those of ownership in oneself at once or at some future time. Generally, a person will be regarded as having a direct or indirect Beneficial Ownership in securities held in his/her name, as well as in the name of a spouse, minor children who live with such person, any member of the person's immediate family,(2) any other relative (parents, adult children, brothers, sisters, in-laws, etc.) whose investments the person directs or controls, whether they live together or not, and securities held by a trust or estate for the person's benefit. The definition of "Beneficial Ownership" will be interpreted with reference to the definition contained in the provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder, as such provisions may be interpreted by the Securities and Exchange Commission, except that the determination of direct or indirect Beneficial Ownership will apply to all securities which an Access Person has or acquires. (3) "BSAM" means Bear Stearns Asset Management Inc. (4) "Compliance Officer" means the Compliance Officer of BSAM. (5) "Covered Security" means a security as defined in Section 2(a)(36) of the 1940 Act, including all related securities, except that it does not include (a) direct obligations of the government of the United States; (b) bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (c) shares issued by registered open-end investment companies. (6) "Covered Service Provider" means an investment adviser, sub-adviser, administrator and principal underwriter for each Fund. (7) "Ethics Committee" means the Ethics Committee established by BSAM. - --------------- (2) A person's "immediate family" includes a spouse, child, mother, father, brother, sister, in-law or any other relative who lives in the same household as the person and is financially dependent upon the person. 2 (8) "Purchase or sale of a Covered Security" includes, among other things, the writing of an option to purchase or sell a Covered Security. (9) "Security held or to be acquired by a Fund" means: (a) Any Covered Security that, within the most recent 15 days, (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or BSAM for purchase by the Fund(3), and (b) Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security. C. Fund Policies. (1) No Access Person shall engage in any act, practice or course of conduct that would violate the provisions of Rule 17j-1(b) set forth above. (2) In keeping with the recommendations of the Board of Governors of the Investment Company Institute, the following general policies shall govern personal investment activities of Access Persons of a Fund or a Portfolio: (a) It is the duty of all Access Persons to place the interest of Fund shareholders first; (b) All Access Persons shall conduct personal securities transactions in a manner that is consistent with this Code of Ethics and that avoids any actual or potential conflict of interest or any abuse of a position of trust and responsibility; and (c) No Access Person of a Fund or of a Portfolio shall take inappropriate advantage of his or her position with the Fund or with a Portfolio. (3) BSAM and the Funds have adopted a Policy Statement on Insider Trading (the "Policy Statement"), a copy of which is attached hereto as Exhibit A. All Access Persons are required by this Code of Ethics to read and familiarize themselves with their responsibilities under this Code of Ethics and the Policy Statement. All Trustees and Access Persons shall certify at the end of each calendar year that they have read and understand this Code of Ethics and the Policy Statement, and that they have complied with the requirements thereof, and the Compliance Officer shall maintain a copy of each executed Acknowledgment. - --------------- (3) A security is "being considered for purchase or sale" when a recommendation to purchase such security has been made and communicated and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. 3 D. Reports by Access Persons. (1) Initial Certification. Each Access Person shall submit an initial report in the form attached hereto as Exhibit B ("Initial Certification of Access Persons") to the Fund's Compliance Officer no later than 10 days after becoming an Access Person. (2) Quarterly Transaction Reports. Each Access Person shall submit to the Fund's Compliance Officer a Securities Transaction Report (Exhibit C) showing all transactions in Covered Securities in which the person has, or by reason of such transaction acquires Beneficial Ownership. Such reports shall be filed no later than 10 days after the end of each calendar quarter. (3) Annual Holdings Report. Each Access Person shall submit to the Compliance Officer annually (as of each December 31) an Annual Asset Certification of Access Persons (Exhibit D), listing all holdings of Covered Securities in which he or she has a direct or indirect Beneficial Ownership interest. Access Persons must submit the Annual Report and certification no later than January 30 of each year. (4) Exceptions from Reporting Requirements. (a) A person need not make a report under this Section D with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control. (b) A Trustee who is not an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act (an "Independent Trustee"), and who would be required to make a report solely by reason of being a Trustee, need not make: (i) An initial holdings report under paragraph (1) of this Section D and an annual holdings report under paragraph (3) of this Section D; and (ii) A quarterly transaction report under paragraph (2) of this Section D, unless the Independent Trustee knew or, in the ordinary course of fulfilling his or her official duties as a Trustee, should have known that during the 15-day period immediately before or after the Trustee's transaction in a Covered Security, a Fund purchased or sold the Covered Security, or the Fund or its investment adviser considered purchasing or selling the Covered Security. (c) An Access Person need not make a quarterly transaction report under paragraph (2) of this Section D if the report would duplicate information contained in broker trade confirmations or account statements received by the Trust, investment adviser or principal underwriter with respect to the Access Person in the time period required by paragraph (2) of this Section D, if all of the information required by that paragraph is contained in the 4 broker trade confirmations or account statements, or in the records of the Fund, investment adviser or principal underwriter. E. Procedures. (1) The Compliance Officer shall notify each Access Person required to submit reports pursuant to this Code of Ethics that such person is subject to this reporting requirement and shall deliver a copy of this Code of Ethics to such person. (2) The Compliance Officer shall report to the Board of Trustees: (a) at the next meeting following the receipt of any Securities Transaction Report with respect to each reported transaction in a security which was held or acquired by the Fund or a Portfolio within 15 days before or after the date of the reported transaction or at a time when, to the knowledge of the Compliance Officer, the Fund, a Portfolio or the investment adviser for the Fund or a Portfolio, was considering the purchase or sale of such security; (b) any transaction not required to be reported to the Board by operation of subparagraph (a) that the Compliance Officer believes may nonetheless constitute a violation of this Code of Ethics; and (c) any apparent violation of any reporting requirement hereunder. (3) The Board of Trustees shall consider reports made to it hereunder and shall determine whether any of the provisions of this Code of Ethics have been violated, and what sanctions, if any, should be imposed. (4) The Board of Trustees, including a majority of the Independent Trustees, with advice of counsel to the Funds and to the Independent Trustees, shall determine, that each Access Person who is an employee of a Covered Service Provider shall be subject to this Code of Ethics or a Code of Ethics adopted by such Covered Service Provider, provided that: (a) The Covered Service Provider has adopted a Code of Ethics that meets the requirements of Rule 17j-1, has been approved by the Board of Trustees and substantially conforms to generally accepted industry and regulatory standards; and (b) The Covered Service Provider has implemented adequate procedures for monitoring compliance with its Code of Ethics. (5) The Board of Trustees shall review the operation of this Code of Ethics at least once a year. To that end, an appropriate officer of each Fund shall prepare an annual report to the Board of Trustees that: 5 (a) summarizes existing procedures of the Fund and its Covered Service Providers concerning personal investing and any changes in the procedures made during the past year; (b) identifies any material violations requiring significant remedial action during the past year and describes the sanctions imposed; (c) identifies any recommended changes in existing restrictions or procedures of the Fund or its Covered Service Providers based upon the experience of the Fund or its investment advisers, evolving industry practices or developments in applicable laws or regulations; and (d) certifies that the Fund has adopted procedures reasonably necessary to prevent Access Persons from violating this Code. (6) This Code of Ethics, a Copy of each Securities Transaction Report by an Access Person, any written report submitted hereunder required by the Ethics Committee, and lists of all persons required to make reports shall be preserved with the Fund records for the period required by Rule 17j-1(f). Adopted: November 12, 1998 Revised: February 7, 2000 August 3, 2000 The Board of Trustees of The Bear Stearns Funds The Board of Directors of Managed Income Securities Plus Fund 6 EXHIBIT A THE BEAR STEARNS FUNDS MANAGED INCOME SECURITIES PLUS FUND, INC. Policy Statement on Insider Trading Policies and Procedures Designed to Prevent Insider Trading I. Introduction: Scope and Coverage The following policies and procedures have been established to aid employees and other persons associated with BSAM Inc. to avoid "insider trading" and to aid BSAM in preventing, detecting and imposing sanctions on those who engage in "insider trading." As a matter of corporate policy, BSAM strives to prevent its Portfolio Managers, officers, Access Persons, Investment Personnel and employees ("Associated Persons") from unlawfully: >> trading while in possession of material, non-public information ("inside information"), >> communicating inside information to others for their use in trading ("tipping"), or >> recommending securities based on inside information. Insider trading is not only unethical; it is also illegal. To promote this policy against illegal insider trading and tipping, we have adopted these policies and procedures concerning the use of material, non-public information and trading of securities. These policies and procedures apply to the conduct of all Associated Persons, whether they are permanent or temporary employees, whether they are employees or independent contractors, and whether or not their conduct is within the scope of their responsibilities for BSAM. Associated Persons who participate in or have access to inside information concerning the investment decisions for the BSAM mutual funds are subject to additional restrictions, which are described in the Code of Ethics. Nothing contained in these policies and procedures changes your responsibilities and obligations under the Code of Ethics if you are covered by it. You must read and understand these policies and procedures. If you fail to comply with these policies and procedures, you risk serious penalties. That is, we may terminate your employment, and you could face substantial personal civil or criminal liability. A-1 If you have any questions regarding these policies and procedures, please call the Compliance Department at 272-2434. II. Summary of the Law of Insider Trading The following general discussion is intended as a guide to help you understand how to avoid insider trading. Whether or not the law would view a particular action as insider trading may require a detailed analysis of the specific facts involved in your particular case. Before you take any action that you believe may be considered insider trading under the law, you should consult with the Compliance Department. The law concerning insider trading is continuously evolving. Generally, the law prohibits >> Trading by any person, whether or not the person is an "insider" in the technical, legal sense, while in possession of inside information(1); and; >> Communicating inside information in violation of a duty to keep it confidential. Below we discuss some of the key concepts of insider trading. For purposes of the discussion, we use the term "tipping" to include both communicating material, nonpublic information to others directly and indirectly through recommendations. A. What Is Inside Information? For information to be considered "inside" information, and therefore subject to the insider trading laws, it need not originate from within a company or even relate to its internal operations. For example, in the Carpenter case, a court found a reporter from The Wall Street Journal to be criminally liable for tipping others about newspaper column stories that were about to be published on various companies. The reporter disclosed to others the dates on which reports on various companies would appear in The Wall Street Journal and whether those reports would be favorable or not, knowing that it was likely that they would trade on the basis of that - --------------- (1) The term "insider" includes persons who, by virtue of their position or relationship with a company, owe a duty of loyalty and confidentiality. Examples of insiders include such classic insiders as officers and directors, as well as "quasi-insiders," such as outside lawyers and accountants whose duty of loyalty and confidentiality results from their employment relationship with the company. See Section II.C.1 of this Policy Statement, "Corporate Insiders," below. A-2 information. The court found that the information belonged to the newspaper and therefore the reporter and those he told misappropriated the information.(2) Similarly, information about a third party's plans to launch a hostile tender offer for a company's shares or a Federal Reserve Board decision to alter interest rates may be considered "inside" information. To come within the law, the information must be "material" and "non-public." B. When Is Information Material? To be liable for trading on or tipping inside information, the information must be "material." Material information generally refers to as information that a reasonable investor would be reasonably likely to consider important in making an investment decision. Information that is likely to affect the price of a company's securities is material. Whether information is material depends on all the facts and circumstances. You could consider material information to include, among other things, information concerning dividend decisions, earnings estimates, changes in previously released earnings estimates, merger acquisition proposals or agreements, the sale of a division, developments concerning litigation, liquidity problems, bankruptcy filings, important inventions or discoveries, and extraordinary management developments, such as the firing of a Chief Executive Officer. Information can be material even if it does not relate to a company's business. C. Who Is Under a Duty to Avoid Trading or Tipping? The issue of who has a duty is complex. Generally speaking, you should assume that anyone who has material, non-public information has a duty not to trade on it or tip it to others for trading. Keep in mind that "tipping" includes not only directly communicating information, but also making recommendations to others based on it (even if the information is not directly disclosed). If you believe that you may be entitled to use material, non-public information that has come into your possession, either for yourself, a client, the firm, or some other person, you must seek guidance from the Legal Department before you take any action. 1. Corporate Insiders Corporate insiders are always under a duty to refrain from trading in the shares of their company while in possession of insider information or tipping such information to others for their trading purposes. The concept of "insider" is broad. It includes officers, directors, and employees of the issuer of the security being traded. It also includes "temporary insiders." A person can become a "temporary insider" of a company if he or she enters into a special confidential relationship with the issuer and, as a result, is given access to information solely for the issuer's purposes. Temporary insiders can include, among others, attorneys, accountants, consultants, investment bankers, and bank lending officers as well as employees of a company's major vendors or material business partners. For example, BSAM could become a temporary - --------------- (2) Carpenter v. U.S., 108 S.Ct. 316 (1987). A-3 insider of a company it invested in if the company was in bankruptcy and BSAM was awarded a seat on its creditor's committee. 2. Tippees People who receive inside information from others should consider themselves "tippees." "Tippees" of corporate insiders have a duty to refrain from trading on or tipping inside information if they are aware or should have been aware that their insider sources violated a fiduciary duty in communicating the information to them.(3) This means that if you receive inside information from a person at a company, you cannot trade securities of that company or tip the inside information to a third party. In the "tippee" situation, the law deems an insider to have violated a fiduciary duty only if the insider personally benefits, directly or indirectly, from the disclosure. However, the concept of a personal benefit is broad. The tippee could be liable if the prosecution shows that the insider has received or will receive some direct compensation, or if the relationship between the insider and tippee that suggests a quid pro quo or a pure gift to the tippee with no expectation of receiving anything in return. Recently, in the Warde case, the Second Circuit Court of Appeals upheld tippee liability based upon the gift theory.(4) In this case, A, the defendant, was a good friend of B, and Director of Company X. B told A that Company X was discussing various options concerning its future. A large conglomerate ultimately acquired Company X. Both A and B profited from warrants they purchased when Company X was in negotiations to be acquired. The court found that A was liable for insider trading based on the theory that he was a "tippee" of B. A appealed, claiming, among other things, that B, the "tipper", had not received any "benefit" in giving A the information. The court disagreed, holding that a tip to a friend resembles trading by the insider followed by a gift of the profits to the recipient. Therefore, the tipper indirectly benefited. There is no distinction between receiving inside information in a personal relationship as opposed to a professional relationship. The SEC takes the position that if you receive inside information in a confidential personal relationship, when the person confiding the information has a reasonable expectation that you will keep the information private, then if you tip that information or trade securities that is the subject of the inside information, then you have violated insider trading laws.(5) The SEC has proposed new Rule 10b5-2, which would codify this position. - --------------- (3) Dirks v. SEC, 463 U.S. 646 (1983) (4) SEC v. Warde, 151 F.3d 42 (2nd Cir. 1998) (5) SEC v. McDermott, No. 99 Civ. 12256 (S.D.N.Y. filed December 21, 1999). A-4 3. Other Outsiders There are two other ways that non-insiders can acquire a duty to avoid trading or tipping non-public information. The first is under the so-called "misappropriation" theory. Under this theory, a person commits fraud in violation of federal securities laws (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5) by "misappropriating" material nonpublic information for securities trading purposes, in breach of a duty of loyalty and confidence. Under the misappropriation theory, prosecutors can reach a wide variety of individuals who have no connection with the issuer of the securities being traded. For example, in the O'Hagan case, a partner of a law firm who represented a company which was planning a takeover was convicted for purchasing options on the shares of the target.(6) Similarly, in the Carpenter case, which we discuss above, the Supreme Court upheld a conviction of a newspaper columnist under the misappropriation theory. The court held that the columnist defrauded The Wall Street Journal when he used the mails and the telephone to communicate information about upcoming stories about public companies to trade in the stock of those companies. The court considered the information to be the property of the newspaper. The second basis for outsider liability involves trading on inside information in connection with a tender offer.(7) That is, even if you are not an insider or a tippee and do not possess "misappropriated" information, you may be prohibited from trading while in possession of the information (or tipping the information) if the information relates to a tender offer. The rule generally makes it unlawful for anyone who learns about a tender offer before its announcement to trade or tip others about the tender offer. 4. Possession v. Use Unless you have been provided with guidance from the Compliance Department to the contrary, you should assume that you may not trade while in possession of material, non-public information even if you believe that the information has not influenced your decision (in other words, even if you would have traded without having the information). The SEC has long argued that it is illegal for someone to trade while in possession of such information even if the trade is not made "on the basis of" the information (i.e., the information was not "used" for trading). Thus, for example, under the SEC's theory, if you have obtained inside information about a company after you already made a decision to buy its shares, you cannot trade. In fact, you must immediately cancel any unexecuted purchase order that was placed before you acquired the information. In several recent cases, the courts have rejected the SEC's theory that it is not necessary to prove that information was "used" in order to prove insider trading but only that the - --------------- (6) U.S. v. O'Hagan, 521 U.S. 642 (1997) (7) Rule 14e-3 under the Exchange Act. A-5 defendant was in possession of the information. In the Adler case, for example, the court required the SEC to show that the individual based his decision to trade on the information in question.(8) Similarly, in the Smith case, the court held that the government must prove that "use" of the information was a "significant factor" in the decision to buy or sell to establish insider trading in a criminal case.(9) It would be very risky to rely on these cases, because courts are willing to find that a "strong inference" of actual use of the material non-public information arises when an insider trades while in possession of this information. Even if you had proof of a pre-existing plan to trade, the government could still attempt to show that material, non-public information was a "significant factor" as to the amount ultimately traded or the timing of the trade. In an effort to remove ambiguity in this area, the SEC has adopted new Rule 10b5-1, which states the general principal that insider trading liability arises when a person trades while "aware" of material non-public information, with certain narrow exceptions.(10) For example, the exceptions cover situations when you entered into a binding contract to trade before coming into possession of inside information, or when you previously instructed another person execute a trade for your account, or if you had adopted, and had previously adhered to, a written plan specifying certain purchases or sales of particular securities. The rule also provides an affirmative defense for purchases or sales that result from a written plan for trading securities that is designed to track or correspond to a market index, market segment or group of securities. III. Penalties and Remedies The penalties for unlawful trading while in possession of or communicating material, non-public information to others are severe, both for the individuals involved in such conduct, their employers, and "controlling persons" (i.e., persons who have the right to exercise control over the activities of others). A person can be subject to some or all of the penalties listed below even if he or she does not personally benefit from the violation. First time penalties include: o Civil injunctions; o Disgorgement of profits; o Civil penalties for the persons' who committed the violation of up to $1 million or three times the amount of profit gained or loss avoided, whether or not the person actually benefited; - --------------- (8) SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998). (9) U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998). (10) Selective Disclosure and Insider Trading, Securities Act Release No. 7881, Securities Exchange Act Release No. 43154, Investment Company Act Release No. 24599 (August 15, 2000). A-6 o Civil penalties for the employer or other "controlling persons" of up to the greater of $2,500,000 or three times the amount of the profit gained or loss avoided; and o Criminal fines and jail sentences. BSAM will not tolerate any illegal conduct by its Associated Persons. Moreover, if you violate these policies and procedures, you may be subject internal disciplinary action, up to and including, for example, censure, fine, suspension, restriction on activities, and immediate termination of your employment. IV. Identifying Inside Information Before you buy or sell securities of a company about which you have potential inside information, either in connection with your duties at BSAM or for your own account, you must resolve the following issues: >> Is the information material? Is this information that an investor would consider important in making his/her investment decisions? Is this information that would substantially affect the market price of the securities if generally disclosed? >> Is the information non-public? To whom has this information been provided? Has the company released this information to shareholders? Has the information been effectively communicated to the marketplace by filings with regulatory bodies, or publications of Dow Jones, Reuters, The Wall Street Journal or other financial media. If, after consideration of these factors, you believe that the information is material and non-public, or if you have any questions as to whether the information is material and non-public, you must: |X| report the matter immediately to the Compliance Officer (or designee); |X| refrain from purchasing or selling the securities in a personal securities transaction or on behalf of others, including BSAM managed accounts; |X| refrain from communicating the information inside or outside BSAM, other than to the Compliance Officer (or designee); and |X| after the Compliance Officer (or designee) has reviewed the issue, you will be instructed to continue the prohibitions against trading and communications, or will be allowed to trade on and/or communicate the information. The above restrictions do not apply to insightful analyses of available data or filings, observations or insights of economic trends or sales that are available but have been overlooked or misinterpreted by analysts. A-7 V. Restricting Access to Material Non-Public Information Associated Persons may not communicate inside information to anyone, including persons within BSAM, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing inside information should be sealed and access to computer files containing inside information should be restricted. VI. Resolving Issues Concerning Insider Trading If, after consideration of the items set forth above, you have any doubt as to whether information is material or non-public, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures or as to the propriety of any action, you must discuss the issue with the Compliance Officer (or designee) before trading on or communicating the information to anyone. VII. Control Procedures The role of the Compliance Officer (or designee) of BSAM is critical to the implementation and maintenance of BSAM's policies and procedures against "insider trading." To prevent "insider trading", the Compliance Officer (or designee) should: |X| provide orientation to new Associated Persons regarding policies and procedures with respect to "insider trading"; |X| answer questions regarding these policies and procedures; |X| resolve issues of whether information received by an Associated Person is material and non-public; |X| review on a regular basis and update as necessary the Code of Ethics and related procedures; |X| promptly review and either approve or disapprove, in writing, each request of an employee for clearance to trade in securities covered by the Code of Ethics; and |X| when it has been determined that an Associated Person has material non-public information: |X| implement measures to prevent dissemination of such information; and |X| restrict Associated Persons from trading the securities. VIII. Special Reports to Management Promptly upon learning of an actual or potential violation of this Policy Statement, the Compliance Officer (or designee) shall prepare and maintain in BSAM's records a written report providing full details of the situation and any remedial action taken. Annually, the Compliance Officer (or designee) shall report to the Board of Trustees of the Funds with regard to any issues that arise during the year under this Policy Statement. A-8 EXHIBIT B THE BEAR STEARNS FUNDS MANAGED INCOME SECURITIES PLUS FUND, INC. INITIAL ASSET CERTIFICATION OF ACCESS PERSONS AS OF __________ Instructions 1. List each Covered Security in each account in which you may be deemed to have Beneficial Ownership that you held at the end of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. You submit this form within 10 days after you become an Access Person (or January 31, 2001, whichever is earlier). 3. You must complete and sign this certification whether or not you or your broker sends statements directly to the Compliance Officer. 4. If you are Trustee who is not an "interested person" of a Fund solely by reason of being a Trustee, then you need not submit this report. - -------------------------------------------------------------------------------- Name of No. of Shares Registration Name of Broker, Dealer or Principal on Account Nature of Security(1) or Bank Amount Interest - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership as of the date listed above. 2. I have read the Code of Ethics, the Policy Statement on Insider Trading and Code of Ethics Procedures and certify that I am in compliance with them. 3. This report excludes holdings with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (1) Including interest rate and maturity, if applicable. EXHIBIT C THE BEAR STEARNS FUNDS MANAGED INCOME SECURITIES PLUS FUND, INC. SECURITY TRANSACTION REPORT For The Calendar Quarter Ended __________ Instructions 1. List transactions in Covered Securities held in any account in which you may be deemed to have Beneficial Ownership as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. Write "none" if you had no transactions in Covered Securities during the quarter. 3. You must submit this form within 10 days after the end of the calendar quarter. 4. If you are Trustee who is not an "interested person" of a Fund and who would otherwise be required to report solely by reason of being a Trustee, then you need only report transactions in Covered Securities when you knew at the time of the transaction or, in the ordinary course of fulfilling your duties as a Trustee, you should have known, that during the 15-day period immediately preceding or after the date of the transaction, such security is or was purchased or sold, or was considered for purchase or sale, by the Funds. Please write "none" if you have no transactions in Covered Securities during the quarter that meet the above conditions. 5. If you submit copies of your monthly brokerage statements to the Compliance Officer, and those monthly brokerage statements disclose the required information with respect to all Covered Securities in which you may be deemed to have Beneficial Ownership, you need not file this form unless you established a new brokerage account during the quarter. 6. For each account that you established during the previous quarter that held securities for your direct or indirect benefit, state the name of the broker, dealer or bank with whom you established the account, the account number and the date you established the account.
============================================================================================= No. of Shares or Broker, Dealer or Other Date of Purchase/ Principal Party Through Whom Name of Security (2) Transaction Sale Amount Price Transaction Was Made - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- =============================================================================================
Certifications: I hereby certify that: During the previous quarter, I established the following accounts with a broker, dealer or bank: - ---------------------------------------------------------------------------- Broker, Dealer or Bank Account Number Date Established - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Certifications: I hereby certify that: 1. The information provided above is correct. 2. This report excludes transactions with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (2) Including interest rate and maturity, if applicable. EXHIBIT D THE BEAR STEARNS FUNDS MANAGED INCOME SECURITIES PLUS FUND, INC. ANNUAL ASSET CERTIFICATION OF ACCESS PERSONS For the Year Ended __________ Instructions 1. List each Covered Security held in any account in which you may be deemed to have Beneficial Ownership as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. Write "none" if you did not hold any Covered Securities at year end. 3. You must submit this form no later than January 30, _____. 4. You must complete and sign this form for annual certification whether or not you or your broker sends statements directly to the Compliance Officer. 5. If you are Trustee who is not an "interested person" of a Fund and who would otherwise be required to report solely by reason of being a Trustee, then you need not submit this report. - ------------------------------------------------------------------------------ No. of Registration Shares or on Security Nature of Broker, Name of Security(3) Principal or Account Interest Dealer or Bank Amount - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership at the end of the period. 2. I have read the Code of Ethics and the Policy Statement on Insider Trading and certify that I am in compliance with them. 3. This report excludes holdings with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (3) Including interest rate and maturity, if applicable. EX-99.P(2) 17 kl05044_ex99p2.txt CODE OF ETHICS OF BSAM AND BSC BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. CODE OF ETHICS WHEREAS, Bear Stearns Asset Management Inc. ("BSAM") is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and provides investment advisory services to investment companies (each a "Fund" and collectively, the "Funds") and other clients; WHEREAS, Bear, Stearns & Co. Inc. ("BSC") is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and serves as underwriter to investment companies for which BSAM serves as investment adviser; WHEREAS, the investment advisory business involves decisions and information which may have at least a temporary impact on the market price of securities, thus creating a potential for conflicts of interest between investment advisers, underwriters and their clients; and WHEREAS, BSAM and BSC have a duty with respect to each portfolio under management and the interests of the Managed Accounts and of the shareholders of the Funds must take precedence over the interests of BSAM, its officers and employees, thus requiring adherence to the highest standards of conduct by the officers and employees of BSAM; and WHEREAS, practical steps must be taken to ensure that no action is taken by an Access Person of BSAM or BSC which is, or appears to be, adverse to the interests of BSC, BSAM or any of its Managed Accounts, including the definition of standards of conduct for such employees, while at the same time avoiding unnecessary restrictions on the actions of such persons; and NOW, THEREFORE, BSAM and BSC hereby adopt the following Code of Ethics (the "Code") pursuant to the provisions of Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940 Act") and Section 204A of the Investment Advisers Act of 1940, as amended (the "Advisers Act"). A. Legal Requirements. Rule 17j-1(b) under the 1940 Act makes it unlawful for "any affiliated person" of BSAM (as investment adviser of the Funds) or the principal underwriter of the Funds, in connection with the purchase or sale by such person of a security "held or to be acquired" by a Fund: 1. To employ any device, scheme or artifice to defraud any Fund; 2. To make any untrue statement of a material fact to any Fund or to omit to state a material fact necessary in order to make the statements made to any Fund, in light of the circumstances under which they are made, not misleading; 3. To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any Fund; or 4. To engage in any manipulative practice with respect to any Fund. In addition, the Advisers Act requires that investment advisers establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration of the nature of such investment adviser's business, to prevent the misuse, in violation of the Advisers Act or the Exchange Act, or the rules or regulations thereunder, of material nonpublic information by such investment adviser or any person associated with the investment adviser. B. Definitions. 1. "Access Person" means: a. all directors, officers and employees of BSAM. b. any director or officer of BSC who, in the ordinary course of his or her regular functions and duties, makes, participates in or obtains information regarding the purchase or sale of securities for the Funds for which the Distributor acts as principal underwriter or whose functions or duties as part of the ordinary course of his or her business relate to the making of any recommendation to the Fund regarding the purchase or sale of securities; c. any director or officer of the Administrator who, in the ordinary course of his or her regular functions and duties, makes, participates in or obtains information concerning the purchase or sale of securities for the Funds and whose functions or duties as part of the ordinary course of his or her business relate to the making of any recommendation to the Fund regarding the purchase or sale of securities; d. all Investment Personnel; and e. any other person designated by the Compliance Officer to be an Access Person. 2. "Administrator" means Bear Stearns Funds Management Inc. 3. "Beneficial Ownership" means: a. the receipt of benefits substantially equivalent to those of ownership through relationship, understanding, agreement, contract or other arrangements; or b. the power to vest benefits substantially equivalent to those of ownership in oneself at once or at some future time. Generally, a person will be regarded as having a direct or indirect Beneficial Ownership in securities held in his/her name, as well as in the name of a spouse, minor children who live 2 with such person, any member of the person's immediate family,(1) any other relative (parents, adult children, brothers, sisters, in-laws, etc.) whose investments the person directs or controls, whether they live together or not, and securities held by a trust or estate for the person's benefit. The definition of "Beneficial Ownership" will be interpreted with reference to the definition contained in the provisions of Section 16 of the Exchange Act, and the rules and regulations thereunder, as such provisions may be interpreted by the Securities and Exchange Commission, except that the determination of direct or indirect Beneficial Ownership will apply to all securities which an Access Person has or acquires. 4. "Compliance Officer" means a person designated by BSAM as the compliance officer with respect to Managed Accounts. 5. "Control" has the meaning set forth in Section 2(a)(9) of the 1940 Act. 6. "Covered Security" means a security as defined in Section 2(a)(36) of the 1940 Act, including all related securities, except that it does not include (a) direct obligations of the government of the United States; (b) bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (c) shares issued by registered open-end investment companies. 7. "De minimis Transaction" means a transaction or series of transactions(2) involving (i) no more than 500 shares of an equity security (x) with an average monthly trading volume of 100 million shares or more or (y) issued by an issuer with a market capitalization (outstanding shares multiplied by current share price) of $1 billion or more or (ii) no more than the greater of $25,000 principal amount or 0.1% of the outstanding principal amount of any issue of any corporate, municipal or international fixed-income security. The exception provided in this Section B.7. is not available to (x) Investment Personnel who make or participate in making recommendations regarding the purchase or sale of the security or related securities, and (y) a Portfolio Manager who buys or sells the same security or a related security for one or more Managed Account during a period commencing seven days prior to and ending seven days after the transaction by the Managed Account. 8. "Employee Account" means securities trading accounts and privately placed securities owned by Access Persons and any other securities trading accounts in which the Access Person has direct or indirect Beneficial Ownership. Employee - --------------- (1) A person's "immediate family" includes a spouse, child, mother, father, brother, sister, in-law or any other relative who lives in the same household as the person and is financially dependent upon the person. (2) For purposes of this definition, "series of transactions" means transactions in a security or related securities within a rolling five business day period. 3 Accounts include accounts of your immediate family members and others. See the definition of "Beneficial Ownership." 9. "Ethics Committee" shall have the same meaning as given in paragraph E. 10. "Exempt Transaction(3)" means: a. a transaction in a security that is non-volitional on the part of either the Access Person or a Managed Account; b. a purchase of a security that is part of an automatic dividend reinvestment plan; c. a purchase of a security effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired; d. a sale of a security that is effected pursuant to a tender offer or similar transaction involving an offer to acquire all or a significant portion of a class of securities; or e. any other transaction otherwise prohibited by this Code, as such transaction is exempted as provided for in Section E below. 11. "Fund" means any one of the series portfolios of The Bear Stearns Funds or any other investment company registered under the 1940 Act of which BSAM is the adviser. 12. "Independent Director" means a director of BSAM who is not an "interested person" of BSAM within the meaning of Section 2(a)(19)(B) of the 1940 Act.(4) - --------------- (3) Note that Exempt Transactions are not exempt from this Code of Ethics in general. Some Exempt Transactions are exempted only from designated reporting requirements under this Code of Ethics and may be exempt from provisions under the Procedures, as amended from time to time (including, for example, preclearance, minimum holding periods and blackout periods). (4) Under Section 2(a)(19)(B), the following individuals are "interested persons" of BSAM: (i) any "affiliated person" (as defined in Section 2(a)(3) of the 1940 Act) of BSAM; any member of the immediate family of any natural person who is an affiliated person of BSAM; (iii) any person who knowingly has any direct or indirect beneficial interest in, or who is designated as trustee, executor, or guardian of any legal interest in, any security issued either by BSAM or by a controlling person of BSAM; (iv) any person or partner or employee of any person who at any time since the beginning of the last two fiscal years of BSAM has acted as legal counsel for BSAM; (v) any person or any affiliated person of a person, that, at any time during the six-month period preceding the determination of whether that person or affiliated person is an interested person, has executed any portfolio transactions for, engaged in any principal transactions with, or distributed shares for (I) BSAM; (II) any investment company holding itself out as a company 4 13. "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, as amended (the "Securities Act"), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act. 14. "Investment Personnel" means (a) any employee of a Managed Account or BSAM (or any company in a control relationship to the Managed Account or BSAM) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Managed Account, and (b) any natural person who controls the Managed Account or BSAM and who obtains information concerning recommendations to the Managed Account regarding the purchase or sale of securities by the Managed Account, including, but not limited to, analysts and traders who provide information and advice to a Portfolio Manager or who help execute a Portfolio Manager's decisions. If an Access Person becomes aware of information or activities that are normally within the function and responsibilities of Investment Personnel, then such Access Person shall be treated as Investment Personnel for the purpose of complying with this Code of Ethics with respect to such information or activities. 15. "Limited Offering" means an offering that is exempt from registration under the Securities Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505 or Rule 506 under the Securities Act. 16. "Managed Account" means each Fund and each separate account (including limited partnerships, limited liability corporations and other entities that are exempt from registration under the 1940 Act) that has entered into an investment management, administrative and/or advisory or sub-advisory agreement with BSAM. 17. "Portfolio Manager" means any employee entrusted with direct responsibility and authority to make investment decisions affecting a Managed Account. 18. "Security held or to be acquired by a Managed Account" means: - --------------- related to BSAM; or (III) any account over which BSAM has brokerage placement discretion; (vi) any person or any affiliated person of a person that, at any time during the six-month period preceding the date of the determination of whether that person or affiliated person is an interested person, has loaned money or other property to: (I) BSAM; (II) any investment company holding itself out as a company related to BSAM; or (III) any account over which BSAM has brokerage placement discretion; or (vii) any natural person that the SEC determines to be an interested person by reason of having had at any time since the beginning of the last two fiscal years of BSAM a material business or professional relationship with BSAM or with the principal executive officer or any controlling person of BSAM. 5 a. Any Covered Security that, within the most recent 15 days, (i) is or has been held by a Managed Account, or (ii) is being or has been considered by a Managed Account or BSAM for purchase by the Managed Account,(5) and b. Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security. 19. "Transaction" means buying or selling, or taking a long or short position in, a security, futures contract, or any other financial instrument. C. Policies. 1. Rule 17j-1. No Access Person will engage in any act, practice or course of conduct that would violate the provisions of Rule 17j-1(b). 2. Duties of Access Persons. The following general policies will govern personal investment activities of Access Persons: a. It is the duty of all Access Persons to place the interests of Managed Accounts first; b. All Access Persons will conduct personal securities transactions in a manner that: i. avoids any actual or potential conflict of interest or any abuse of a position of trust and responsibility; and ii. is consistent with this Code of Ethics, any policy regarding allocation of trades as may be adopted by BSAM and approved by the Funds' Trustees; c. No Access Person will take inappropriate advantage of his or her position with a Managed Account. 3. Personal Trading Procedures. Access Persons shall comply with the Code of Ethics Procedures established by BSAM and BSC from time to time. 4. Initial Public Offerings. Investment Personnel may not may acquire direct or indirect Beneficial Ownership of any Covered Security in an Initial Public Offering. 5. Limited Offerings. Investment Personnel may not acquire direct or indirect Beneficial Ownership of any Limited Offering (other than those managed by - --------------- (5) A security is "being considered for purchase or sale" when a recommendation to purchase such security has been made and communicated and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. 6 BSAM) without the prior written approval of BSAM's General Counsel and the Investment Person's direct supervisor. Investment Personnel shall send a copy of such approval to the compliance department of BSC and the Compliance Officer. The prior written approval should take into account, among other factors, whether the investment opportunity should be reserved for the Managed Accounts, and whether the opportunity is being offered to an individual by virtue of his or her position with BSAM. Any authorized investment in a Limited Offering must be disclosed to the Compliance Officer by such Investment Personnel when he or she plays any part in a Managed Account's subsequent consideration of an investment in securities of the issuer, and any decision by the Fund to purchase securities of the issuer will be subject to an independent review by the Ethics Committee. 6. Transactions in Securities on the Restricted List. From time to time, Access Persons may obtain material, non-public information or establish special or "insider" relationships with one or more issuers of securities (i.e., the employee may become an officer or director of an issuer, a member of a creditor committee that engages in material negotiations with an issuer, etc.). In such cases, Access Persons should keep in mind that they are subject to the requirements and restrictions set forth in Exhibit A, the Policy Statement on Insider Trading. 7. Insider Trading. BSAM and the Funds have adopted a Policy Statement on Insider Trading (the "Policy Statement"), a copy of which is attached hereto as Exhibit A. All Access Persons are required by this Code of Ethics to read and familiarize themselves with their responsibilities under this Code of Ethics and the Policy Statement. All Trustees and Access Persons shall certify at the end of each calendar year that they have read and understand this Code of Ethics and the Policy Statement, and that they have complied with the requirements thereof, and the Compliance Officer shall maintain a copy of each executed Acknowledgment. D. Reporting Requirements. 1. Reports by Access Persons. a. Initial Reports by Access Persons. i. Access Persons who are not Investment Personnel. Access Persons who are not Investment Personnel shall submit to the Compliance Officer (or designee) a complete report on the Asset Certification Form (see Exhibit B-1). ii. Investment Personnel. Access Persons who are Investment Personnel shall submit to the Compliance Officer (or designee) a complete report on the Asset Certification Form (see Exhibit B-2). iii. Contents of Asset Certification Form. The Asset Certification Form must list each Covered Securities held as of the end of the previous calendar quarter, in each Employee Account. This report 7 must include book entry shares held at companies, broker/dealers, investment advisers or other institutions, and physically issued certificates held in a safe deposit box, at one's home, or in the trust department of a bank or trust company. iv. Deadline. Access Persons must submit this initial listing of Covered Securities no later than the end of the then current calendar quarter. In the event that the Access Person held no Covered Securities as of the above reporting dates, the report should so specify. v. Independent Directors. The requirements of this Section D.1.a. shall not apply to Independent Directors. b. Quarterly Reports by Access Persons. i. Access Persons who are not Investment Personnel. Access Persons who are not Investment Personnel shall submit to the Compliance Officer a Security Transaction Report each quarter (See Exhibit C-1). ii. Investment Personnel. Access Persons who are Investment Personnel shall submit to the Compliance Officer a Security Transaction Report each quarter (See Exhibit C-2). iii. Contents of report. The Security Transaction Report shall list all transactions in Covered Securities held in any Employee Account. Access Persons need not report transactions in securities purchased or sold in Exempt Transactions. iv. Deadline. Access Persons must submit the Security Transaction Report no later than 10 days after the end of each calendar quarter. v. Independent Directors. Independent Directors may satisfy the requirements of this Section D.1.b. by filing with the Compliance Officer a Security Transaction Report (Independent Directors) each quarter (See Exhibit C-3). c. Annual Holdings Reports by Access Persons. i. Access Persons who are not Investment Personnel. Access Persons who are not Investment Personnel shall submit to the Compliance Officer annually (as of each December 31) an Annual Asset Certification (See Exhibit D-1). ii. Investment Personnel. Access Persons who are Investment Personnel shall submit to the Compliance Officer annually (as of December 31) an Annual Asset Certification (See Exhibit D-2). 8 iii. Contents of Certification. The Annual Asset Certification shall list all holdings of Covered Securities in each Employee Account as of December 31 of each year. iv. Deadline. Access Persons must submit the Annual Asset Certification no later than January 30 of each year. v. Independent Directors. The requirements of this Section D.1.c. shall not apply to Independent Directors. d. Exceptions from Reporting Requirements. i. Access Persons (other than Investment Personnel) need not make a report under this Section D with respect to transactions effected for, and Covered Securities held in, any Employee Account over which the Access Person has no direct or indirect influence or control. ii. Access Persons need not make a quarterly transaction report under paragraph (1)(b) of this Section D if the report would duplicate information contained in broker trade confirmations or account statements received by the Compliance Officer in the time period required by paragraph (1)(b) of this Section D, if all of the information required by that paragraph is contained in the broker trade confirmations or account statements, unless the Access Person established a new account during the quarter. 2. Notification by Compliance Officer. The Compliance Officer shall notify each Access Person required to make reports pursuant to this Code of Ethics that such person is subject to this reporting requirement and shall deliver a copy of this Code of Ethics to such person. 3. Reports to Fund Trustees. a. Periodic Reports. The Compliance Officer shall notify the Board of Trustees at the next meeting following receipt of any Security Transaction Report of information of: i. any violation of this Code of Ethics, or transaction not otherwise required to be reported by this Code of Ethics that the Compliance Officer believes nonetheless may evidence a violation of this Code of Ethics; and ii. any security that the Compliance Officer has designated as an Exempt Security. b. Annual Report to Fund Trustees. The Ethics Committee will prepare an annual report to the Board of Trustees of the Funds that: 9 i. summarizes existing procedures of the Fund concerning employee personal investing and any changes in the procedures made during the past year; ii. identifies any violations requiring significant remedial action during the past year; iii. any transaction that has been exempted by the Ethics Committee; iv. identifies any recommended changes in existing restrictions or procedures of BSAM or the Funds based upon the experience of the Funds or BSAM, evolving industry practices or developments in applicable laws or regulations; and v. certifies that BSAM and BSC have adopted procedures reasonably necessary to prevent Access Persons from violating this Code. 4. Preservation of Records. This Code of Ethics, a copy of each Securities Transaction Report, any written report issued hereunder by the Compliance Officer, and lists of all persons required to make reports hereunder shall be preserved with BSAM's records for the period required by Rule 17j-1(f). E. Ethics Committee. 1. A committee ("the Ethics Committee") composed of BSAM's General Counsel, heads of Fixed-Income and Equity Portfolio Management areas, Chief Financial Officer, head Equity Trader, and Compliance Officer shall oversee, interpret and revise the rules of this Code of Ethics. 2. The Ethics Committee has the power to exempt transactions in Employee Accounts from the rules of this Code of Ethics or related procedures when there is reasonable ground to believe that the Access Person has acted in good faith and the Employee Account has not improperly benefited from the transaction that has occurred in or is being considered for a Managed Account, and that the Managed Account has not been improperly disadvantaged thereby. The Ethics Committee may delegate this power to the Compliance Officer, provided (i) the Compliance Officer shall notify the Ethics Committee, in writing on the same business day, that an exception has been granted; and (ii) any individual member of the Ethics Committee may, within two business days, challenge this grant of exception. In this event, the Ethics Committee shall convene to make a final determination. The Compliance Officer shall make a report to the Ethics Committee on all exceptions granted at the next quarterly meeting of the Ethics Committee. 3. Only the Ethics Committee or its delegate has the power to exempt a transaction in an Employee Account from the rules of this Code of Ethics. 4. Any three members of the Ethics Committee acting together may take any authorized to be taken under this Code of Ethics. 10 F. Administration. 1. All Access Persons must be presented with a copy of this Code of Ethics. 2. All Access Persons are required to read this Code of Ethics and to acknowledge in writing that they have read, understood and agreed to abide by this Code of Ethics. 3. All Access Persons are required to provide a list of all of his or her Employee Accounts. 4. Access Persons who violate the rules of this Code of Ethics are subject to sanctions, which may include censure, suspension or termination of employment. 5. Any information obtained from an Access Person shall be kept in strict confidence, except that reports of securities transactions pursuant hereto will be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization to the extent required by law or regulation. 6. Nothing contained in this Code of Ethics shall be interpreted as relieving any Employee Account from acting in accordance with the provisions of any applicable law, rule or regulation or any other statement of policy or procedure governing the conduct of Access Persons. 7. If any Access Person has any question with regard to the applicability of the provisions of this Code of Ethics generally or with regard to any securities transaction, he or she should consult with the Compliance Officer or his designee. G. Reports to the Board of Trustees of the Funds No less frequently than annually, BSAM and BSC shall furnish to the Board of Trustees of each Fund a written report that: 1. describes any issues arising under this Code of Ethics since the last report to the Board of Trustees, including, but not limited to, information about material violations of the Code and sanctions imposed in response to the material violations; and 2. certifies that BSAM and BSC have adopted procedures reasonably necessary to prevent Access Persons from violating the Code. 11 H. Record Keeping. BSAM and BSC shall maintain at their principal places of business the following records: 1. A copy of this Code of Ethics and any Code of Ethics that has been in effect within the previous five years. 2. Any record of any violation of this Code of Ethics and any action taken as a result of the violation. These records shall be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs. 3. A copy of each report made by an Access Person as required by this Code of Ethics, including any information provided in lieu of the monthly reports. These records shall be maintained for at least five years after the end of the fiscal year in which the report is made or the information provided, the first two years in an easily accessible place. 4. A record of all persons, currently or within the past five years, who are or were required to make reports under this Code of Ethics, or who are or were responsible for reviewing these reports. These records shall be maintained in an easily accessible place. 5. A copy of each report presented to the Board of Trustees of the Funds shall be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. 6. A copy of each decision to approve an acquisition by Investment Personnel of Initial Public Offerings and Limited Offerings. These records must be maintained for at least five years after the end of the fiscal year in which the approval is granted. Adopted: November 12, 1998 Revised: June 25, 1999 February 7, 2000 August 3, 2000 November 3, 2000 February 5, 2001 July 10, 2001 October 1, 2001 November 28, 2001 February 28, 2002 March 6, 2002 12 EXHIBIT A BEAR STEARNS ASSET MANAGEMENT INC. Policy Statement on Insider Trading Policies and Procedures Designed to Prevent Insider Trading I. Introduction: Scope and Coverage The following policies and procedures have been established to aid employees and other persons associated with BSAM Inc. to avoid "insider trading" and to aid BSAM in preventing, detecting and imposing sanctions on those who engage in "insider trading." As a matter of corporate policy, BSAM strives to prevent its Portfolio Managers, officers, Access Persons, Investment Personnel and employees ("Associated Persons") from unlawfully: >> trading while in possession of material, non-public information ("inside information"), >> communicating inside information to others for their use in trading ("tipping"), or >> recommending securities based on inside information. Insider trading is not only unethical; it is also illegal. To promote this policy against illegal insider trading and tipping, we have adopted these policies and procedures concerning the use of material, non-public information and trading of securities. These policies and procedures apply to the conduct of all Associated Persons, whether they are permanent or temporary employees, whether they are employees or independent contractors, and whether or not their conduct is within the scope of their responsibilities for BSAM. Associated Persons who participate in or have access to inside information concerning the investment decisions for the BSAM mutual funds are subject to additional restrictions, which are described in the Code of Ethics. Nothing contained in these policies and procedures changes your responsibilities and obligations under the Code of Ethics if you are covered by it. You must read and understand these policies and procedures. If you fail to comply with these policies and procedures, you risk serious penalties. That is, we may terminate your employment, and you could face substantial personal civil or criminal liability. If you have any questions regarding these policies and procedures, please call the Compliance Department at 212-272-8095 or 212-272-3146. A-1 II. Summary of the Law of Insider Trading The following general discussion is intended as a guide to help you understand how to avoid insider trading. Whether or not the law would view a particular action as insider trading may require a detailed analysis of the specific facts involved in your particular case. Before you take any action that you believe may be considered insider trading under the law, you should consult with the Compliance Department. The law concerning insider trading is continuously evolving. Generally, the law prohibits >> Trading by any person, whether or not the person is an "insider" in the technical, legal sense, while in possession of insider information(1); and >> Communicating inside information to other persons in violation of a duty to keep it confidential. Below we discuss some of the key concepts of insider trading. For purposes of the discussion, we use the term "tipping" to include both communicating material, nonpublic information to others directly and indirectly through recommendations. A. What Is Inside Information? For information to be considered "inside" information, and therefore subject to the insider trading laws, it need not originate from within a company or even relate to its internal operations. For example, in the Carpenter case, a court found a reporter from The Wall Street Journal to be criminally liable for tipping others about newspaper column stories that were about to be published on various companies. The reporter disclosed to others the dates on which reports on various companies would appear in The Wall Street Journal and whether those reports would be favorable or not, knowing that it was likely that they would trade on the basis of that information. The court found that the information belonged to the newspaper and therefore the reporter and those he told misappropriated the information.(2) - --------------- (1) The term "insider" includes persons who, by virtue of their position or relationship with a company, owe a duty of loyalty and confidentiality. Examples of insiders include such classic insiders as officers and directors, as well as "quasi-insiders," such as outside lawyers and accountants whose duty of loyalty and confidentiality results from their employment relationship with the company. See Section II.C.1 of this Policy Statement, "Corporate Insiders," below. (2) Carpenter v. U.S., 108 S.Ct. 316 (1987). A-2 Similarly, information about a third party's plans to launch a hostile tender offer for a company's shares or a Federal Reserve Board decision to alter interest rates may be considered "inside" information. To come within the law, the information must be "material" and "non-public." B. When Is Information Material? To be liable for trading on or tipping inside information, the information must be "material." Material information generally refers to as information that a reasonable investor would be reasonably likely to consider important in making an investment decision. Information that is likely to affect the price of a company's securities is material. Whether information is material depends on all the facts and circumstances. You could consider material information to include, among other things, information concerning dividend decisions, earnings estimates, changes in previously released earnings estimates, merger acquisition proposals or agreements, the sale of a division, developments concerning litigation, liquidity problems, bankruptcy filings, important inventions or discoveries, and extraordinary management developments, such as the firing of a Chief Executive Officer. Information can be material even if it does not relate to a company's business. C. Who Is Under a Duty to Avoid Trading or Tipping? The issue of who has a duty is complex. Generally speaking, you should assume that anyone who has material, non-public information has a duty not to trade on it or tip it to others for trading. Keep in mind that "tipping" includes not only directly communicating information, but also making recommendations to others based on it (even if the information is not directly disclosed). If you believe that you may be entitled to use material, non-public information that has come into your possession, either for yourself, a client, the firm, or some other person, you must seek guidance from the Legal Department before you take any action. 1. Corporate Insiders Corporate insiders are always under a duty to refrain from trading in the shares of their company while in possession of inside information or tipping such information to others for their trading purposes. The concept of "insider" is broad. It includes officers, directors, and employees of the issuer of the security being traded. It also includes "temporary insiders." A person can become a "temporary insider" of a company if he or she enters into a special confidential relationship with the issuer and, as a result, is given access to information solely for the issuer's purposes. Temporary insiders can include, among others, attorneys, accountants, consultants, investment bankers, and bank lending officers as well as employees of a company's major vendors or material business partners. For example, BSAM could become a temporary insider of a company it invested in if the company was in bankruptcy and BSAM was awarded a seat on its creditor's committee. 2. Tippees People who receive inside information from others should consider themselves "tippees." "Tippees" of corporate insiders have a duty to refrain from trading on or tipping A-3 inside information if they are aware or should have been aware that their insider sources violated a fiduciary duty in communicating the information to them.(3) This means that if you receive inside information from a person at a company, you cannot trade securities of that company or tip the inside information to a third party. In the "tippee" situation, the law deems an insider to have violated a fiduciary duty only if the insider personally benefits, directly or indirectly, from the disclosure. However, the concept of a personal benefit is broad. The tippee could be liable if the prosecution shows that the insider has received or will receive some direct compensation, or if the relationship between the insider and tippee that suggests a quid pro quo or a pure gift to the tippee with no expectation of receiving anything in return. Recently, in the Warde case, the Second Circuit Court of Appeals upheld tippee liability based upon the gift theory.(4) In this case, A, the defendant, was a good friend of B, and Director of Company X. B told A that Company X was discussing various options concerning its future. A large conglomerate ultimately acquired Company X. Both A and B profited from warrants they purchased when Company X was in negotiations to be acquired. The court found that A was liable for insider trading based on the theory that he was a "tippee" of B. A appealed, claiming, among other things, that B, the "tipper", had not received any "benefit" in giving A the information. The court disagreed, holding that a tip to a friend resembles trading by the insider followed by a gift of the profits to the recipient. Therefore, the tipper indirectly benefited. There is no distinction between receiving inside information in a personal relationship as opposed to a professional relationship. The SEC takes the position that if you receive inside information in a confidential personal relationship, when the person confiding the information has a reasonable expectation that you will keep the information private, then if you tip that information or trade securities that is the subject of the inside information, then you have violated insider trading laws.(5) The SEC has proposed new Rule 10b5-2, which would codify this position. 3. Other Outsiders There are two other ways that non-insiders can acquire a duty to avoid trading or tipping non-public information. The first is under the so-called "misappropriation" theory. Under this theory, a person commits fraud in violation of federal securities laws (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5) by "misappropriating" material nonpublic information for securities trading purposes, in breach of a duty of loyalty and confidence. Under the - --------------- (3) Dirks v. SEC, 463 U.S. 646 (1983) (4) SEC v. Warde, 151 F.3d 42 (2nd Cir. 1998) (5) SEC v. McDermott, No. 99 Civ. 12256 (S.D.N.Y. filed December 21, 1999). A-4 misappropriation theory, prosecutors can reach a wide variety of individuals who have no connection with the issuer of the securities being traded. For example, in the O'Hagan case, a partner of a law firm who represented a company that was planning a takeover was convicted for purchasing options on the shares of the target.(6) Similarly, in the Carpenter case, which we discuss above, the Supreme Court upheld a conviction of a newspaper columnist under the misappropriation theory. The court held that the columnist defrauded The Wall Street Journal when he used the mails and the telephone to communicate information about upcoming stories about public companies to trade in the stock of those companies. The court considered the information to be the property of the newspaper. The second basis for outsider liability involves trading on inside information in connection with a tender offer.(7) That is, even if you are not an insider or a tippee and do not possess "misappropriated" information, you may be prohibited from trading while in possession of the information (or tipping the information) if the information relates to a tender offer. The rule generally makes it unlawful for anyone who learns about a tender offer before its announcement to trade or tip others about the tender offer. 4. Possession v. Use Unless you have been provided with guidance from the Compliance Department to the contrary, you should assume that you may not trade while in possession of material, non-public information even if you believe that the information has not influenced your decision (in other words, even if you would have traded without having the information). The SEC has long argued that it is illegal for someone to trade while in possession of such information even if the trade is not made "on the basis of" the information (i.e., the information was not "used" for trading). Thus, for example, under the SEC's theory, if you have obtained inside information about a company after you already made a decision to buy its shares, you cannot trade. In fact, you must immediately cancel any unexecuted purchase order that was placed before you acquired the information. In several recent cases, the courts have rejected the SEC's theory that it is not necessary to prove that information was "used" in order to prove insider trading but only that the defendant was in possession of the information. In the Adler case, for example, the court required the SEC to show that the individual based his decision to trade on the information in question.(8) Similarly, in the Smith case, the court held that the government must prove that "use" of the information was a "significant factor" in the decision to buy or sell to establish insider trading in a criminal case.(9) - --------------- (6) U.S. v. O'Hagan, 521 U.S. 642 (1997). (7) Rule 14e-3 under the Exchange Act. (8) SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998). (9) U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998). A-5 It would be very risky to rely on these cases, because courts are willing to find that a "strong inference" of actual use of the material non-public information arises when an insider trades while in possession of this information. Even if you had proof of a pre-existing plan to trade, the government could still attempt to show that material, non-public information was a "significant factor" as to the amount ultimately traded or the timing of the trade. In an effort to remove ambiguity in this area, the SEC has adopted new Rule 10b5-1, which states the general principal that insider trading liability arises when a person trades while "aware" of material non-public information, with certain narrow exceptions.(10) For example, the exceptions cover situations when you entered into a binding contract to trade before coming into possession of inside information, or when you previously instructed another person execute a trade for your account, or if you had adopted, and had previously adhered to, a written plan specifying certain purchases or sales of particular securities. The rule also provides an affirmative defense for purchases or sales that result from a written plan for trading securities that is designed to track or correspond to a market index, market segment or group of securities. III. Penalties and Remedies The penalties for unlawful trading while in possession of or communicating material, non-public information to others are severe, both for the individuals involved in such conduct, their employers, and "controlling persons" (i.e., persons who have the right to exercise control over the activities of others). A person can be subject to some or all of the penalties listed below even if he or she does not personally benefit from the violation. First time penalties include: o Civil injunctions; o Disgorgement of profits; o Civil penalties for the persons' who committed the violation of up to $1 million or three times the amount of profit gained or loss avoided, whether or not the person actually benefited; o Civil penalties for the employer or other "controlling persons" of up to the greater of $2,500,000 or three times the amount of the profit gained or loss avoided; and o Criminal fines and jail sentences. BSAM will not tolerate any illegal conduct by its Associated Persons. Moreover, if you violate these policies and procedures, you may be subject internal disciplinary action, up - --------------- (10) Selective Disclosure and Insider Trading, Securities Act Release No. 7881, Securities Exchange Act Release No. 43154, Investment Company Act Release No. 24599 (August 15, 2000. A-6 to and including, for example, censure, fine, suspension, restriction on activities, and immediate termination of your employment. IV. Identifying Inside Information Before you buy or sell securities of a company about which you have potential inside information, either in connection with your duties at BSAM or for your own account, you must resolve the following issues: >> Is the information material? Is this information that an investor would consider important in making his/her investment decisions? Is this information that would substantially affect the market price of the securities if generally disclosed? >> Is the information non-public? To whom has this information been provided? Has the company released this information to shareholders? Has the information been effectively communicated to the marketplace by filings with regulatory bodies, or publications of Dow Jones, Reuters, The Wall Street Journal or other financial media. If, after consideration of these factors, you believe that the information is material and non-public, or if you have any questions as to whether the information is material and non-public, you must: |X| report the matter immediately to the Compliance Officer (or designee); |X| refrain from purchasing or selling the securities in a personal securities transaction or on behalf of others, including BSAM managed accounts; |X| refrain from communicating the information inside or outside BSAM, other than to the Compliance Officer (or designee); and |X| after the Compliance Officer (or designee) has reviewed the issue, you will be instructed to continue the prohibitions against trading and communications, or will be allowed to trade on and/or communicate the information. The above restrictions do not apply to insightful analyses of available data or filings, observations or insights of economic trends or sales that are available but have been overlooked or misinterpreted by analysts. V. Restricting Access to Material Non-Public Information Associated Persons may not communicate inside information to anyone, including persons within BSAM, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing inside information should be sealed and access to computer files containing inside information should be restricted. A-7 VI. Resolving Issues Concerning Insider Trading If, after consideration of the items set forth above, you have any doubt as to whether information is material or non-public, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures or as to the propriety of any action, you must discuss the issue with the Compliance Officer (or designee) before trading on or communicating the information to anyone. VII. Control Procedures The role of the Compliance Officer (or designee) of BSAM is critical to the implementation and maintenance of BSAM's policies and procedures against "insider trading." To prevent "insider trading", the Compliance Officer (or designee) should: |X| provide orientation to new Associated Persons regarding policies and procedures with respect to "insider trading"; |X| answer questions regarding these policies and procedures; |X| resolve issues of whether information received by an Associated Person is material and non-public; |X| review on a regular basis and update as necessary the Code of Ethics and related procedures; |X| promptly review and either approve or disapprove, in writing, each request of an employee for clearance to trade in securities covered by the Code of Ethics; and |X| when it has been determined that an Associated Person has material non-public information: |X| implement measures to prevent dissemination of such information; and |X| restrict Associated Persons from trading the securities. VIII. Special Reports to Management Promptly upon learning of an actual or potential violation of this Policy Statement, the Compliance Officer (or designee) shall prepare and maintain in BSAM's records a written report providing full details of the situation and any remedial action taken. Annually, the Compliance Officer (or designee) shall report to the Board of Trustees of the Funds with regard to any issues that arise during the year under this Policy Statement. A-8 EXHIBIT B-1 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO., INC. INITIAL ASSET CERTIFICATION OF ACCESS PERSONS (OTHER THAN INVESTMENT PERSONNEL) AS OF __________ Instructions 1. List each Covered Security in each Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) that you held at the end of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. You submit this form within 10 days after you become an Access Person (or January 31, 2001, whichever is earlier). 3. You must complete and sign this certification whether or not you or your broker sends statements directly to the Compliance Officer. - -------------------------------------------------------------------------------- Name of No. of Shares Registration Name of Broker, Dealer or Principal on Account Nature of Security(1) or Bank Amount Interest - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership as of the date listed above. 2. I have identified all other Employee Accounts (that may hold Covered Securities) of which I have Beneficial Ownership. 3. I have read the Code of Ethics, the Policy Statement on Insider Trading and Code of Ethics Procedures and certify that I am in compliance with them. 4. This report excludes holdings with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (1) Including interest rate and maturity, if applicable. EXHIBIT B-2 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO., INC. INITIAL ASSET CERTIFICATION OF ACCESS PERSONS (INVESTMENT PERSONNEL ONLY) AS OF __________ Instructions 1. List each Covered Security in each Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) that you held at the end of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. 2. You submit this form within 10 days after you become an Access Person (or January 31, 2001, whichever is earlier). 3. You must complete and sign this certification whether or not you or your broker sends statements directly to the Compliance Officer. - -------------------------------------------------------------------------------- Name of No. of Shares Registration Name of Broker, Dealer or Principal on Account Nature of Security(1) or Bank Amount Interest - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership as of the date listed above. 2. I have identified all other Employee Accounts (that may hold Covered Securities") of which I have Beneficial Ownership. 3. I have read the Code of Ethics and the Policy Statement on Insider Trading and certify that I am in compliance with them. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (1) Including interest rate and maturity, if applicable. EXHIBIT C-1 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. SECURITY TRANSACTION REPORT OF ACCESS PERSONS (OTHER THAN INVESTMENT PERSONNEL) For The Calendar Quarter Ended __________ Instructions 1. List transactions in Covered Securities held in any Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. Write "none" if you had no transactions in Covered Securities during the quarter. 3. You must submit this form within 10 days after the end of the calendar quarter. 4. If you submit copies of your monthly brokerage statements to the Compliance Officer, and those monthly brokerage statements disclose the required information with respect to all Covered Securities in which you may deemed to have Beneficial Ownership, you need not file this form unless you established a new account during the quarter. 5. For each Employee Account that you established during the previous quarter that is permitted to hold Covered Securities for your direct or indirect benefit, state the name of the broker, dealer or bank with whom you established the account, the account number and the date you established the account.
============================================================================================= No. of Shares or Broker, Dealer or Other Date of Purchase/ Principal Party Through Whom Name of Security (1) Transaction Sale Amount Price Transaction Was Made - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- =============================================================================================
During the previous quarter, I established the following accounts with a broker, dealer or bank: - ------------------------------------------------------------------------ Broker, Dealer or Bank Account Number Date Established - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Certifications: I hereby certify that: 1. The information provided above is correct. 2. This report excludes transactions with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (1) Including interest rate and maturity, if applicable. EXHIBIT C-2 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. SECURITY TRANSACTION REPORT OF ACCESS PERSONS (INVESTMENT PERSONNEL ONLY) For The Calendar Quarter Ended __________ Instructions 1. List transactions in Covered Securities held in any Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. 2. Write "none" if you had no transactions in Covered Securities during the quarter. 3. You must submit this form within 10 days after the end of the calendar quarter. 4. If you submit copies of your monthly brokerage statements to the Compliance Officer, and those monthly brokerage statements disclose the required information with respect to all Covered Securities in which you may deemed to have Beneficial Ownership, you need not file this form unless you established a new account during the quarter. 5. For each Employee Account that you established during the previous quarter that is permitted to hold Covered Securities for your direct or indirect benefit, state the name of the broker, dealer or bank with whom you established the account, the account number and the date you established the account.
============================================================================================= No. of Shares or Broker, Dealer or Other Date of Purchase/ Principal Party Through Whom Name of Security (2) Transaction Sale Amount Price Transaction Was Made - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- =============================================================================================
During the previous quarter, I established the following accounts with a broker, dealer or bank: Certification: I hereby certify that: 1. The information provided above is correct. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (2) Including interest rate and maturity, if applicable. EXHIBIT C-3 THE BEAR STEARNS ASSET MANAGEMENT INC. SECURITY TRANSACTION REPORT - INDEPENDENT DIRECTORS For The Calendar Quarter Ended __________ Instructions 1. List transactions in Covered Securities held in any account in which you may be deemed to have Beneficial Ownership as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. Write "none" if you had no transactions in Covered Securities during the quarter. 3. You must submit this form within 10 days after the end of the calendar quarter. 4. If you are an Independent Director, then you need only report transactions in Covered Securities when you knew at the time of the transaction or, in the ordinary course of fulfilling your duties as an Independent Director, you should have known, that during the 15-day period immediately preceding or after the date of the transaction, such security is or was purchased or sold, or was considered for purchase or sale, by the any Portfolio or account managed by BSAM. Please write "none" if you have no transactions in Covered Securities during the quarter that meet the above conditions. 5. If you submit copies of your monthly brokerage statements to the Compliance Officer, and those monthly brokerage statements disclose the required information with respect to all Covered Securities in which you may be deemed to have Beneficial Ownership, you need not file this form unless you established a new brokerage account during the quarter. 6. For each account that you established during the previous quarter that is permitted to hold Covered Securities for your direct or indirect benefit, state the name of the broker, dealer or bank with whom you established the account, the account number and the date you established the account.
============================================================================================= No. of Shares or Broker, Dealer or Other Date of Purchase/ Principal Party Through Whom Name of Security (3) Transaction Sale Amount Price Transaction Was Made - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- =============================================================================================
During the previous quarter, I established the following accounts with a broker, dealer or bank: - ------------------------------------------------------------------------ Broker, Dealer or Bank Account Number Date Established - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Certifications: I hereby certify that: 1. The information provided above is correct. 2. This report excludes transactions with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (3) Including interest rate and maturity, if applicable. EXHIBIT D-1 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. ANNUAL ASSET CERTIFICATION OF ACCESS PERSONS (OTHER THAN INVESTMENT PERSONNEL) For the Year Ended __________ Instructions 1. List each Covered Security held in any Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts. 2. Write "none" if you did not hold any Covered Securities at year end. 3. You must submit this form no later than January 30, _____. 4. You must complete and sign this form for annual certification whether or not you or your broker sends statements directly to the Compliance Officer. - ------------------------------------------------------------------------------ No. of Registration Shares or on Security Nature of Broker, Name of Security(4) Principal or Account Interest Dealer or Bank Amount - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership at the end of the period. 2. I have read the Code of Ethics, the Policy Statement on Insider Trading and the Code of Ethics Procedures and certify that I am in compliance with them. 3. This report excludes holdings with respect to which I had no direct or indirect influence or control. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (4) Including interest rate and maturity, if applicable. EXHIBIT D-2 BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. ANNUAL ASSET CERTIFICATION OF ACCESS PERSONS (INVESTMENT PERSONNEL ONLY) For the Year Ended __________ Instructions 1. List each Covered Security held in any Employee Account (that is, each account in which you may be deemed to have Beneficial Ownership) as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You are deemed to have Beneficial Ownership of accounts of your immediate family members. 2. Write "none" if you did not hold any Covered Securities at year end. 3. You must submit this form no later than January 30, _____. 4. You must complete and sign this form for annual certification whether or not you or your broker sends statements directly to the Compliance Officer. - ------------------------------------------------------------------------------ No. of Shares or Registration Principal on Security Nature of Broker, Name of Security (5) Amount or Account Interest Dealer or Bank - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Covered Securities in which I may be deemed to have Beneficial Ownership at the end of the period. 2. I have read the Code of Ethics, the Policy Statement on Insider Trading and the Code of Ethics Procedures and certify that I am in compliance with them. Date:__________________ Signature:____________________ Name:_______________________ - --------------- (5) Including interest rate and maturity, if applicable. BEAR STEARNS ASSET MANAGEMENT INC. BEAR, STEARNS & CO. INC. CODE OF ETHICS PROCEDURES II. Introduction Bear Stearns Asset Management Inc. and Bear, Stearns & Co. Inc. hereby adopt the following Procedures to apply to all Access Persons covered by the Code of Ethics: III. Procedures A. Prohibited Activities 1. Disclosure of Activities of Managed Accounts. Investment Personnel may not reveal to any other person (except in the normal course of his or her duties on behalf of BSAM) any information regarding securities transactions by a Managed Account or consideration by a Managed Account or BSAM of any such securities transaction. 2. Representations Concerning Securities. No Access Person may make any misrepresentation or omit to state any material fact known to him or her in connection with the purchase or sale of any securities by any Employee Account or Managed Account. 3. Recommendation of Securities. Investment Personnel may not recommend any securities transaction for a Managed Account, or the addition to, deletion from or change in weighting of any such security in any of BSAM's model portfolios, without having disclosed to the Compliance Officer his or her interest, if any, in such securities or the issuer thereof, including without limitation: a. his or her direct or indirect Beneficial Ownership of any securities of such issuer; b. any contemplated transaction by such person in such securities; c. any position with such issuer or its affiliates; and d. any present or proposed business relationship between such issuer or its affiliates, on the one hand, and such person or any party in which such person has a significant interest, on the other. 4. Transactions in Securities on the Restricted List. From time to time, Access Persons may obtain material, non-public information or establish special or "insider" relationships with one or more issuers of securities (i.e., the employee may become an officer or director of an issuer, a member of a creditor committee that engages in material negotiations with an issuer, etc.). In such cases, Access 1 Persons should keep in mind that they are subject to the requirements and restrictions set forth in Exhibit A, the Policy Statement on Insider Trading. 5. Depriving Managed Accounts of Investment Opportunities. The failure of a Portfolio Manager to recommend an investment opportunity to, or to purchase an investment opportunity for, a Managed Account in order to obtain a personal benefit will be considered a course of conduct that deprives the Managed Account of an investment opportunity. An example of this type of prohibited conduct is to effect a personal transaction in a security and to intentionally fail to recommend, or to fail to effect, a suitable Managed Account transaction in such security in order to avoid the appearance of a conflict of interest or violate a provision of this Code of Ethics. 6. "Scalping" or "Front-Running." Access Persons may not acquire or dispose of Beneficial Ownership of a security if such acquisition or disposition is based upon the employee's knowledge of actions being taken or being considered by BSAM on behalf of any Managed Account. Examples of this type of prohibited conduct include: a. for personal gain, an Access Person uses knowledge of a future purchase of a security by a Managed Account and buys the security or acquires direct or indirect Beneficial Ownership of the security before the Managed Account buys the security; or b. for personal gain, an Access Person uses knowledge of a future sale (long or short) of a security by a Managed Account and sells the security for any account with respect to which the Access Person is the direct or indirect Beneficial Owner before the Managed Account sells the security. 7. Minimum Holding Period. Access Persons are prohibited from effecting a purchase and voluntary sale, or sale and voluntary purchase, of the same (or equivalent) securities within 30 calendar days of a trade in any Employee Account ("short-term trades"). a. Holding Period Exceptions. A holding period exception will be granted for: i. a limit order placed at the time of purchase; ii. options purchased or sold in an underlying stock for the purpose of protecting a position in an Employee Account; and iii. hardship exceptions upon application on a case-by case basis. b. Retroactive Cancellation. BSAM may cancel retroactively any transaction that does not satisfy the minimum holding period, and any profits realized may be subject to disgorgement and any losses realized are for the relevant 2 Employee Account. 8. Blackout Periods. a. Same Day Restriction. Access Persons may not execute a transaction in any security on any day during which: i. a Managed Account has a pending "buy" or "sell" order in the same (or similar) security, until that order is fully executed or withdrawn; and ii. the same (or similar) security is being considered for purchase or sale by a Managed Account, provided that the Access Person is aware of such consideration. b. Seven Day Restriction. No Access Person may purchase or sell any security or related security for an Employee Account for a period commencing seven days prior and ending seven days after: i. the purchase or sale (or entry of an order for the purchase or sale) of that security or any related security for a Managed Account, or ii. the addition to, deletion from or change in weighting in any of BSAM's model portfolios of that security or any related security. For purposes of calculating the Seven Day Restriction, the trade date is not included. c. Blackout Period Exceptions. The blackout periods described in this Paragraph A.8. shall not apply to non-Covered Securities, Exempt Transactions, De minimis Transactions(1) and transactions in exchange-traded funds that track a broad-based securities index. d. Retroactive Cancellation. The BSAM trading desk may cancel retroactively all non-Exempt Transactions in Employee Accounts in a - --------------- (1) The De minimis Transaction exception to the Same Day Restriction and the Seven Day Restriction is not available to: (a) Portfolio Managers who buy or sell the same security (or a related security) for any Employee Account during a period commencing seven days prior to and ending seven days after the transaction by the Managed Account; and (b) Investment Personnel who cover an issuer and who buy or sell the same security of that issuer (or a related security) for any Employee Account during a period commencing seven days prior to and ending seven days after the transaction by the Managed Account. See Section B.7. of the Code of Ethics ("De minimis Transactions"). 3 security that was traded in violation of the Same Day Restriction or the Seven Day Restriction, and any profits realized may be subject to disgorgement and any losses realized are for the relevant Employee Account. e. Reporting. Any Access Person who discovers that a securities transaction in his or her Employee Account violates the Same Day or Seven Day Blackout Period restrictions shall promptly submit to the Compliance Officer a report describing the transaction. The report must contain the date and nature of the transaction, the identity and amount of the securities involved, the price at which the transaction was effected and the names of any other financial institutions involved in the transaction. 9. Service as a Director. Investment Personnel shall not serve on the board of directors of any for-profit company without the prior approval of the Compliance Officer. Investment Personnel serving as directors shall be isolated from those making investment decisions with respect to the securities of the issuer through "Chinese Wall" or other procedures specified by the Compliance Officer absent a determination by the Compliance Officer to the contrary for good cause shown. B. Procedures for Employee Accounts. 1. Employee Accounts Maintained at BSC. Access Persons must maintain all Employee Accounts relating to Covered Securities at BSC, unless given permission, upon a showing of extraordinary circumstances, by BSAM's Chief Executive Officer and the Compliance Officer. Accounts maintained outside of BSC are subject to all preclearance and reporting requirements of the Code. 2. Preclearance. a. General. Prior to effecting a purchase or sale for an Employee Account, each Access Person must obtain written approval of the trade ticket by the Head Trader (or designee) in the case of equity securities or the Director of Fixed Income (or designee) in the case of fixed income securities. b. Timing of Approved Trade. Written approval of personal securities transactions will be valid for 24 hours. c. Trading by Compliance Officer. All trading for Employee Accounts of the Compliance Officer must be approved by the Head Trader (or designee) in the case of equity securities or the Director of Fixed Income (or designee) in the case of fixed-income securities. d. Preclearance Requirement Exceptions. The preclearance requirement described in this Paragraph B.2. shall not apply to non-Covered Securities, Exempt Transactions, De minimis 4 Transactions(2) and transactions in exchange-traded funds that track a broad-based securities index. C. Exemption for Independent Directors and Certain Employee Accounts The following provisions shall not apply to (a) Independent Directors and (b) Employee Accounts in which an Access Person (other than Investment Personnel) may be deemed to have a direct or indirect Beneficial Interest when the Access Person does not directly or indirectly control the investment of that Employee Account, including Employee Accounts when the Access Person has entered into an agreement in which a third party, such as an investment adviser, has been given full discretion to effect transactions for the Employee Account: 1. Minimum holding periods (paragraph A.7.) 2. Blackout periods (paragraph A.8.) 3. Employee Accounts maintained at BSC (paragraph B.1.) 4. Preclearance (paragraph B.2.) Access Persons should be aware that trading of securities in Employee Accounts not subject to blackout periods may create the appearance of impropriety and the burden shall be on the Access Person to demonstrate that the Access Person (i) had no direct or indirect control over such Employee Account, and (ii) did not improperly benefit from information received in connection with the investment of such Employee Account. - --------------- (2) The De minimis Transaction exception to the Same Day Restriction and the Seven Day Restriction is not available to: (a) Portfolio Managers who buy or sell the same security (or a related security) for any Employee Account during a period commencing seven days prior to and ending seven days after the transaction by the Managed Account; and (b) Investment Personnel who, in connection with his or regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities of an issuer and who buy or sell the same security of that issuer (or a related security) for any Employee Account during a period commencing seven days prior to and ending seven days after the transaction by the Managed Account. See Section B.7. of the Code of Ethics ("De minimis Transactions"). 5 D. Limited Access Persons. 1. Designation of Limited Access Persons. From time to time, the Ethics Committee may designate one or more persons who would otherwise be considered Access Persons as Limited Access Persons on Schedule I of the Code of Ethics Procedures. 2. Considerations Used to Determine Status as Limited Access Person. In determining whether to designate any officer, director or employee as a Limited Access Person, the Ethics Committee may consider: >> the nature and extent of the person's involvement with day-to-day investment decision making with respect to Managed Accounts; >> the nature of the person's interaction with Investment Personnel; >> the nature and frequency of the person's personal trading activity; >> the likelihood that the person would benefit improperly from his or her knowledge of BSAM's operations and investment decision-making process; and >> other factors deemed relevant. 3. Status as a Limited Access Person. Limited Access Persons shall be exempt from such of the following provisions of this Code as is determined to be appropriate by the Ethics Committee: (i) Minimum Holding Periods (A.7.); (ii) Blackout Periods (A.8.) and (iii) Preclearance (B.2.). Personal trades of New York-based Limited Access Persons shall be reviewed on a T+1 or T+2 basis, as appropriate. 4. Termination of Status of Limited Access Person. The Ethics Committee, in its sole discretion, may remove any Limited Access Person from Schedule I for good cause, including, but not limited to, any violation of this Code. 5. Special Procedures. Within a reasonable time thereafter, the Compliance Officer shall review each trade executed by any Limited Access Person and may, in his or her sole discretion, cancel or rescind any such trade if it is determined that: a. the Limited Access Person has benefited improperly by the trade; or b. the trade has operated to the detriment of a Managed Account; or c. the Limited Access Person has engaged in a transaction that creates the appearance of an impropriety (e.g., front running, etc.). 6 6. Reporting. The Compliance Officer shall report to the Board of Trustees of the Funds concerning any addition to or removal of an Limited Access Person from Schedule I. E. Special Procedures for Managed Accounts in which Access Persons and Investment Personnel Have a Beneficial Ownership Interest. 1. General Principle. The special procedures described herein are not intended to abrogate the general principle that the client's interest always comes first. If a procedure is not explicit in any respect, that general principle will control. 2. Specific Procedures. Managed Accounts in which Access Persons have an interest will be permitted to effect transactions in the same or similar securities and on the same day as other Managed Accounts, provided that there are no other policies or procedures that would preclude the transaction (e.g., the "Policy Statement on Insider Trading"). Paragraphs A and B of this Code of Ethics will not apply to transactions for Managed Accounts in which Access Persons have a Beneficial Ownership interest, provided that: a. Investment Personnel in the aggregate do not have a Beneficial Ownership interest equal to 5% or more of the Managed Account; and b. Access Persons in the aggregate do not have a Beneficial Ownership interest equal to 25% or more of the Managed Account. For purposes of compliance with this Paragraph D, the term "Beneficial Ownership" includes the receipt of any performance fees and/or performance allocations. Adopted: August 3, 2000 Revised: November 3, 2000 February 5, 2001 July 10, 2001 October 1, 2001 November 28, 2001 February 28, 2002 March 6, 2002 7 SCHEDULE I LIMITED ACCESS PERSONS Mark Lotke Michael Minikes Hiroshi Miyamoto Hiromichi Otsu Kurt Soukup Warren Spector Robert Steinberg Employees of Bear Stearns International Ltd. who staff the Lynx New Media Ventures Fund EX-99.P(3) 18 kl05044_ex99p3.txt CODE OF ETHICS OF MARVIN & PALMER CODE OF ETHICS MARVIN & PALMER ASSOCIATES, INC. 1. Introduction This Code of Ethics ("Code") has been adopted by Marvin & Palmer Associates, Inc. ("Marvin & Palmer Associates"). Its purpose is to alert the officers, directors, employees and certain affiliated persons of Marvin & Palmer Associates to their ethical and legal responsibilities with respect to certain securities transactions involving (a) possible conflicts of interest with advisory clients ("clients") or (b) the possession of certain material non-public information. The provisions of this Code are based upon the following general fiduciary principles: A. THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF MARVIN & PALMER ASSOCIATES' CLIENTS FIRST; B. THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THIS CODE AND IN SUCH A MANNER TO AVOID ANY ACTUAL, POTENTIAL, OR PERCEIVED CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY; AND C. THE FUNDAMENTAL STANDARD THAT ADVISORY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS. Furthermore, because even the appearance of impropriety could damage the reputation of Marvin & Palmer Associates or its clients, this Code expressly prohibits Access Persons and investment personnel (each as defined below) and their affiliates from engaging in certain specified activities. This Code also requires Access Persons and investment personnel to make certain reports concerning their personal securities transactions and the receipt of certain gifts or other benefits. This Code is adopted pursuant to the requirements of Rule 17j-1 under the Investment Company Act of 1940, as amended (the "Investment Company Act"), that registered investment companies and their advisors adopt a written code of ethics, and Section 204A and Rule 204-2(a)(12) of the Investment Advisers Act of 1940 that registered investment advisors adopt procedures reasonably designed to prevent the misuse of material non-public information and maintain records of personal securities transactions of advisory personnel, respectively. Every Access Person must read, acknowledge receipt of, and retain this Code. Any questions concerning this Code should be addressed to Marvin & Palmer Associates' Clearing Person. 2. Definitions For purposes of this Code: "Access Person" shall mean any officer, director or employee of Marvin & Palmer Associates. It shall also mean any other person who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by a August 2001 client, or whose functions related to the making of any recommendation with respect to such purchases or sales. "Clearing Person" shall mean the Head Trader of Marvin & Palmer Associates and any other person designated by the Chief Executive Officer to perform some or all of the functions of the Clearing Person under this Code. "Covered Security" means all instruments commonly known as a security, including, without limitation, (1) all common and preferred equity securities regardless of the identity of the issuer, (2) partnership interests, limited partnership interests, units in a unit trust, depository receipt and other kinds of certificates of participation, (3) all debt securities regardless of original length of maturity and time remaining to maturity, regardless of the identity of the issuer and regardless of whether the debt is convertible and exchangeable for another instrument or security, (4) rights, warrants, options, futures and all derivative instruments and (5) any instrument in any way related to any of the foregoing. "Covered Security" does not include securities issued by federal, state or local governments, bankers' acceptances, bank certificates of deposit and time deposits, commercial paper, repurchase agreements, and shares of registered open-end investment companies (i.e., "mutual funds") so long as Marvin & Palmer Associates is not the adviser or sub-adviser to such mutual funds. In other words, securities issued by open-end funds that are advised or sub-advised by Marvin & Palmer Associates or by closed-end funds are included within the definition of "Covered Security." "Gifts" shall mean cash or other tangible items of value. The term shall not include entertainment (including, among other things, tickets to sporting and other events and food and dining) provided in furtherance of a legitimate business purpose. "Insider trading" shall mean the trading of any security while in the possession of material non-public information as to which the Access Person (1) has a duty to keep confidential or (2) knows or should have known was improperly obtained. "Material information" means information that is substantially likely to be considered important in making an investment decision by a reasonable investor, or information that is reasonably certain to have a substantial effect on the price of an issuer's securities. Information is non-public until it has been effectively communicated or made available to the marketplace. "Independent Directors" shall mean a director of Marvin & Palmer Associates who is not an interested person of Marvin & Palmer Associates within the meaning of Section 2(a)(19)(B) of the Investment Company Act. A Marvin & Palmer Associates interested person includes: (i) any affiliated person of Marvin & Palmer Associates; (ii) any member of the immediate family of any natural person who is an affiliated person (as defined in the Investment Company Act) of Marvin & Palmer Associates; (iii) any person who knowingly has any direct or indirect beneficial interest in any security issued by Marvin & Palmer Associates or by a controlling person of Marvin & Palmer Associates; (iv) any person or partner or employee of any person who at any time since the beginning of the last two completed fiscal years of the investment company has acted as legal counsel for Marvin & Palmer Associates; (v) any broker or dealer registered under the Securities Exchange Act of 1934 or any affiliated person of such a broker or dealer; and (vi) any natural person whom the Securities and Exchange Commission by order shall have determined to be an interested person by reason of having had at any time since the beginning of the last two completed fiscal years of an investment company advised by Marvin & Palmer Associates a material business or professional relationship with Marvin & Palmer Associates or with the principal executive officer or any controlling person of Marvin & Palmer Associates. August 2001 2 "Investment personnel" shall mean portfolio managers who make decisions about client investments and the analysts, traders and other personnel who assist in that process. 3. Prohibited Conduct A. It shall be a violation of this Code for any Access Person to direct the purchase or sale of (including options to purchase or sell) a Covered Security in contravention of the Internal Policy Restrictions, a copy of which is attached as Exhibit A, for the account of any person other than a client. B. It shall be a violation of this Code for any Access Person: i. To make recommendations concerning the purchase or sale of securities by a client without disclosing Access Person's interest, if any, in such securities or the issuer thereof, including without limitation: a. Any direct or indirect beneficial ownership of any securities of such issuer; b. Any contemplated transaction by such person in such securities; and c. Any present or proposed relationship with such issuer or its affiliates. ii. To participate in any securities transaction on a joint basis with any registered investment company in violation of applicable law; iii. To engage in "insider trading," whether for his or her own benefit or the benefit of others; iv. To divulge the current portfolio positions, and current and anticipated portfolio transactions, programs, and studies of a client to anyone unless it is properly within his or her duties to do so; and v. To communicate material non-public information concerning any security to others unless it is properly within his or her duties to do so. C. It shall be a violation of this Code for any investment personnel: i. To serve as a director of a publicly held company prior to a determination by the Clearing Person that such service would be consistent with the interests of Marvin & Palmer Associates' clients; and ii. To receive any gift or other thing of more than $250.00 value from any person or entity that does, or prospectively can reasonably be expected to do business with or on behalf of any client. D. The General Policy on Insider Information and Trading, a copy of which is attached as Exhibit B, is a part of this Code. 4. Reports August 2001 3 A. The reporting requirements described below shall apply to any account in which the Access Person has any beneficial economic interest AND over which the Access Person has direct or indirect influence or control. Examples of beneficial economic interest include accounts in the name of: i. a spouse or spousal equivalent; ii. a minor child; iii. a relative sharing the same house; or iv. anyone else, if the Access Person obtains benefits substantially equivalent to ownership of the securities or can obtain ownership of the securities immediately or in the future. B. All Access Persons, other than Independent Directors, shall provide for the transmission to Marvin & Palmer Associates of duplicate copies of all confirms and account statements by each account described in paragraph A above in which any covered securities are held or can be held. C. All Access Persons, other than Independent Directors, shall report to Marvin & Palmer Associates the following information with respect to any transaction in any Covered Security (within ten days of said transaction) in which such Access Person has, or by reason of such transaction acquired, any direct or indirect beneficial ownership in the Covered Security, to the extent that such transaction is not otherwise reflected in account statements submitted to Marvin & Palmer Associates pursuant to paragraph B above: i. The date of the transaction, the title and the number of shares, and the principal amount of each Covered Security involved; ii. The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); iii. The price at which the transaction was effected; and iv. The name of the broker, dealer or bank with or through whom the transaction was effected. D. Within 10 days of either the commencement of employment or the date a person becomes an Access Person, all Access Persons, other than Independent Directors, shall report to Marvin & Palmer Associates' Clearing Person all personal securities holdings, including (i) the title, number of shares and principal amount of each Covered Security in which the Access Person had a direct or indirect beneficial interest upon becoming an Access Person, (ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect interest of the Access Person as of such date and (iii) the date on which the report is submitted. The Personal Brokerage Information form, which is attached as Exhibit D, may be used for such purpose. E. Not later than 10 days after the end of each calendar quarter, all Access Persons, other than Independent Directors, shall report to Marvin & Palmer Associates' Clearing Person (i) August 2001 4 information with respect to any securities transactions occurring during the quarter, including (a) the date of the transaction, the title, interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security, (b) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition), (c) the price at which the transaction was effected, (d) the name of the broker, dealer or bank with or through which the transaction was effected and (e) the date that the report is submitted and (ii) information with respect to any account established by the Access Person for which any securities were held during the quarter for the direct or indirect benefit of the Access Person, including (a) the name of the broker, dealer or bank with whom the Access Person established the account, (b) the date the account was established and (c) the date that the report is submitted. The Quarterly Information form, which is attached as Exhibit E, may be used for such purpose. F. Independent Directors must file a Quarterly Information form if the Independent Director trades in a Covered Security that the Independent Director knew or should have known that during the 15 day period immediately before or after the Independent Director's transaction in the Covered Security, a registered investment company that Marvin & Palmer Associates advises (a "Fund") purchased or sold the Covered Security, or the Fund or Marvin & Palmer Associates considered purchasing or selling the Covered Security. G. Annually all Access Persons shall report to Marvin & Palmer Associates' Clearing Person the following information (which information must be current as of a date no more than 30 days before the report is submitted: (i) the title, number of shares and principal amount of each Covered Security in which the Access Person had a direct or indirect interest, (ii) the name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person and (iii) the date that the report is submitted. The Annual Information form, which is attached as Exhibit F, may be used for such purpose. H. All reports and account statements received by Marvin & Palmer Associates in accordance with this Code shall be kept confidential except to the extent that disclosure may be required by regulatory authorities and that disclosure, on a confidential basis, may be made for an audit of compliance procedures. I. Marvin & Palmer Associates shall identify all Access Persons who are under a duty to complete and provide the reports described above and shall inform such persons of such duty. J. Marvin & Palmer Associates shall establish and maintain procedures by which appropriate management or compliance personnel will review the account statements and the reports required to be made pursuant to paragraphs D, E and F. 5. Pre-Clearance and Gifts A. Except as specifically provided, all Access Persons, other than Independent Directors, shall complete a Request for Permission, an example of which is attached as Exhibit C, prior to purchasing or selling (including options to purchase or sell a security) a Covered Security for any person other than a client. No transaction shall be effected unless advance written clearance of a transaction in a Covered Security is obtained from the Clearing Person on the same day as the proposed purchase or sale of such Covered Security. August 2001 5 B. All Access Persons shall report to Marvin & Palmer Associates' Clearing Person the following information concerning each gift or other benefit received from, or paid for, by any person or entity that does business with or on behalf of any client in which the value of such exceeds $250. i. A description of each gift, including the date of receipt; ii. The cost of such gift; and iii. The name and company affiliation of the person providing each gift. Such report shall be made reasonably contemporaneously with the receipt of the gift. 6. Interpretations and Exceptions Any questions regarding the applicability, meaning or administration of this Code shall be referred by the person concerned in advance of any contemplated transaction to the Clearing Person. Exemptions may be granted by such person, if, in his judgment, the fundamental obligation of the person involved is not compromised. 7. Sanctions Violation of any provision of this Code is grounds for dismissal. Other sanctions may be imposed. August 2001 6 EXHIBIT A INTERNAL POLICY RESTRICTIONS 1. Access Persons are prohibited from purchasing or selling: A. Securities and related securities (such as options warrants and convertible securities etc.) determined by the Clearing Person to be restricted for purchase or sale by Access Persons. B. Securities and related securities for which client has an outstanding order. C. Securities and related securities that were traded on the same day or the prior day, or that the Access Person knows, or reasonably should know, are intended to be traded on the same day or the next day, by a client or for a client's account. 2. Investment personnel are prohibited from purchasing or selling: A. Securities being offered as part of an initial public offering unless specific permission is received from the Clearing Person. B. Securities being offered in a privately placed transaction (also known as a "limited offering") unless specific permission is received from the Clearing Person. The investment personnel seeking permission shall provide in writing full details concerning the proposed transaction, including a certification that the investment opportunity did not arise by virtue of such person's activities on behalf of Marvin & Palmer Associates. The Clearing Person may grant permission only if he or she concludes, after consultation with relevant investment personnel, that Marvin & Palmer Associates would not have any foreseeable interest in investing in such security or any related security for the account of any client. If the proposed investment is in a private investment pool ("PIP"), such permission also shall take into account (i) the size of the Marvin & Palmer Associates employee's investment in the PIP, (ii) whether there exists any potential competition between any client and the PIP for future investments and (iii) whether there exists any past, present or future relationships between the manager of the PIP and the Marvin & Palmer Associates employee, Marvin & Palmer Associates or any client. Securities and related securities if the purchase or sale would result in a profit from the purchase and sale, or (with respect to short sales) the sale and purchase, of the same or equivalent securities within 60 calendar days (the "60 day rule"). 3. Notwithstanding the prohibitions described above: A. Access Persons may participate (i) on an on-going basis in an issuer's dividend reinvestment or stock purchase plan, (ii) in any transaction over which such person did not have any direct or indirect influence or control and (iii) in involuntary transactions (such as mergers, inheritances, gifts etc.), and in each case pre-clearance pursuant to the Code shall not be required. B. Investment Personnel may sell, subject to the 60 day rule, securities and related securities, as to which clients have sold their entire holdings. August 2001 7 C. Investment Personnel may sell securities without regard to the 60 day rule if the Clearing Person makes a determination in writing that such transaction will not be inconsistent with any of the three general fiduciary principles articulated in the Code. August 2001 8 EXHIBIT B GENERAL POLICY ON INSIDER INFORMATION AND TRADING Any Access Person in possession of material nonpublic information about a company or its operations, or about any security, may not trade in such company's securities, or such security, regardless of whether the trade is based on such material nonpublic information. In addition, any Access Person possessing such material nonpublic information may not (i) communicate to anyone such material nonpublic information for other than legitimate corporate purposes, (ii) recommend the purchase or sale of that company's securities, or (iii) assist someone who is engaging in any of the above activities. All restrictions contained in this policy also apply to family members and close friends of Access Persons, and to other persons who have a relationship (legal, personal or otherwise) with an Access Person that might reasonably result in such other person's transactions being attributable to such Access Person. The matters set forth above require an analysis of two concepts on a case-by-case basis: whether information in possession of an Access Person who trades in securities is "material" and whether such information is "nonpublic." Information is considered "material" when there is substantial likelihood that a reasonable investor would consider the information important in deciding to buy, sell or hold securities. In short, information that could affect the market price of securities should be considered to be material. By way of example, it is probable that the following information would be deemed material: annual, quarterly or monthly financial results, significant changes in earnings or earnings projections, changes in dividend policies, the possibility of a recapitalization, the offering or repurchase of a company's stock, unusual gains or losses, negotiations regarding major acquisitions or divestitures, important management changes, impending bankruptcy or liquidation, and significant threatened or pending litigation developments. Information is considered "nonpublic" unless it has been effectively disclosed in a manner sufficient to insure that the public has had the opportunity to evaluate such information. August 2001 9 EXHIBIT C REQUEST FOR PERMISSION TO ENGAGE IN PERSONAL TRANSACTION I hereby request permission to effect a transaction today in securities indicated below for my own account or other account in which I have a beneficial interest or legal title: (Use approximate amounts and prices of proposed transactions.) PURCHASES AND ACQUISITIONS No. of Shares or Principal Unit Total Amount Name of Security Price Price Broker - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- SALES AND OTHER DISPOSITIONS No. of Shares or Principal Unit Total Amount Name of Security Price Price Broker - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - ---------------- ---------------------- ------- --------- ------------- - -------------------------------- -------------------------------------- Permission Granted:Yes /_/ No /_/ Name: ________________________________ Trade Authorized by (please check): Chris Luft /_/> Signature:____________________________ Keith Gallagher /_/ Zeke Maki /_/ Date:_________________________________ - -------------------------------- -------------------------------------- --------------------------------------------------- Prior Transaction Within 60 Days?: Yes /_/ No /_/ If "Yes", date of Prior Transaction: _______________ --------------------------------------------------- August 2001 10 EXHIBIT D Personal Brokerage Information /_/ I have no personal brokerage information to report. /_/ My personal brokerage information is indicated below. I have attached copies of the most recent statements of the accounts listed below that hold covered securities. - ------------------------------------------------------------------------- Can the Account Name, Address and Hold Phone Number of Account Covered Account Name Broker, Dealer or Bank Number Securities? - ------------------------------------------------------------------------- 1. Yes /_/> No /_/> - ------------------------------------------------------------------------- 2. Yes /_/> No /_/> - ------------------------------------------------------------------------- 3. Yes /_/> No /_/> - ------------------------------------------------------------------------- 4. Yes /_/> No /_/> - ------------------------------------------------------------------------- 5. Yes /_/> No /_/> - ------------------------------------------------------------------------- August 2001 11 In addition to the covered securities listed on the statements that are attached to this form, I have a direct or an indirect interest in the following covered securities: /_/ None. - --------------------------------------------------------------------------- Number of Shares and Broker, Dealer or Bank Title Principal Account Where Held (If Any) - --------------------------------------------------------------------------- 1. - --------------------------------------------------------------------------- 2. - --------------------------------------------------------------------------- 3. - --------------------------------------------------------------------------- 4. - --------------------------------------------------------------------------- 5. - --------------------------------------------------------------------------- _________________________________ __________________________________ Signature Date August 2001 12 EXHIBIT E Quarterly Information In addition to the transactions listed on the statements for the accounts that are listed on the attached sheet as holding covered securities, copies of the statements of which are being provided to Marvin & Palmer Associates' Clearing Person, the following transactions have occurred during the calendar quarter just completed with respect to covered securities in which I have a direct or indirect interest: /_/ None. - --------------------------------------------------------------------------- Date of Title, Nature of the Price Name of Transaction Interest Transaction Broker, Rate, (Purchase, Dealer or Maturity Sale or Other Bank Date, Number - Describe) of Shares and Principal Amount - --------------------------------------------------------------------------- 1. - --------------------------------------------------------------------------- 2. - --------------------------------------------------------------------------- 3. - --------------------------------------------------------------------------- During the calendar quarter just completed, I established accounts in which securities were held other than the accounts listed on the attached sheet. /_/ None. - --------------------------------------------------------------------------- Name, Address and Telephone Number Date the Account Can the Account of Broker, Dealer or Bank was Established Hold Covered Securities? - --------------------------------------------------------------------------- 1. Yes /_/ No /_/ - --------------------------------------------------------------------------- 2. Yes /_/ No /_/ - --------------------------------------------------------------------------- 3. Yes /_/ No /_/ - --------------------------------------------------------------------------- _________________________________ __________________________________ Signature Date August 2001 13 EXHIBIT F Annual Information In addition to the covered securities listed on the year-end statements of the accounts that are listed on attached sheet as holding covered securities, copies of which statements are being provided to Marvin & Palmer Associates' Clearing Person, and the covered securities listed on the attached sheet, I have a direct or indirect interest in the following securities: /_/ None. - --------------------------------------------------------------------------- Title, Number of Shares and Name of the Broker, Dealer or Bank Principal Amount Where Held - --------------------------------------------------------------------------- 1. - --------------------------------------------------------------------------- 2. - --------------------------------------------------------------------------- 3. - --------------------------------------------------------------------------- 4. - --------------------------------------------------------------------------- In addition to the accounts that are listed on the attached sheet, securities are held for my direct or indirect benefit in the following accounts: /_/ None. - --------------------------------------------------------------------------- Name, Address and Telephone Number Date the Account Can the Account of Broker, Dealer or Bank was Established Hold Covered Securities? - --------------------------------------------------------------------------- 1. Yes /_/ No /_/ - --------------------------------------------------------------------------- 2. Yes /_/ No /_/ - --------------------------------------------------------------------------- 3. Yes /_/ No /_/ - --------------------------------------------------------------------------- _________________________________ __________________________________ Signature Date August 2001 14 STATEMENT REGARDING CODE OF ETHICS OF MARVIN & PALMER ASSOCIATES, INC. The undersigned hereby certifies that he or she has read and will abide by the Marvin & Palmer Associates, Inc. Code of Ethics and reporting requirements set forth in the Code. If the undersigned is an officer or employee of Marvin & Palmer Associates, Inc., the undersigned acknowledges that failure to observe the provisions of the Code shall be a basis for dismissal for cause and may subject him or her to civil liabilities and criminal penalties. The undersigned hereby certifies that he or she has cleared and disclosed all securities transactions as required by the Code. _________________________________ __________________________________ Date Signature August 2001 15 -----END PRIVACY-ENHANCED MESSAGE-----