-----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, QIxFhaI1jk1d80SCd1ekBbTOVBdRNToyAmdw6Q+N2W4XaE81IWn+rn8GE3KKEuVz IE/6AUfczk0dRdgIss+9xQ== /in/edgar/work/20000720/0000950130-00-003961/0000950130-00-003961.txt : 20000920 0000950130-00-003961.hdr.sgml : 20000920 ACCESSION NUMBER: 0000950130-00-003961 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20000720 EFFECTIVENESS DATE: 20000720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS FUNDS CENTRAL INDEX KEY: 0000931145 STANDARD INDUSTRIAL CLASSIFICATION: [ ] FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-84842 FILM NUMBER: 676195 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-08798 FILM NUMBER: 676196 BUSINESS ADDRESS: STREET 1: 245 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10167 MAIL ADDRESS: STREET 2: 245 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10167 485BPOS 1 0001.txt THE BEAR STEARNS FUNDS As filed via EDGAR with the Securities and Exchange Commission on July 20, 2000 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. 26 [X] ------ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 26 __________________ THE BEAR STEARNS FUNDS ---------------------- (Exact Name of Registrant as Specified in Charter) 575 Lexington Avenue, New York, New York 10022 ---------------------------------------------- (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 & Frankel LLP 575 Lexington Avenue 919 Third Avenue New York, New York 10022 New York, New York 10022 (Name and Address of Agent for Service) 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 to paragraph (b) [X] on July 28, 2000, pursuant to paragraph (b) [_] 60 days after filing pursuant to paragraph (a)(1) [_] on (date) pursuant to paragraph (a)(1) [_] 75 days after filing pursuant to paragraph (a)(2) [_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box: [_] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. The Bear Stearns Funds Prospectus Dated July 28, 2000 .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 the 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.575 Lexington Avenue New York, NY 10022 1-800-447-1139 [LOGO OF BEAR STEARNS] Table of Contents ................................................................................ Risk/Return Summary 1 ................................................ Investments 5 ................................................ Risk Factors 6 ................................................ Management of the Portfolio 8 ................................................ How the Portfolio Values Its Shares 8 ................................................ Investing in the Portfolio 9 ................................................ How to Buy Shares How to Sell Shares Dividends, Distributions and Taxes 12 ................................................ Additional Information 14 ................................................ Financial Highlights 15
................................................ 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: .not deposits or obligations of any bank; .not insured by the Federal Deposit Insurance Corporation; .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. Maturity. The Portfolio has a weighted average maturity of 60 days or less. The Portfolio is currently rated AAAm by S&P and AAA by Moody's. In order to maintain these ratings, the Portfolio will maintain 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. 1 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. [GRAPH] Prime Money Market Portfolio Annual Total Return (%)/1/ 1998 5.55% 1999 5.14% Past performance is not necessarily an indication of future results. /1/The Portfolio's year-to-date return as of June 30, 2000 was 6.12%. During the period shown in the bar chart, the highest quarterly return was 1.39% (for the quarter ended September 30, 1998) and the lowest quarterly return was 1.19% (for the quarter ended June 30, 1999). 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 (for the periods ended December 31, Since Inception 1999) 1 Year July 14, 1997 -------------------------------------------------------------- Prime Money Market Portfolio--Class Y 5.14% 5.43% --------------------------------------------------------------
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, 1999 was 5.69%. 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, 1999 was 5.85%. For the Portfolio's current seven-day yield and seven-day effective yield, call 1-800-766-4111. 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 (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** ------------------------------------------------------------------ Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ------------------------------------------------------------------ Management Fees 0.20% ------------------------------------------------------------------ Distribution (12b-1) Fees 0.00% ------------------------------------------------------------------ Other Expenses 0.17% ---- ------------------------------------------------------------------ Total Annual Portfolio Operating Expenses 0.37% ------------------------------------------------------------------ Fee Waiver and Expense Reimbursement (0.17)% ---- ------------------------------------------------------------------ Net Expenses/1/ 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, 2001, 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.* 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 $102 $191 $451 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.20% until July 31, 2001 and thereafter will equal 0.37%. 4 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. . 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 5 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. 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. 6 . 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. --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. 7 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 575 Lexington Avenue, New York, NY 10022. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading 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, 2000 of approximately $15.1 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, 2000, the Adviser received management fees based on a percentage of the average daily net assets of the Portfolio in the amount of 0.041%. 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 calculates its share price, called its NAV, each business day at 3:00 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 calculated after you place your order. A business day is a day on which the New York Stock Exchange, Inc. and the Federal Reserve Bank of New York are open. Portfolio securities that are listed primarily on foreign exchanges may trade on weekends or on other days on which the Portfolio does not price its shares. In this case, the Portfolio's NAV may change on days when you are not able to buy or sell shares. 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. 8 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. 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 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 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 2:30 p.m. Eastern Time. On the day of the purchase, call the Transfer Agent at 1-800-447-1139 prior to 3:00 p.m. Eastern Time, to give notice of the purchase and before wiring any funds. 9 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 . You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. . When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. . The Trust will 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 . Visit your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By telephone . Call your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By mail . Mail your redemption request to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By wire . Submit wiring instructions to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. Redemption Through the Transfer Agent [GRAPHIC] By mail . Mail your redemption request to: PFPC Inc. Attention: The Bear Stearns Funds Prime Money Market Portfolio P.O. Box 8960 Wilmington, DE 19899-8960 [GRAPHIC] By telephone . Call the Transfer Agent at 1-800-447-1139. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 10 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 $50,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. Call the Transfer Agent at 1-800-447-1139 for information about obtaining a Medallion Program signature guarantee. . Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. . Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. . Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. The Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a combination of cash and a share of actual portfolio securities. Call the Transfer Agent for details. . Suspension of the Right of Redemption. The 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. 11 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. 12 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 are taxable as capital gain. . 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. 13 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. 14 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 Period Fiscal Fiscal July 14, 1997* Year Ended Year Ended through March 31, 2000 March 31, 1999 March 31, 1998 --------------------------------------------------------------------------- Per Share Operating Performance Net asset value, beginning of period $1.0000 $1.0000 $1.0000 --------------------------------------------------------------------------- Net investment income(/1/) 0.0526 0.0524 0.0399 --------------------------------------------------------------------------- Net increase in net assets resulting from operations 0.0526 0.0524 0.0399 --------------------------------------------------------------------------- Dividends and distributions to shareholders from net investment income (0.0526) (0.0524) (0.0399) --------------------------------------------------------------------------- Net asset value, end of period $1.0000 $1.0000 $1.0000 --------------------------------------------------------------------------- Total investment return(/2/) 5.39% 5.37% 5.72% --------------------------------------------------------------------------- Ratios/Supplemental Data Net assets, end of period (000's omitted) $913,907 $386,201 $121,460 --------------------------------------------------------------------------- Ratio of expenses to average net assets(/1/) 0.20% 0.20% 0.13%(/3/) --------------------------------------------------------------------------- Ratio of net investment income to average net assets(/1/) 5.36% 5.24% 5.58%(/3/) --------------------------------------------------------------------------- Increase/(decrease) reflected in above expense ratio and net investment income due to waivers and related reimbursements 0.17% 0.25% 0.52%(/3/) ---------------------------------------------------------------------------
---- * 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. 15 [THE BEAR STEARNS FUNDS LOGO] 575 Lexington Avenue New York, NY 10022 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 Deloitte & Touche LLP Management Inc. Two World Financial Center 575 Lexington Avenue New York, NY 10281 New York, NY 10022 ADMINISTRATOR Bear Stearns Funds Management Inc. 575 Lexington Avenue New York, NY 10022 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 TRANSFER & DIVIDEND DISBURSEMENT AGENT PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 16 This page intentionally left blank 17 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. You may also obtain a copy of the Portfolio's prospectus from the Bear Stearns Worldwide Web site at http://www.bearstearns.com. Investment Company Act File No. 811-8798 BSF-P-011-04 The Bear Stearns Funds Prospectus Dated July 28, 2000 Fixed Income Funds . Income Portfolio . . High Yield Total Return Portfolio . . Emerging Markets Debt 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.575 Lexington Avenue New York, NY 10022 1-800-447-1139 [LOGO OF BEAR STEARNS] Table of Contents ................................................................................ Risk/Return Summaries 1 ................................................ Income Portfolio High Yield Total Return Portfolio Emerging Markets Debt Portfolio Investments 19 ................................................ Risk Factors 21 ................................................ Management of the Portfolios 24 ................................................ Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares 24 ................................................ Investing in the Portfolios 25 ................................................ 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 35 ................................................ Dividends, Distributions and Taxes 36 ................................................ Additional Information 37 ................................................ Financial Highlights 38
................................................ 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: . not deposits or obligations of any bank; . not insured by the Federal Deposit Insurance Corporation; . 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 market conditions, the Income Portfolio invests at least 75% of its total assets in investment-grade, U.S. dollar-denominated fixed income securities issued by U.S. companies and the U.S. government or its political subdivisions, agencies or instrumentalities. 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 Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG Index"), a market-capitalization weighted index that includes U.S. Treasury, government-sponsored, mortgage and investment-grade corporate fixed income securities maturing in one year or more issued by entities having a minimum of $50 million in debt outstanding at the time of inclusion in the Salomon BIG Index. Under normal market conditions, the Income Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration between three and six 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. 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 75% 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 25% 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, Fitch IBCA International or Duff & Phelps. For a discussion of the ratings categories of various NRSROs, see 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. Income Portfolio 2 . 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: . 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. [GRAPH] Income Portfolio Annual Total Return (%)/1/ 1996 2.74 1997 7.58 1998 7.29 1999 -1.24 Past performance is not necessarily an indication of future results. /1/The Income Portfolio's year-to-date return as of June 30, 2000, was 2.90%. During the period shown in the bar chart, the highest quarterly return was 3.70% (for the quarter ended June 30, 1997) and the lowest quarterly return was (2.17)% (for the quarter ended March 31, 1996). Income Portfolio 3 The table shows how the average annual total returns of Class A, B and C shares of the Income Portfolio for one year and since the date of inception compared to the Salomon BIG Index, a broad-based unmanaged index that represents the general performance of fixed income securities. The table also compares the Income Portfolio's performance to that of the Lipper A Rated Bond Fund Index, a measure of the performance of investment-grade fixed income mutual funds. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year April 5, 1995 --------------------------------------------------------- Income Portfolio - Class A (5.66)% 4.64%* --------------------------------------------------------- Income Portfolio - Class B (6.53)% ** --------------------------------------------------------- Income Portfolio - Class C (2.81)% 5.14% --------------------------------------------------------- Salomon BIG Index (0.83)% 6.96% --------------------------------------------------------- Lipper A Rated Bond Fund Index (2.04)% 6.44% ---------------------------------------------------------
* 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, 1999 was (0.07)%. The comparable returns for the same period for the Salomon BIG Index and the Lipper A Rated Bond Fund Index were 3.31% and 2.01%, respectively. Income Portfolio 4 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 percentage of offering price) 4.50 % 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 0.45 % 0.45 % 0.45 % ------------------------------------------------------- Distribution (12b-1) Fees 0.10 % 0.75 % 0.75 % ------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 3.38 % 3.38 % 3.38 % ------- ------- ------- ------------------------------------------------------- Total Annual Portfolio Operating Expenses 3.93 % 4.58 % 4.58 % ------------------------------------------------------- Fee Waiver and Expense Reimbursement (3.13)% (3.13)% (3.13)% ------- ------- ------- ------------------------------------------------------- Net Expenses/2/ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the Income Portfolio's net expenses do not exceed the amounts indicated above. Income Portfolio 5 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 $528 $1,319 $2,126 $4,222 ------------------------------------------ Class B $648 $1,400 $2,261 $4,364** ------------------------------------------ Class C $248 $1,100 $2,061 $4,497 ------------------------------------------
If you do not sell your shares at the end of each period--***
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class B $148 $1,100 $2,061 $4,364** ------------------------------------------ Class C $148 $1,100 $2,061 $4,497 ------------------------------------------
* 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, 2001 and thereafter will equal 3.93% for Class A and 4.58% 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." Income Portfolio 6 High Yield Total Return Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Total return through high current income and capital appreciation. Principal Strategies Under normal market conditions, the High Yield Total Return Portfolio (the "High Yield Portfolio") will invest at least 80% of its total assets in high yield fixed income securities (as defined below), including domestic and foreign debt securities, convertible securities and preferred stocks. Within this 80% category, the High Yield Portfolio may invest in the following securities (up to the stated percentage of its total assets): . 25% in foreign securities; . 25% in zero-coupon securities, pay-in-kind bonds or discount obligations; . 20% in distressed securities; . 20% in mortgage-related securities; . 15% in loans and participations; 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. 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. High Yield Portfolio 7 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. Who May Want to Invest in the High Yield Portfolio The High Yield Portfolio may be appropriate for investors who: . seek high current income coupled with 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. High Yield Portfolio 8 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. [GRAPH] High Yield Portfolio Annual Total Return (%)/1/ 1998 4.28 1999 0.07 Past performance is not necessarily an indication of future results. /1/The High Yield Portfolio's year-to-date return as of June 30, 2000, was (2.39)%. During the period shown in the bar chart, the highest quarterly return was 8.30% (for the quarter ended March 31, 1998) and the lowest quarterly return was (6.96)% (for the quarter ended September 30, 1998). The table shows how the average annual total returns of 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 Global High Yield Index, a broad-based unmanaged index that represents the general performance of high yield fixed income securities. The table also compares the High Yield Portfolio's performance to that of the Lipper High Yield Bond Fund Index, a measure of the performance of high yield fixed income mutual funds. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns Since Inception (for the periods ended December 31, 1999) 1 Year January 2, 1998 -------------------------------------------------------------------- High Yield Portfolio - Class A (4.46)% (0.19)% -------------------------------------------------------------------- High Yield Portfolio - Class B (5.11)% 0.22% -------------------------------------------------------------------- High Yield Portfolio - Class C (1.48)% 1.49% -------------------------------------------------------------------- Credit Suisse First Boston Global High Yield Index 3.28% 1.92% -------------------------------------------------------------------- Lipper High Yield Bond Fund Index 4.78% 2.33% --------------------------------------------------------------------
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 A Class B Class C --------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.50% 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 0.60% 0.60% 0.60% --------------------------------------------------------------------------- Distribution (12b-1) Fees 0.10% 0.75% 0.75% --------------------------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 0.88% 0.89% 0.89% ------- ------- ------- --------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.58% 2.24% 2.24% --------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.58)% (0.59)% (0.59)% ------- ------- ------- --------------------------------------------------------------------------- Net Expenses/2/ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the High Yield Portfolio's net expenses do not exceed the amounts indicated above. High Yield Portfolio 10 Example This Example illustrates the cost of investing in the High Yield Portfolio over various time periods. It is intended to help you compare the cost of investing in the High Yield Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the High Yield Portfolio; . your investment returns 5% each year; . the High Yield Portfolio's operating expenses remain the same.* Although your actual costs may be higher or lower, based on these assumptions your costs would be: If you sell your shares at the end of each period --
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class A $547 $872 $1,219 $2,197 ------------------------------------------ Class B $668 $944 $1,346 $2,362** ------------------------------------------ Class C $268 $644 $1,146 $2,529 ------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class B $168 $644 $1,146 $2,362** ------------------------------------------ Class C $168 $644 $1,146 $2,529 ------------------------------------------
* 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, 2001, and thereafter will equal 1.58% for Class A and 2.24% 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." High Yield Portfolio 11 Emerging Markets Debt Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective High current income by investing primarily in debt obligations of issuers located in emerging countries with a secondary objective of capital appreciation. Principal Strategies Under normal market conditions, the Emerging Markets Debt Portfolio ("EMD Portfolio") will invest at least 80% of its total assets in debt obligations of issuers in emerging countries. "Debt obligations" include fixed or floating rate bonds, notes, debentures, commercial paper, loans, Brady bonds, and other debt securities issued or guaranteed by governments, agencies or instrumentalities, central banks, commercial banks or private issuers, including repurchase agreements with respect to obligations of governments or central banks. Debt obligations also include preferred stock and convertible securities, which have characteristics of both debt and equity investments. Under normal market conditions, the EMD Portfolio may invest up to 10% of its total assets in convertible securities. The EMD Portfolio's investments in debt obligations may have stated maturities ranging from overnight to 30 years. "Emerging countries" include any country that is generally considered to be an emerging or developing country by the World Bank, the International Finance Corporation or the United Nations and its authorities. An issuer is considered to be located in an emerging country if it (i) derives 50% or more of its total revenues from either goods produced, sales made or services performed in emerging countries, or (ii) is organized under the laws of, and with a principal office in, an emerging country. The EMD Portfolio intends to focus its investments in Asia, Eastern Europe, Latin America and Africa. Countries that are not considered emerging countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States. In selecting investments for the EMD Portfolio, the Adviser will emphasize investments in countries that are making the most progress toward sustainable economic growth with lower inflation. The EMD Portfolio will apply the percentage limits described in this Risk/Return Summary at the time of purchase. The EMD Portfolio: . will invest at least 70% of its total assets in at least three emerging countries; . may invest up to 40% of its total assets in any one country; . may invest up to 20% of its total assets in loans and participations; and . will invest at least 30% of its total assets in Latin America. The EMD Portfolio seeks capital appreciation by investing in securities that it expects will benefit from declines in long-term interest rates or improvements in an issuer's credit quality. EMD Portfolio 12 Currency. The EMD Portfolio primarily invests in a combination of high- yield U.S. dollar-denominated instruments and local currency instruments in emerging countries where the relationship between interest rates and anticipated foreign exchange movements relative to the U.S. dollar are expected to result in a high dollar rate of return. In addition to current income, the EMD Portfolio also seeks capital appreciation from interest- rate and currency exchange fluctuations and improving credit quality. The EMD Portfolio will invest at least 70% of its total assets in U.S. dollar-denominated instruments. The EMD Portfolio may invest up to 30% of its total assets in debt obligations denominated in local currencies, although the EMD Portfolio expects that it will not invest more than 20% of its total assets in debt obligations denominated in the currency of any one country. Foreign Currency Hedging -- Use of Forward Foreign Exchange Contracts. The EMD 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 Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, the EMD 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 EMD Portfolio may enter into a forward contract for any of the following reasons: . To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against another foreign currency (cross hedge). Quality. The EMD Portfolio may invest in debt obligations that the Adviser determines to be suitable investments notwithstanding any credit ratings that may be assigned to such securities. All of the EMD Portfolio's assets may be invested in debt obligations that are unrated or below investment grade. The EMD Portfolio may purchase non-performing securities and some of these securities may be comparable to securities rated as low as the lowest credit ratings of an NRSRO. For a discussion of the ratings categories of various NRSROs, see the Appendix to the SAI. Principal Risks You may lose money by investing in the EMD Portfolio. The EMD 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 EMD Portfolio's net asset value, yield and/or total return: . Foreign securities issued in emerging countries are generally more volatile because the securities markets in these countries have comparatively less trading volume and fewer participants. EMD Portfolio 13 . Inefficient settlement procedures in emerging countries may cause the EMD Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. . Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. . 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. . The rate of inflation may increase, resulting in higher interest rates, causing the EMD 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. . A financial intermediary involved in a loan participation may become insolvent or the EMD Portfolio, as holder of the loan, may be compelled to participate in restructuring the underlying loan. . The EMD Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. The EMD Portfolio is a non-diversified mutual fund, which means that it may devote a larger portion of its assets to the securities of a single issuer than if it were diversified. This could make the EMD Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the EMD Portfolio The EMD Portfolio may be appropriate for investors who: . seek high current income; . want to add an emerging markets fixed income component to an existing portfolio; . are willing to accept the relatively greater price volatility of investments in emerging markets compared to other fixed income investments. The EMD Portfolio may not be appropriate for investors who: . are not willing to accept the risks associated with foreign securities markets or currency fluctuation; . are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. EMD Portfolio 14 Performance The bar chart and table below illustrate the risks of investing in the EMD 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. Prior to July 29, 1999, the EMD Portfolio was a series of Bear Stearns Investment Trust, another registered investment company advised by BSAM. The performance information below reflects the performance of the EMD Portfolio during the time that it was a series of Bear Stearns Investment Trust and BSAM served as its investment adviser. The bar chart shows returns for Class A shares of the EMD 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. [GRAPH] EMD Portfolio Annual Total Return (%)/1/ 1996 40.80/2/ 1997 14.61 1998 -10.76 1999 18.69 Past performance is not necessarily an indication of future results. /1/The EMD Portfolio's year-to-date return as of June 30, 2000, was 7.55%. /2/The EMD Portfolio's performance prior to January 1, 1996 is not shown because it was managed by an investment adviser other than BSAM, its current investment adviser, for the period from inception (May 3, 1993) to May 3, 1995. During the period shown in the bar chart, the highest quarterly return was 11.37% (for the quarter ended June 30, 1996) and the lowest quarterly return was (18.67)% (for the quarter ended September 30, 1998). EMD Portfolio 15 The table shows how the average annual total return of Class A, B and C shares of the EMD Portfolio for one year and since the date of inception compared to the Salomon Smith Barney Emerging Markets Debt Mutual Fund Index (the "EMMF Index") and the J.P. Morgan Emerging Market Bond Index -- Global Constrained ("EMBI-GC Index"). The EMMF Index is a broad-based unmanaged index that represents the general performance of Brady bonds and assets of two non-Brady countries, Morocco and Russia. The EMBI-GC Index is a broad-based unmanaged index that includes Brady bonds, sovereign loans and eurobonds. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year May 4, 1995 ------------------------------------------------ EMD Portfolio - Class A 13.41% 10.54%* ------------------------------------------------ EMD Portfolio - Class B 12.87% ** ------------------------------------------------ EMD Portfolio - Class C 17.00% *** ------------------------------------------------ EMMF Index 24.63% 20.09% ------------------------------------------------ EMBI-GC Index# 19.56% 16.93% ------------------------------------------------
* 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 January 12, 1998. The average annual total return for Class B shares of the EMD Portfolio for the period from January 12, 1998 to December 31, 1999 was 1.59%. The comparable returns for the same period for the EMMF Index and the EMBI-GC Index were 6.25% and 6.40%, respectively. *** Class C shares commenced operations on July 26, 1995. The average annual total return for Class C shares of the EMD Portfolio for the period from July 26, 1995 to December 31, 1999 was 16.48%. The comparable returns for the same period for the EMMF Index and the EMBI-GC Index were 19.03% and 15.95%, respectively. # Although both the EMMF Index and the EMBI-GC Index are shown in this table, the Adviser has determined that the EMBI-GC Index is more broad-based, more frequently updated, more widely recognized and better supported in terms of analytic data than the EMMF Index. Accordingly, on April 1, 2000, the EMD Portfolio discontinued using the EMMF Index as a benchmark for its performance and began using the EMBI-GC Index. EMD Portfolio 16 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the EMD 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) 4.50% 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/2/ 1.00% 1.00% 1.00% -------------------------------------------------------------------------- Distribution (12b-1) Fees 0.10% 0.75% 0.75% -------------------------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 1.76% 1.67% 1.66% ------- ------- ------- -------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.86% 3.42% 3.41% -------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.11)% (1.02)% (1.01)% ------- ------- ------- -------------------------------------------------------------------------- Net Expenses/3/ 1.75% 2.40% 2.40% ------- ------- ------- --------------------------------------------------------------------------
* 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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/ Management fees are based on the EMD Portfolio's average daily net assets at an annual rate of 1.00% charged on assets up to $50 million, 0.85% charged on assets between $50 million and $100 million and 0.55% charged on assets above $100 million. /3/ The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2001, so that the EMD Portfolio's net expenses do not exceed the amounts indicated above. EMD Portfolio 17 Example This Example illustrates the cost of investing in the EMD Portfolio over various time periods. It is intended to help you compare the cost of investing in the EMD Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the EMD Portfolio; . your investment returns 5% each year; . the EMD 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 $620 $1,196 $1,797 $3,416 ------------------------------------------ Class B $743 $1,256 $1,892 $3,508** ------------------------------------------ Class C $343 $ 954 $1,688 $3,626 ------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class B $243 $956 $1,692 $3,508** ------------------------------------------ Class C $243 $954 $1,688 $3,626 ------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.75% for Class A and 2.40% for both Class B and C shares until July 31, 2001, and thereafter will equal 2.86% for Class A, 3.42% for Class B and 3.41% for Class C shares. ** Class B shares convert to Class A shares eight years after purchase; therefore, Class A expenses are used in the Example after year eight in the case of Class B shares. *** 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." EMD Portfolio 18 INVESTMENTS 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 longer term fixed income securities and, to a lesser extent, with investing in below investment-grade securities. The Income Portfolio evaluates a security's duration 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 Salomon BIG Index. As of March 31, 2000, the weighted average maturity of securities in the Salomon BIG Index was approximately nine years with an average duration of approximately five 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 declines in long-term interest rates or improvements in an issuer's business or prospects. EMD Portfolio The EMD Portfolio seeks to identify investment opportunities in emerging countries that are positioning themselves for sustainable economic growth with low inflation. These countries typically show signs of improving economic and political fundamentals, such as the appointment or election of reform-minded governments, tighter monetary and fiscal policies, privatization of state-controlled industries, and reform of social security and civil service systems. The EMD Portfolio will attempt to maximize returns by adjusting the portfolio in response to numerous factors affecting debt obligations, including political and economic developments and changes in credit quality and exchange rates. Investing in floating rate and short-to- intermediate term securities may enable the EMD Portfolio to maximize returns in different interest rate environments. In addition, the ability to invest in fixed-rate securities with maturities of up to 30 years may allow the EMD Portfolio to take advantage of changes in prevailing interest rates. 19 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 High Yield EMD Portfolio Portfolio Portfolio ------------------------------------------------------------ Asset-backed securities X X ------------------------------------------------------------ Brady bonds X ------------------------------------------------------------ Convertible securities X X X ------------------------------------------------------------ Discount securities X X X ------------------------------------------------------------ Distressed securities X X X ------------------------------------------------------------ Eurobonds and global bonds X X X ------------------------------------------------------------ Indexed securities X X ------------------------------------------------------------ Loans X X ------------------------------------------------------------ Mortgage-related securities X X 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. 20 . 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. 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. For temporary defensive purposes, the EMD Portfolio may hold foreign currencies or multinational currency units. . Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. High yield and emerging country markets are especially volatile and may result in more frequent trading. Active trading, if profitable, may result in higher capital gains distributions, which would increase your tax liability. Frequent trading may also increase a Portfolio's costs, lessening its performance over time. 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. 21 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 IBCA International 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. 22 Investments in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. . Currency risk. 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. 23 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 575 Lexington Avenue, New York, NY 10022. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading 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, 2000 of approximately $15.1 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, 2000, 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 0.00% --------------------------- High Yield Portfolio 0.04% --------------------------- EMD Portfolio 0.27% ---------------------------
Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. Each team consists of 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 Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant 24 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. It describes the minimum investment requirements for the Portfolios, the expenses and sales charges applicable to each Class of shares and the procedures to follow if you decide to buy shares. Please read the entire Prospectus carefully before buying shares of a Portfolio. Investment Requirements Minimum Initial Investment: . Non-Retirement Account: $1,000 . Retirement Account: $500 Minimum Subsequent Investment: . Non-Retirement Account: $50 . Retirement Account: $25 Choosing a Class of Shares Once you decide to buy shares of a Portfolio, you must determine which class of shares to buy. Each Portfolio offers Class A, B and C shares. Each class has its own cost structure and features that will affect the results of your investment over time in different ways. Your financial adviser or account representative can help you choose the class of shares that best suits your investment needs. . Class A shares have a front-end sales charge, which is added to the Class A NAV to determine the offering price per share. . Class B and C shares do not have a front- end sales charge, which means that your entire investment is available to work for you right away. However, Class B and C shares have a contingent deferred sales charge ("CDSC") that you must pay if you sell your shares within a specified period of time. In addition, the annual expenses of Class B and C shares are higher than the annual expenses of Class A shares. In deciding which class is best, you may consider, among other things: . how much you intend to invest; . the length of time you expect to hold your investment. 25 Relative Advantages of Each Share Class
Investor Characteristics Advantages ------------------------------------------------------------------------------ Class A . Long-term investment horizon . Lower expense structure and the and/or qualify for waiver or amount of the initial sales reduction of sales charge 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 1%, if you sell the longer you hold shares within your shares one year of purchase --------------------------------------------------------------------------- Annual Expenses Lower than Class Higher than Class A Higher than B and C shares shares (Note: Class B Class A shares; shares convert to Class same as Class B A shares 8 years after shares 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them up to 60 days after selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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. 26 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 offering of Investment price per share As a % of NAV ------------------------------------------------------------------ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them up to 60 days after selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. 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. 27 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). . Current shareholders of other mutual funds not distributed by Bear, Stearns & Co. Inc., the Portfolios' distributor, that have paid a front end sales charge or were subject to a CDSC, and that buy shares of a Portfolio within 60 days of selling shares of the other mutual fund. This waiver is not available to investors who acquire Class A shares by exchange from the Money Market Portfolio of The RBB Fund, Inc. To qualify for this waiver, you or 28 your Authorized Dealer must notify Bear Stearns in writing. However, if you sell your Portfolio shares up to one year after the date of purchase, the Portfolio will impose a CDSC on 1% of the lesser of purchase or sale price. To take advantage of the sales charge waiver, you must indicate your eligibility on your Account Information Form. If you think you may be eligible for a sales charge waiver, please contact your account representative or call PFPC Inc., the Portfolios' Transfer Agent, at 1- 800-447-1139. Reduction of Class A Sales Charges You may reduce your Class A sales charge by taking advantage of the following privileges: . Right of Accumulation. Lets you add the value of all Class A shares of the Portfolios that you currently own for purposes of calculating the sales charge on future purchases of Class A shares. You may count share purchases made by the following investors to calculate the reduced sales charge: you, your spouse and your children under the age of 21 (including shares in certain retirement accounts), and a company that you, your spouse or your children control; a trustee or other fiduciary account (including an employee benefit plan); a trustee or other fiduciary that buys shares concurrently for two or more employee benefit plans of a single employer or of affiliated employers. . Letter of Intent. Lets you buy Class A shares of any Portfolio over a 13-month period at the same sales charge as if all shares had been bought at once. You are not obligated to buy the full amount of the shares. However, you must complete the intended purchase to obtain the reduced sales load. To qualify for this plan, check the "Letter of Intent" box on the Account Information Form at the time you buy shares of any Portfolio. Waiver of CDSC The Trust will waive the CDSC of Class A, B and C shares under the following circumstances: . redemptions made within one year after the death or disability of a shareholder; . redemptions by employees participating in eligible benefit plans, 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. 29 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. 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 are financial institutions that 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. 30 Purchase Procedures Purchase through the Distributor or Authorized Dealers Method of Purchase Instructions [GRAPHIC] In person/ [GRAPHIC] . Contact your account representative. By mail . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. . For a new account, your account representative will help you to complete the application. . Mail your application or additional purchase to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 . Send overnight mail to: PFPC Inc. Attention: The Bear Stearns Funds 400 Bellevue Parkway Wilmington, DE 19899 [GRAPHIC] By telephone/ . Contact your account representative. [GRAPHIC] wire . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. . 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. . 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 . 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. 31 Additional Purchases Through the Transfer Agent Method of Purchase Instructions [GRAPHIC] By mail . Mail your application or additional purchase to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 [GRAPHIC] Wilmington, DE 19899-8960 By telephone/ . On the day of purchase, call the Transfer Agent at 1- [GRAPHIC] 800-447-1139 prior to the close of regular trading on the NYSE (usually 4:00 p.m. Eastern Time) to give wire notice of the purchase and before wiring any funds. . 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. . 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 accepts your request to sell those shares. . Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. . Signature guarantees. If your redemption proceeds exceed $50,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. Call the Transfer Agent at 1-800- 447-1139 for information about obtaining a Medallion Program signature guarantee. 32 . 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. . 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; . 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. 33 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. . The Trust may reject your exchange request. The Trust may modify or terminate the exchange option at any time. 34 SHAREHOLDER SERVICES The Trust offers several additional shareholder services. If you would like to take advantage of any of these services, please call your account representative or the Transfer Agent at 1-800-447-1139 to obtain the appropriate forms. These services may be changed or terminated at any time with 60 days' notice. . Automatic investment plan. You may buy shares of a Portfolio at regular intervals by direct transfer of funds from your bank. You may invest a set amount ($250 for the initial purchase; minimum subsequent investments of $50 or $25 for retirement accounts). . 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. . 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. . Reinstatement privilege. If you sell your Class A shares, you may repurchase them (or Class A shares of any other Portfolio) within 60 days without paying an additional sales charge. 35 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: . 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. . Cash. The Trust will send you a check no later than seven days after the payable date. . Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. . Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio. See the description of this option in the "Shareholder Services" section above. . Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account 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. 36 Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. It is important for you to be aware of the following information about the tax treatment of your investment. . Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain. . 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 Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. . Certain dividends 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) or exchange shares of a Portfolio, you must recognize any gain or loss. . Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. . You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. ADDITIONAL INFORMATION Performance Financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, 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. 37 Financial Highlights -- Income Portfolio The financial highlights table is intended to help you understand the financial performance of the Income Portfolio since its inception. This information reflects financial results for a single share of the Income Portfolio. The total returns in the table represent the rate 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.
Distributions Net Asset Net Realized Dividends from Net Value, Net and Unrealized from Net Realized Beginning Investment Gain/(Loss) on Investment Capital of Period Income*(/1/) Investments*(/2/) Income Gains -------------------------------------------------------------------------------------------- Class A 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) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 12.26 0.73 (0.20) (0.73) (0.03) -------------------------------------------------------------------------------------------- For the period April 5, 1995** through March 31, 1996 12.00 0.71 0.30 (0.71) (0.04) -------------------------------------------------------------------------------------------- Class B 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*** through March 31, 1998 12.47 0.10 (0.10) (0.10) - -------------------------------------------------------------------------------------------- Class C 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) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 12.26 0.68 (0.20) (0.68) (0.03) -------------------------------------------------------------------------------------------- For the period April 5, 1995** through March 31, 1996 12.00 0.67 0.30 (0.67) (0.04) --------------------------------------------------------------------------------------------
------ * 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. *** 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. 38 Financial Highlights -- Income Portfolio
Increase/(Decrease) Reflected in Net Ratio of Expense Ratios and Asset Net Assets, Ratio of Investment Net Investment Income Value, Total End of Expenses to Income Due to Waivers and End of Investment Period Average Net to Average Related Portfolio Period Return(/3/) (000's omitted) Assets(/1/) Net Assets(/1/) Reimbursements Turnover Rate ---------------------------------------------------------------------------------------------------------------- Class A $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 ---------------------------------------------------------------------------------------------------------------- 13.03 4.40 3,367 0.80 5.99 1.73 262.95 ---------------------------------------------------------------------------------------------------------------- 12.26 8.54 4,467 0.80(/5/) 5.76(/5/) 2.87(/5/) 107.35 ---------------------------------------------------------------------------------------------------------------- Class B 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 11.53 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 ---------------------------------------------------------------------------------------------------------------- 12.03 3.99 1,018 1.20 5.57 1.74 262.95 ---------------------------------------------------------------------------------------------------------------- 12.26 8.13 1,775 1.25(/5/) 5.38(/5/) 2.95(/5/) 107.35 ----------------------------------------------------------------------------------------------------------------
------ 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. 39 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.
Distributions Net Asset Net Realized Dividends from Net Value, Net and Unrealized from Net Realized Beginning Investment Gain/(Loss) on Investment Capital of Period Income*(/1/) Investments*(/2/) Income Gains ------------------------------------------------------------------------------------------- Class A 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** through March 31, 1998 12.00 0.26 0.73 (0.26) - ------------------------------------------------------------------------------------------- Class B 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** through March 31, 1998 12.00 0.24 0.73 (0.24) - ------------------------------------------------------------------------------------------- Class C 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** through March 31, 1998 12.00 0.24 0.73 (0.24) - -------------------------------------------------------------------------------------------
------ * 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. 40 Financial Highlights -- High Yield Portfolio
Increase/(Decrease) Net Ratio of Reflected in Asset Net Assets, Ratio of Investment Expense Ratios and Value, Total End of Expenses to Income Net Investment Income End of Investment Period Average Net to Average Due to Waivers and Portfolio Period Return(/3/) (000's omitted) Assets(/1/) Net Assets(/1/) Related Reimbursements Turnover Rate --------------------------------------------------------------------------------------------------------- Class A $ 9.78 (4.68)% $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 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 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, if any. Total investment return is not annualized. 4 Annualized. 41 Financial Highlights -- EMD Portfolio The financial highlights table is intended to help you understand the financial performance of the EMD Portfolio since its inception. This information reflects financial results for a single share of the EMD Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the EMD Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the EMD Portfolio's financial statements, are included in the EMD Portfolio's annual report, which is available by calling the Trust at 1- 800-447-1139.
Distributions Net Asset Net Realized Dividends from Net Value, Net and Unrealized from Net Realized Beginning Investment Gain/(Loss) on Investment Capital of Period Income*(/1/) Investments*(/2/) Income Gains -------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, 2000 $ 9.27 $0.83 $ 1.31 $(0.83) - -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.00 1.05 (2.60) (1.01) $ (0.17) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 11.14 0.91 1.17 (0.92) (0.30) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 9.02 0.85 2.10 (0.83) - -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1996 6.90 0.91 2.13 (0.92) - -------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2000 9.19 0.76 1.31 (0.76) - -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 11.95 0.98 (2.60) (0.97) (0.17) -------------------------------------------------------------------------------------------- For the period January 12, 1998** through March 31, 1998 11.33 0.21 0.61 (0.20) - -------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2000 9.20 0.76 1.31 (0.76) - -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 11.95 0.98 (2.59) (0.97) (0.17) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 11.14 0.97 1.04 (0.90) (0.30) -------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 9.04 0.84 2.07 (0.81) - -------------------------------------------------------------------------------------------- For the period July 26, 1995** through March 31, 1996 7.81 0.59 1.32 (0.68) - --------------------------------------------------------------------------------------------
------ * 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 value during the respective periods. For EMD Portfolio, net realized and unrealized gain/(loss) on investments include forward foreign currency exchange contracts and translation of foreign currency related transactions. 42 Financial Highlights -- EMD Portfolio
Increase/(Decrease) Net Ratio of Reflected in Asset Net Assets, Ratio of Investment Expense Ratios and Value, Total End of Expenses to Income Net Investment Income End of Investment Period Average Net to Average Due to Waivers and Portfolio Period Return(/3/) (000's omitted) Assets(/1/) Net Assets(/1/) Related Reimbursements Turnover Rate ---------------------------------------------------------------------------------------------------------------- Class A $10.58 24.54% $28,517 1.75% 8.59% 1.11% 91.98% ---------------------------------------------------------------------------------------------------------------- 9.27 (12.40) 29,526 1.75 10.38 1.28 82.47 ---------------------------------------------------------------------------------------------------------------- 12.00 19.31 33,448 1.75 7.70 1.01 128.91 ---------------------------------------------------------------------------------------------------------------- 11.14 33.48 33,185 2.00 7.95 0.80 223.41 ---------------------------------------------------------------------------------------------------------------- 9.02 46.13 28,860 2.00 10.64 1.18 266.46 ---------------------------------------------------------------------------------------------------------------- Class B 10.50 23.88 1,808 2.40 7.93 1.02 91.98 ---------------------------------------------------------------------------------------------------------------- 9.19 (13.08) 1,459 2.40 9.73 1.43 82.47 ---------------------------------------------------------------------------------------------------------------- 11.95 7.29(/4/) 566 2.40(/5/) 7.13(/4/,/5/) 2.25(/4/,/5/) 128.91 ---------------------------------------------------------------------------------------------------------------- Class C 10.51 23.86 2,750 2.40 7.82 1.01 91.98 ---------------------------------------------------------------------------------------------------------------- 9.20 (12.99) 2,165 2.40 9.73 1.16 82.47 ---------------------------------------------------------------------------------------------------------------- 11.95 18.66 4,317 2.40 7.31 1.05 128.91 ---------------------------------------------------------------------------------------------------------------- 11.14 32.97 2,583 2.40 7.59 0.64 223.41 ---------------------------------------------------------------------------------------------------------------- 9.04 25.45(/4/) 202 2.40(/5/) 8.72(/4/,/5/) 3.42(/4/,/5/) 266.46 ----------------------------------------------------------------------------------------------------------------
------ 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. 43 The Bear Stearns Funds 575 Lexington Avenue New York, NY 10022 1-800-766-4111 DISTRIBUTOR Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 INVESTMENT ADVISER Bear Stearns Asset Management Inc. 575 Lexington Avenue New York, NY 10022 ADMINISTRATOR Bear Stearns Funds Management Inc. 575 Lexington Avenue New York, NY 10022 CUSTODIANS Income and High Yield Portfolios: Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 EMD Portfolio: Brown Brothers Harriman & Co. 40 Water Street Boston, MA 02109 TRANSFER & DIVIDEND DISBURSEMENT AGENT PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 COUNSEL Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, NY 10022 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, NY 10281 44 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. You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns Worldwide Web site at http://www.bearstearns.com. Investment Company Act File No. 811-8798 BSF-P-016-04 The Bear Stearns Funds Prospectus Dated July 28, 2000 Fixed Income Funds .Income Portfolio . . . .High Yield Total Return Portfolio . . . . .Emerging Markets Debt 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 the 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.575 Lexington Avenue New York, NY 10022 1-800-447-1139 [LOGO OF BEAR STEARNS] Table of Contents ................................................................................ Risk/Return Summary 1 ................................................ Income Portfolio High Yield Total Return Portfolio Emerging Markets Debt Portfolio Investments 16 ................................................ Risk Factors 18 ................................................ Management of the Portfolios 21 ................................................ Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares 21 ................................................ Investing in the Portfolios 22 ................................................ How to Buy Shares How to Sell Shares Exchanges Dividends, Distributions and Taxes 25 ................................................ Additional Information 27 ................................................ Financial Highlights 28
................................................ 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: .not deposits or obligations of any bank; .not insured by the Federal Deposit Insurance Corporation; .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 market conditions, the Income Portfolio invests at least 75% of its total assets in investment-grade, U.S. dollar-denominated fixed income securities issued by U.S. companies and the U.S. government or its political subdivisions, agencies or instrumentalities. 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 Salomon Smith Barney Broad Investment Grade Bond Index (the "Salomon BIG Index"), a market-capitalization weighted index that includes U.S. Treasury, government-sponsored, mortgage and investment-grade corporate fixed income securities maturing in one year or more issued by entities having a minimum of $50 million in debt outstanding at the time of inclusion in the Salomon BIG Index. Under normal market conditions, the Income Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration between three and six 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. 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 75% 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 25% 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, Fitch IBCA International or Duff & Phelps. 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: . 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. Income Portfolio 2 . 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: . 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 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 Portfolio's investments had been managed to realize high current income for the entire period. [GRAPH] Income Portfolio Annual Total Return (%)/1/ 1996 3.10% 1997 7.95% 1998 7.66% 1999 0.90% Past performance is not necessarily an indication of future results. /1/The Income Portfolio's year-to-date return as of June 30, 2000, was 3.09%. During the period shown in the bar chart, the highest quarterly return was 3.79% (for the quarter ended June 30, 1997) and the lowest quarterly return was (2.09)% (for the quarter ended March 31, 1996). Income Portfolio 3 The table shows how the average annual total return for Class Y shares of the Income Portfolio for one year and since the date of inception compared to the Salomon BIG Index, a broad-based unmanaged index that represents the general performance of fixed income securities. The table also compares the Income Portfolio's performance to that of the Lipper A Rated Bond Fund Index, a measure of the performance of investment grade fixed income mutual funds.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year September 8, 1995 ---------------------------------------------------------- Income Portfolio - Class Y (0.90)% 5.27% ---------------------------------------------------------- Salomon BIG Index (0.83)% 6.05% ---------------------------------------------------------- Lipper A Rated Bond Fund Index (2.04)% 5.31% ----------------------------------------------------------
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 3.13% -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 3.58% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (3.13)% -------------------------------------------------------------------- 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, 2001, so that the Income Portfolio's net expenses do not exceed the amount indicated above. Income Portfolio 4 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:
1 Year 3 Years 5 Years 10 Years ----------------------------------------- Class Y $46 $805 $1,586 $3,638 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.45% until July 31, 2001 and thereafter will equal 3.58%. 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 market conditions, the High Yield Total Return Portfolio (the "High Yield Portfolio") will invest at least 80% of its total assets in high yield fixed income securities (as defined below), including domestic and foreign debt securities, convertible securities and preferred stocks. Within this 80% category, the High Yield Portfolio may invest in the following securities (up to the stated percentage of its total assets): . 25% in foreign securities; . 25% in zero-coupon securities, pay-in-kind bonds or discount obligations; . 20% in distressed securities; . 20% in mortgage-related securities; . 15% in loans and participations; 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. 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. High Yield Portfolio 6 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. Who May Want to Invest in the High Yield Portfolio The High Yield Portfolio may be appropriate for investors who: . seek high current income coupled with 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. 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. [GRAPH] The High Yield Portfolio Total Return (%)/1/ 1998 4.28% 1999 0.07% Past performance is not necessarily an indication of future results. /1/The High Yield Portfolio's year-to-date return as of June 30, 2000, was (2.39)%. During the period shown in the bar chart, the highest quarterly return was 8.30% (for the quarter ended March 31, 1998) and the lowest quarterly return was (6.96)% (for the quarter ended September 30, 1998). 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 Global High Yield Index, a broad-based unmanaged index that represents the general performance of high yield fixed income securities. The table also compares the High Yield Portfolio's performance to that of the Lipper High Yield Bond Fund Index, a measure of the performance of high yield fixed income mutual funds. The figures shown in the table do not reflect sales charges applicable to Class A shares.
Average Annual Total Returns Since Inception (for the periods ended December 31, 1999) 1 Year January 2, 1998 ------------------------------------------------------------------- High Yield Portfolio - Class A 0.07% 2.14% ------------------------------------------------------------------- Credit Suisse First Boston Global High Yield Index 3.28% 1.92% ------------------------------------------------------------------- Lipper High Yield Bond Fund Index 4.78% 2.33% -------------------------------------------------------------------
High Yield Portfolio 8 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 0.63% -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.23% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.58)% -------------------------------------------------------------------- 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, 2001. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2001, 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: . 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:
1 Year 3 Years 5 Years 10 Years ----------------------------------------- Class Y $66 $333 $620 $1,437 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.65% until July 31, 2001, and thereafter will equal 1.23%. High Yield Portfolio 9 Emerging Markets Debt Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective High current income by investing primarily in debt obligations of issuers located in emerging countries with a secondary objective of capital appreciation. Principal Strategies Under normal market conditions, the Emerging Markets Debt Portfolio ("EMD Portfolio") will invest at least 80% of its total assets in debt obligations of issuers in emerging countries. "Debt obligations" include fixed or floating rate bonds, notes, debentures, commercial paper, loans, Brady bonds, and other debt securities issued or guaranteed by governments, agencies or instrumentalities, central banks, commercial banks or private issuers, including repurchase agreements with respect to obligations of governments or central banks. Debt obligations also include preferred stock and convertible securities, which have characteristics of both debt and equity investments. Under normal market conditions, the EMD Portfolio may invest up to 10% of its total assets in convertible securities. The EMD Portfolio's investments in debt obligations may have stated maturities ranging from overnight to 30 years. "Emerging countries" include any country that is generally considered to be an emerging or developing country by the World Bank, the International Finance Corporation or the United Nations and its authorities. An issuer is considered to be located in an emerging country if it (i) derives 50% or more of its total revenues from either goods produced, sales made or services performed in emerging countries, or (ii) is organized under the laws of, and with a principal office in, an emerging country. The EMD Portfolio intends to focus its investments in Asia, Eastern Europe, Latin America and Africa. Countries that are not considered emerging countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States. In selecting investments for the EMD Portfolio, the Adviser will emphasize investments in countries that are making the most progress toward sustainable economic growth with lower inflation. The EMD Portfolio will apply the percentage limits described in the Risk/Return Summary at the time of purchase. The EMD Portfolio . will invest at least 70% of its total assets in at least three emerging countries; . may invest up to 40% of its total assets in any one country; . may invest up to 20% of its total assets in loans and participations; and . will invest at least 30% of its total assets in Latin America. The EMD Portfolio seeks capital appreciation by investing in securities that it expects will benefit from declines in long-term interest rates or improvements in an issuer's credit quality. EMD Portfolio 10 Currency. The EMD Portfolio primarily invests in a combination of high- yield U.S. dollar-denominated instruments and local currency instruments in emerging countries where the relationship between interest rates and anticipated foreign exchange movements relative to the U.S. dollar are expected to result in a high dollar rate of return. In addition to current income, the EMD Portfolio also seeks capital appreciation from interest- rate and currency exchange fluctuations and improving credit quality. The EMD Portfolio will invest at least 70% of its total assets in U.S. dollar-denominated instruments. The EMD Portfolio may invest up to 30% of its total assets in debt obligations denominated in local currencies, although the EMD Portfolio expects that it will not invest more than 20% of its total assets in debt obligations denominated in the currency of any one country. Foreign Currency Hedging -- Use of Forward Foreign Exchange Contracts. The EMD 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 Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, the EMD 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 EMD Portfolio may enter into a forward contract for any of the following reasons: . To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against another foreign currency (cross hedge). Quality. The EMD Portfolio may invest in debt obligations that the Adviser determines to be suitable investments notwithstanding any credit ratings that may be assigned to such securities. All of the EMD Portfolio's assets may be invested in debt obligations that are unrated or below investment grade. The EMD Portfolio may purchase non-performing securities and some of these securities may be comparable to securities rated as low as the lowest credit ratings of an NRSRO. For a discussion of the ratings categories of various NRSROs, see the Appendix to the SAI. Principal Risks You may lose money by investing in the EMD Portfolio. The EMD 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 EMD Portfolio's net asset value, yield and/or total return: . Foreign securities issued in emerging countries are generally more volatile than securities issued in established markets because the securities markets in these countries have comparatively less trading volume and fewer participants. EMD Portfolio 11 . Inefficient settlement procedures in emerging countries may cause the EMD Portfolio to miss investment opportunities or be exposed to liability for failure to deliver securities. . Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. . 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. . The rate of inflation may increase, resulting in higher interest rates, causing the EMD 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. . A financial intermediary involved in a loan participation may become insolvent or the EMD Portfolio, as holder of the loan, may be compelled to participate in restructuring the underlying loan. . The EMD Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield. The EMD Portfolio is a non-diversified mutual fund which means that it may devote a larger portion of its assets to the securities of a single issuer than if it were diversified. This could make the EMD Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the EMD Portfolio The EMD Portfolio may be appropriate for investors who: . seek high current income; . want to add an emerging markets fixed income component to an existing portfolio; . are willing to accept the relatively greater price volatility of investments in emerging markets compared to other fixed income investments. The EMD Portfolio may not be appropriate for investors who: . are not willing to accept the risks associated with foreign securities markets or currency fluctuation; . are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. EMD Portfolio 12 Performance Class Y shares of the EMD Portfolio have not yet commenced operations. The bar chart and table below illustrate the risks of investing in the EMD Portfolio by showing changes in 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. Prior to July 29, 1999, the EMD Portfolio was a series of Bear Stearns Investment Trust, another registered investment company advised by BSAM. The performance information below reflects the performance of the EMD Portfolio during the time that it was a series of Bear Stearns Investment Trust and BSAM served as its investment adviser. 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. EMD Portfolio Annual Total Return (%)/1/ [GRAPH] 1996 40.80%/2/ 1997 14.61% 1998 -10.76% 1999 18.69% Past performance is not necessarily an indication of future results. /1/The EMD Portfolio's year-to-date return as of June 30, 2000, was 7.55%. /2/The EMD Portfolio's performance prior to January 1, 1996 is not shown because it was managed by an investment adviser other than BSAM, its current investment adviser, for the period from inception (May 3, 1993) to May 3, 1995. During the period shown in the bar chart, the highest quarterly return was 11.37% (for the quarter ended June 30, 1996) and the lowest quarterly return was (18.67)% (for the quarter ended September 30, 1998). EMD Portfolio 13 The table shows how the average annual total return for Class A shares of the EMD Portfolio for one year and since the date of inception compared to the Salomon Smith Barney Emerging Markets Debt Mutual Fund Index (the "EMMF Index") and the J.P. Morgan Emerging Market Bond Index -- Global Constrained ("EMBI-GC Index"). The EMMF Index is a broad-based unmanaged index that represents the general performance of Brady bonds and assets of two non-Brady countries, Morocco and Russia. The EMBI-GC Index is a broad- based unmanaged index that includes Brady bonds, sovereign loans and eurobonds. The figures shown in the table do not reflect sales charges applicable to Class A shares.
Average Annual Total Returns (for the periods ended December 31, 1999) 1 Year Since Inception* ------------------------------------------------- EMD Portfolio - Class A 18.69% 17.34% ------------------------------------------------- EMMF Index 24.63% 20.09% ------------------------------------------------- EMBI-GC Index # 19.56% 16.93% -------------------------------------------------
* The Adviser began managing Class A shares on May 4, 1995. # Although both the EMMF Index and the EMBI-GC Index are shown in this table, the Adviser has determined that the EMBI-GC Index is more broad-based, more frequently updated, more widely recognized and better supported in terms of analytic data than the EMMF Index. Accordingly, on April 1, 2000, the EMD Portfolio discontinued using the EMMF Index as a benchmark for its performance and began using the EMBI-GC Index. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the EMD Portfolio.
Class Shareholder Fees (paid directly from your investment)* 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/1/ 1.00% ------------------------------------------------------------------ Distribution (12b-1) Fees 0.00% ------------------------------------------------------------------ Other Expenses 1.51% ------------------------------------------------------------------ Total Annual Portfolio Operating Expenses 2.51% ------------------------------------------------------------------ Fee Waiver and Expense Reimbursement (1.11)% ------------------------------------------------------------------ Net Expenses/2/ 1.40% ------------------------------------------------------------------
* 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. EMD Portfolio 14 /1/ Management fees are based on the EMD Portfolio's average daily net assets at an annual rate of 1.00% charged on assets up to $50 million, 0.85% charged on assets between $50 million and $100 million and 0.55% charged on assets above $100 million. /2/ The expenses shown are based on estimated expenses of Class Y shares of the EMD Portfolio for the fiscal year ending March 31, 2001. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2001, so that the EMD Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the EMD Portfolio over various time periods. It is intended to help you compare the cost of investing in the EMD Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the EMD Portfolio; . your investment returns 5% each year; . the EMD 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 $143 $676 $1,236 $2,762 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.40% until July 31, 2001, and thereafter will equal 2.51%. EMD Portfolio 15 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 longer term fixed income securities and, to a lesser extent, with investing in below investment-grade securities. The Income Portfolio evaluates a security's duration 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 Salomon BIG Index. As of March 31, 2000, the weighted average maturity of securities in the Salomon BIG Index was approximately nine years with an average duration of approximately five 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 declines in long-term interest rates or improvements in an issuer's business or prospects. EMD Portfolio The EMD Portfolio seeks to identify investment opportunities in emerging countries that are positioning themselves for sustainable economic growth with low inflation. These countries typically show signs of improving economic and political fundamentals, such as the appointment or election of reform-minded governments, tighter monetary and fiscal policies, privatization of state-controlled industries, and reform of social security and civil service systems. The EMD Portfolio will attempt to maximize returns by adjusting the portfolio in response to numerous factors affecting debt obligations, including political and economic developments and changes in credit quality and exchange rates. Investing in floating rate and short-to- intermediate term securities may enable the EMD Portfolio to maximize returns in different interest rate environments. In addition, the ability to invest in fixed-rate securities with maturities of up to 30 years may allow the EMD Portfolio to take advantage of changes in prevailing interest rates. 16 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 EMD Portfolio ------------------------------------------------------------------------ Asset-backed securities X X ------------------------------------------------------------------------ Brady bonds X ------------------------------------------------------------------------ Convertible securities X X X ------------------------------------------------------------------------ Discount securities X X X ------------------------------------------------------------------------ Distressed securities X X X ------------------------------------------------------------------------ Eurobonds and global bonds X X X ------------------------------------------------------------------------ Indexed securities X X ------------------------------------------------------------------------ Loans X X ------------------------------------------------------------------------ Mortgage-related securities X X 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 17 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. 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. For temporary defensive purposes, the EMD Portfolio may hold foreign currencies or multinational currency units. . Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. High yield and emerging country markets are especially volatile and may result in more frequent trading. Active trading, if profitable, may result in higher capital gains distributions, which would increase your tax liability. Frequent trading may also increase a Portfolio's costs, lessening its performance over time. 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. 18 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 IBCA International 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 19 in foreign countries could be affected by factors not present in the U.S., including expropriation, confiscation of property, and difficulties in enforcing contracts. All of these factors can make foreign investments, especially those in emerging countries, more volatile than U.S. investments. . Currency risk. 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. 20 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 575 Lexington Avenue, New York, NY 10022. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading 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, 2000, of approximately $15.1 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, 2000, 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 0.00% -------------------------- High Yield Portfolio 0.04% -------------------------- EMD Portfolio 0.27% --------------------------
Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. Each team consists of 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. 21 The Portfolios value their investments based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by the Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant Portfolio's investments and other assets, subtracting its liabilities, and then dividing that figure by the number of outstanding shares of the class. 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. 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 22 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 . You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. . When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. . The Trust will 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 [GRAPHCI] In person . Visit your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By telephone . Call your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By mail . Mail your redemption request to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. [GRAPHIC] By wire . Submit wiring instructions to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 23 Redemption Through the Transfer Agent Method of Redemption Instructions [GRAPHIC] By mail . Mail your redemption request to: PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 [GRAPHIC] By telephone . Call the Transfer Agent at 1-800-447-1139. . 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 . Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. . Signature guarantees. If your redemption proceeds exceed $50,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. Call the Transfer Agent at 1-800- 447-1139 for information about obtaining a Medallion Program signature guarantee. . Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. . Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. . Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. The Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a combination of cash and a share of actual portfolio securities. Call the Transfer Agent for details. 24 . 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: . 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. . The Trust may reject your exchange request. 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. 25 You can receive dividends or distributions in one of the following ways: . Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account 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 your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. . Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may not use this service to establish a new account. . 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. It is important for you to be aware of the following information about the tax treatment of your investment. . Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain. . 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 Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. . Certain dividends 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) or exchange shares of a Portfolio, you must recognize any gain or loss. . Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. . You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 26 ADDITIONAL INFORMATION Performance Financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, 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. 27 Financial Highlights -- Income Portfolio The financial highlights table is intended to help you understand the financial performance of the Income Portfolio since its inception. This information reflects financial results for a single share of the Income Portfolio. The total returns in the table represent the rate 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 1-800-447-1139. Class Y shares of the High Yield Portfolio and the EMD Portfolio have not yet commenced operations.
Net Asset Net Realized Dividends Distributions Value, Net and Unrealized from Net from Net Beginning Investment Gain/(Loss) on Investment Realized of Period Income*(/1/) Investments*(/2/) Income Capital Gains - ----------------------------------------------------------------------------------------- Class Y 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) - ----------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 12.26 0.77 (0.20) (0.77) (0.03) - ----------------------------------------------------------------------------------------- For the period September 8, 1995** through March 31, 1996 12.35 0.41 (0.05) (0.41) (0.04) - -----------------------------------------------------------------------------------------
- ------ * 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 related 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. 28 Financial Highlights -- Income Portfolio
Increase/(Decrease) Net Ratio of Reflected in Assets, Net Expense Ratios and Net Asset End of Ratio of Investment Net Investment Value, Total Period Expenses to Income to Income Due to Portfolio End of Investment (000's Average Net Average Net Waivers and Related Turnover Period Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - ------------------------------------------------------------------------------------------------- Class Y $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 - ------------------------------------------------------------------------------------------------- 12.03 4.77 13,486 0.45 6.34 1.73 262.95 - ------------------------------------------------------------------------------------------------- 12.26 2.92(/4/) 12,199 0.45(/5/) 5.93(/4/,/5/) 2.89(/4/,/5/) 107.35 - -------------------------------------------------------------------------------------------------
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. 29 The Bear Stearns Funds 575 Lexington Avenue New York, NY 10022 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 245 Park Avenue PFPC Inc. New York, NY 10167 Bellevue Corporate Center INVESTMENT ADVISER 400 Bellevue Parkway Wilmington, DE 19809 Bear Stearns Asset Management Inc. COUNSEL 575 Lexington Avenue Kramer Levin Naftalis & Frankel LLP New York, NY 10022 919 Third Avenue New York, NY 10022 ADMINISTRATOR Bear Stearns Funds Management INDEPENDENT AUDITORS Inc. Deloitte & Touche LLP 575 Lexington Avenue Two World Financial Center New York, NY 10022 New York, NY 10281 CUSTODIAN Income and High Yield Portfolios: Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 EMD Portfolio: Brown Brothers Harriman & Co. 40 Water Street Boston, MA 02109 30 This page intentionally left blank 31 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. You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns Worldwide Web site at http://www.bearstearns.com. Investment Company Act File No. 811-8798 BSF-P-018-04 The Bear Stearns Funds Prospectus Dated July 28, 2000 Equity Funds .S&P STARS Portfolio . .The Insiders Select Fund . .Large Cap Value Portfolio . .Small Cap Value Portfolio . .Focus List Portfolio . .Balanced Portfolio . .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.575 Lexington Avenue New York, NY 10022 1-800-447-1139 [LOGO OF BEAR STEARNS] Table of Contents ................................................................................ Risk/Return Summaries 1 ........................................... S&P STARS Portfolio The Insiders Select Fund Large Cap Value Portfolio Small Cap Value Portfolio Focus List Portfolio Balanced Portfolio International Equity Portfolio Investments 39 ........................................... Risk Factors 43 ........................................... Management of the Portfolios 47 ........................................... Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares 48 ........................................... Investing in the Portfolios 48 ........................................... 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 59 ........................................... Dividends, Distributions and Taxes 60 ........................................... Additional Information 62 ........................................... Financial Highlights 64 ...........................................
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: . not deposits or obligations of any bank; . not insured by the Federal Deposit Insurance Corporation; . 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 To achieve the investment objective of the S&P STARS Portfolio, Bear Stearns Asset Management Inc., the investment adviser for each Portfolio ("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. . 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 that are listed on U.S. exchanges ("ADRs") that, at their time of initial purchase, were ranked five stars or, at their time of short sale, were ranked one star. . 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. 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. The S&P STARS Portfolio may invest up to 15% of its total assets without regard to STARS ranking to increase exposure to additional sectors or take advantage of investment opportunities in securities of issuers that S&P may not follow. 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. However, if S&P downgrades a security held by the S&P STARS Portfolio from five or four stars to three stars, 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, 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 1,100 issuers and evaluates the short-term (up to 12 months) appreciation potential of the reviewed stocks, as shown below. * * * * * 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 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . A small- or middle-capitalization 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- 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. . Short sales may involve substantial risk and may involve leverage, which may increase potential losses. . Ratings by S&P's research group may not accurately assess the investment prospects of a particular security. S&P STARS Portfolio 2 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: . are investing for the long term; . want to add an equity component to their portfolio. The S&P STARS Portfolio may not be appropriate for investors who: The S&P STARS 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 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. [GRAPH] S&P STARS Portfolio Annual Total Return (%) 1 1996 27.77 1997 17.99 1998 39.69 1999 39.53 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, 2000, was 16.18%. During the period shown in the bar chart, the highest quarterly return was 28.69% (for the quarter ended December 31, 1998) and the lowest quarterly return was (11.65)% (for the quarter ended September 30, 1998). S&P STARS Portfolio 3 The table shows how the average annual total returns for Class A, B and C shares of the S&P STARS 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. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year April 3, 1995 ------------------------------------------------------ S&P STARS Portfolio - Class A 37.53% 30.54%* ------------------------------------------------------ S&P STARS Portfolio - Class B 36.75% ** ------------------------------------------------------ S&P STARS Portfolio - Class C 36.81% 29.86% ------------------------------------------------------ S&P 500 Index 21.03% 27.46% ------------------------------------------------------
* 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, 1999 was 37.10%. The comparable return for the same period for the S&P 500 Index was 24.60%. S&P STARS Portfolio 4 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 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 (includes a 0.25% shareholder servicing fee) 0.68% 0.68% 0.68% ---- ---- ---- ---------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.68% 2.18% 2.18% ---------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.18)% (0.18)% (0.18)% ---- ---- ---- ---------------------------------------------------------------------------- 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, 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: . you invest $10,000 in the S&P STARS Portfolio; . your investment returns 5% each year; . 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 $1,034 $1,396 $2,414 --------------------------------------------------------------------------------------- Class B $703 $ 965 $1,353 $2,373** --------------------------------------------------------------------------------------- Class C $303 $ 665 $1,153 $2,499 ---------------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --*** ---
1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------------------- Class B $203 $665 $1,153 $2,373** --------------------------------------------------------------------------------------- Class C $203 $665 $1,153 $2,499 ---------------------------------------------------------------------------------------
* 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, 2001 and thereafter will equal 1.68% for Class A, 2.18% 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." S&P STARS Portfolio 6 The Insiders Select Fund ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, The Insiders Select Fund invests at least 85% of 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. The Adviser anticipates that the issuers principally will be mid- capitalization companies (companies that under current market conditions have market capitalizations that range from $2 billion to $10 billion at the time of purchase). The Insiders Select Fund will invest in U.S. equity securities that the Adviser believes will equal or exceed the performance of the Standard & Poor's MidCap 400 Stock Index (the "S&P MidCap 400 Index"). The dollar-weighted average market capitalization of stocks in the S&P MidCap 400 Index was approximately $3.9 billion as of June 30, 2000. The Insiders Select Fund may invest in stocks that are not included in the S&P MidCap 400 Index. In selecting investments for The Insiders Select Fund, the Adviser analyzes . trading in a company's securities by corporate insiders, officers, directors and significant stockholders; . published company reports prepared by financial analysts, including revisions to earnings predictions; and . a company's corporate finance activities, including stock repurchase programs, dividend policies and new securities issuance. Insiders, analysts and the company may send signals that the Adviser analyzes to produce valuable information about the prospects for individual companies. In its analysis, the Adviser uses only data that is available to the public. The Adviser obtains the data on insider trading activity from CDA/Investnet, among other sources, which compiles this information from publicly available SEC filings. In addition to the factors described above, the Adviser also 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. Insiders Select Fund 7 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . A middle-capitalization 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. . 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. 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: . are investing for the long term; . 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: . are not willing to take any risk that they may experience share price fluctuations or lose money on their investment. Insiders Select Fund 8 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. [GRAPH] The Insiders Select Fund Annual Total Return (%) 1 1996 21.38 1997 29.64 1998 9.29 1999 9.12 Past performance is not necessarily an indication of future results. /1/The Insider's Select Fund's year-to-date return as of June 30, 2000 was (4.35)%. During the period shown in the bar chart, the highest quarterly return was 16.35% (for the quarter ended December 31, 1998) and the lowest quarterly return was (16.52)% (for the quarter ended September 30, 1998). The table shows how the average annual total returns for Class A, B and C 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. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year June 16, 1995 ------------------------------------------------------- Insiders Select Fund - Class A 3.10% 16.60%* ------------------------------------------------------- Insiders Select Fund - Class B 3.58% ** ------------------------------------------------------- Insiders Select Fund - Class C 7.59% 17.47% ------------------------------------------------------- S&P MidCap 400 Index 14.74% 25.56% -------------------------------------------------------
* 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, 1999 was 6.71%. The comparable return for the same period for the S&P MidCap 400 Index was 17.02%. Insiders Select Fund 9 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 Fees/2/ 1.00% 1.00% 1.00% ------------------------------------------------------------------------------ Distribution (12b-1) Fees 0.25% 0.75% 0.75% ------------------------------------------------------------------------------ Other Expenses (includes a 0.25% shareholder servicing fee) 1.21% 1.21% 1.21% ---- ---- ---- ------------------------------------------------------------------------------ Total Annual Portfolio Operating Expenses 2.46% 2.96% 2.96% ------------------------------------------------------------------------------ Fee Waiver and Expense Reimbursement (0.81)% (0.81)% (0.81)% ---- ---- ---- ------------------------------------------------------------------------------ Net Expenses/3/ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that The Insiders Select Fund's net expenses do not exceed the amounts indicated above. 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: . you invest $10,000 in The Insiders Select Fund; . your investment returns 5% each year; . 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 $1,201 $1,719 $3,135 ---------------------------------------------------------------------------------------- Class B $718 $1,139 $1,686 $3,105** ---------------------------------------------------------------------------------------- Class C $318 $ 839 $1,486 $3,223 ----------------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------------------- Class B $218 $839 $1,486 $3,105** ---------------------------------------------------------------------------------------- Class C $218 $839 $1,486 $3,223 ----------------------------------------------------------------------------------------
* 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, 2001, and thereafter will equal 2.46% for Class A and 2.96% 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." Insiders Select Fund 11 Large Cap Value Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Large Cap Value Portfolio ("Large Cap 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 Large Cap 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 Large Cap 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 Large Cap Portfolio invests will vary depending on market conditions. As of June 30, 2000, the weighted average market capitalization of issuers of securities held by the Large Cap Portfolio was greater than $65 billion. Principal Risks You may lose money by investing in the Large Cap Portfolio. The Large 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 Large Cap Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. Large Cap Portfolio 12 Who May Want to Invest in the Large Cap Portfolio The Large Cap Portfolio may be appropriate for investors who: . are investing for the long term; . want to add a large-cap equity component to their portfolio. The Large Cap 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. Large Cap Portfolio 13 Performance The bar chart and table below illustrate the risks of investing in the Large 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 returns for Class A shares of the Large 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. [GRAPH] Large Cap Value Portfolio Annual Total Return (%)/1/ 1996 14.37 1997 31.07 1998 15.61 1999 0.23 Past performance is not necessarily an indication of future results. /1/The Large Cap Portfolio's year-to-date return as of June 30, 2000 was (2.52)%. 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 (12.73)% (for the quarter ended September 30, 1998). The table shows how the average annual total returns for Class A, B and C shares of the Large Cap 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. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year April 3, 1995 -------------------------------------------------------- Large Cap Portfolio - Class A (5.29)% 16.35%* -------------------------------------------------------- Large Cap Portfolio - Class B (4.68)% ** -------------------------------------------------------- Large Cap Portfolio - Class C (1.12)% 17.18% -------------------------------------------------------- S&P 500 Index 21.03 % 27.46% --------------------------------------------------------
* 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 28, 1998. The average annual total return for Class B shares of the Large Cap Portfolio for the period from January 28, 1998 to December 31, 1999 was 6.26%. The comparable return for the same period for the S&P 500 Index was 9.78%. Large Cap Portfolio 14 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Large 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 (includes a 0.25% shareholder servicing fee) 2.28% 2.28% 2.28% ------ ------ ------ ----------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 3.28% 3.78% 3.78% ----------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.78)% (1.78)% (1.78)% ------ ------ ------ ----------------------------------------------------------------------------- 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the Large Cap Portfolio's net expenses do not exceed the amounts indicated above. Large Cap Portfolio 15 Example This Example illustrates the cost of investing in the Large Cap Portfolio over various time periods. It is intended to help you compare the cost of investing in the Large Cap Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Large Cap Portfolio; . your investment returns 5% each year; . the Large 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 $1,347 $2,022 $3,815 --------------------------------------------------------------------------------------- Class B $703 $1,291 $1,999 $3,796** --------------------------------------------------------------------------------------- Class C $303 $ 991 $1,799 $3,905 ---------------------------------------------------------------------------------------
If you do not sell your shares at the end of each period--*** ---
1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------------------- Class B $203 $991 $1,799 $3,796** --------------------------------------------------------------------------------------- Class C $203 $991 $1,799 $3,905 ---------------------------------------------------------------------------------------
* 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, 2001 and thereafter will equal 3.28% for Class A and 3.78% 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." Large Cap Portfolio 16 Small Cap Value Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Small Cap Value Portfolio ("Small Cap Portfolio") invests at least 65% of its total assets in equity securities of companies with market capitalizations (at time of purchase) of up to $2 billion ("small companies") that the Adviser identifies as value companies. Within this 65% category, the Small Cap 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 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, 2000 the weighted average market capitalization of issuers whose securities were held by the Small Cap Portfolio was approximately $1.1 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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 17 . 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. . 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: . are investing for the long term; . want to add a small-cap equity component to their portfolio. The Small Cap Portfolio may not be appropriate for investors who: The Small Cap Portfolio may not be appropriate for investors who: --- . want to invest only in larger, more established companies; . 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 18 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. [GRAPH] Small Cap Value Portfolio Annual Total Return (%) 1 1996 15.45 1997 32.64 1998 -1.41 1999 14.11 Past performance is not necessarily an indication of future results. /1/The Small Cap Portfolio's year-to-date return as of June 30, 2000 was 4.94%. During the period shown in the bar chart, the highest quarterly return was 22.04% (for the quarter ended December 31, 1998) and the lowest quarterly return was (26.11)% (for the quarter ended September 30, 1998). The table shows how the average annual total returns for Class A, B and C shares of the Small Cap Portfolio for one year 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. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year April 3, 1995 ------------------------------------------------------- Small Cap Portfolio - Class A* 7.84% 16.58% ------------------------------------------------------- Small Cap Portfolio - Class B 8.55% ** ------------------------------------------------------- Small Cap Portfolio - Class C 12.49% 17.36% ------------------------------------------------------- Russell 2000 Index 21.29% 16.49% -------------------------------------------------------
* 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, 1999 was 6.06%. The comparable return for the same period for the Russell 2000 Index was 9.87%. Small Cap Portfolio 19 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 (includes a 0.25% shareholder servicing fee) 1.15% 1.15% 1.15% ---- ---- ---- ---------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.15% 2.65% 2.65% ---------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.65)% (0.65)% (0.65)% ---- ---- ---- ---------------------------------------------------------------------------- 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the Small Cap Portfolio's net expenses do not exceed the amounts indicated above. Small Cap Portfolio 20 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: . you invest $10,000 in the Small Cap Portfolio; . your investment returns 5% each year; . 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 $1,127 $1,585 $2,848 ----------------------------------------------------------------------------------------- Class B $703 $1,062 $1,547 $2,814** ----------------------------------------------------------------------------------------- Class C $303 $ 762 $1,347 $2,935 -----------------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------- Class B $203 $762 $1,347 $2,814** ----------------------------------------------------------------------------------------- Class C $203 $762 $1,347 $2,935 -----------------------------------------------------------------------------------------
* 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, 2001, and thereafter will equal 2.15% for Class A and 2.65% 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 21 Focus List Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Focus List Portfolio will invest at least 65% of its total assets in the common stocks of U.S. and foreign issuers that, at the time of purchase, are included on the Bear Stearns Focus List (the "Focus List"). The Focus List Portfolio may invest up to 35% of its total assets in stocks that are not on the Focus List. The Adviser may select non-Focus List securities, for example, when the Adviser determines that Focus List stocks are illiquid, would cause the Focus List Portfolio to be overweighted in a particular sector or overly concentrated in a particular industry, or for other reasons. Using a rating system of "1" through "5," the Bear Stearns Equity Research Department, consisting of 90 analysts who cover common stocks of more than 1,100 U.S. and foreign companies, assigns the following ratings: 1 (Buy), 2 (Attractive), 3 (Neutral), 4 (Avoid), 5 (Sell). More than 600 stocks are rated Buy or Attractive. The Focus List typically consists of 20 stocks rated Buy or Attractive. The Adviser determines how much of the Focus List Portfolio's assets to allocate to each Focus List stock. The Bear Stearns Research Department and the Research Stock Selection Committee (comprised of senior Research Department personnel) will assign a Buy rating to stocks when they believe the stock will significantly outperform the market over the next three to six months because of a catalyst or near-term event that they expect will trigger upward movement in the stock's price. These catalysts may include a change in management, the introduction of a new product or a change in the industry outlook. An Attractive rating means that an analyst has determined that the stock has solid long-term growth prospects and is undervalued in comparison to comparable companies. Principal Risks You may lose money by investing in the Focus List Portfolio. The Focus List Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risk factors may affect the Focus List Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. Focus List Portfolio 22 . 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. The Focus List 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 Focus List Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the Focus List Portfolio The Focus List Portfolio may be appropriate for investors who: . are investing for the long term; . are seeking an equity component for their portfolio. The Focus List Portfolio may not be appropriate for investors who: . are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with stocks selected by the Bear Stearns Focus List Committee or lose money on their investment. Focus List Portfolio 23 Performance The bar chart and table below illustrate the risks of investing in the Focus List Portfolio by showing its performance for various time periods ended December 31st. The figures shown in the table assume reinvestment of dividends and distributions. The bar chart shows returns for Class A shares of the Focus List 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. [GRAPH] Focus List Portfolio Annual Total Return (%) 1 1998 33.64 1999 26.30 Past performance is not necessarily an indication of future results. /1/The Focus List Portfolio's year-to-date return as of June 30, 2000 was (4.80)%. During the period shown in the bar chart, the highest quarterly return was 32.75% (for the quarter ended December 31, 1998) and the lowest quarterly return was (10.65)% (for the quarter ended September 30, 1998). The table shows how average annual total returns for Class A, B and C shares of the Focus List 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. The figures shown in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception* December 31, 1999) 1 Year December 29, 1997 --------------------------------------------------------- Focus List Portfolio - Class A 19.36% 26.16% --------------------------------------------------------- Focus List Portfolio - Class B 20.50% 27.85% --------------------------------------------------------- Focus List Portfolio - Class C 24.41% 29.04% --------------------------------------------------------- S&P 500 Index 21.03% 24.71% ---------------------------------------------------------
* This table does not reflect any performance information for the period December 29, 1997 through December 31, 1997. Focus List Portfolio 24 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Focus List 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 0.65% 0.65% 0.65% ----------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% 0.75% 0.75% ----------------------------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 1.83% 1.83% 1.83% ------- ------- ------- ----------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.73% 3.23% 3.23% ----------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.33)% (1.33)% (1.33)% ------- ------- ------- ----------------------------------------------------------------------------- Net Expenses/2/ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the Focus List Portfolio's net expenses do not exceed the amounts indicated above. Focus List Portfolio 25 Example This Example illustrates the cost of investing in the Focus List Portfolio over various time periods. It is intended to help you compare the cost of investing in the Focus List Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Focus List Portfolio; . your investment returns 5% each year; . the Focus List 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 $685 $1,231 $1,803 $3,350 ----------------------------------------------------------------------------------------- Class B $693 $1,171 $1,773 $3,324** ----------------------------------------------------------------------------------------- Class C $293 $ 871 $1,573 $3,440 -----------------------------------------------------------------------------------------
If you do not sell your shares at the end of each period --***
1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------- Class B $193 $871 $1,573 $3,324** ----------------------------------------------------------------------------------------- Class C $193 $871 $1,573 $3,440 -----------------------------------------------------------------------------------------
* 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, 2001, and thereafter will equal 2.73% for Class A and 3.23% 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." Focus List Portfolio 26 Balanced Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Long-term capital growth and current income. Principal Strategies The Balanced Portfolio seeks capital appreciation primarily through the equity component of its portfolio while investing in fixed income securities primarily to lessen overall portfolio volatility and to provide income for regular quarterly dividends. The percentage of the Balanced Portfolio invested in equity and fixed- income securities will vary from time to time as the Adviser evaluates their relative attractiveness based on market valuations, economic growth and inflation forecasts. When allocating equity and fixed income investments, the Adviser takes into account the Balanced Portfolio's intention to pay regular quarterly dividends. The amount of quarterly dividends may fluctuate depending on prevailing interest rates, dividend policies of issuers and how the Adviser allocates the Balanced Portfolio's assets, among other things. Under normal market conditions, the Balanced Portfolio will invest at least 90% of its total assets in equity and fixed income securities. Equity Securities. Under normal market conditions, the Balanced Portfolio invests between 40% and 60% of its total assets in equity securities. Of this amount, the Balanced Portfolio may invest up to 10% of its 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 Balanced Portfolio may invest must be rated at least "investment grade" by an NRSRO at the time of purchase. The Adviser uses a "fundamental research" approach to investing in equity securities. The Adviser looks for equity securities that have the best prospects for long-term capital growth. The Adviser examines fundamental research factors, including price-to-book ratios, price-to-earnings ratios and price-to-cash-flow ratios relative to companies in the S&P 500 Index. The Adviser considers factors such as the company's projected three-to- five year earnings growth rate, 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. Fixed Income Securities. Under normal market conditions, the Balanced Portfolio invests between 40% and 60% of its total assets in fixed income securities. The Balanced Portfolio invests primarily in high quality debt obligations that have been rated "A-" or higher by S&P or "A3" or better by Moody's Investors Service ("Moody's"). The Balanced Portfolio may also invest in debt obligations that are rated below these categories but considered investment grade by Moody's or S&P. In addition, the Balanced Portfolio may invest up to 5% of its total assets in higher-risk, below investment-grade debt securities rated no lower than "B" by an NRSRO or that the Adviser considers to be of comparable quality. The Adviser looks for debt obligations that offer attractive returns that compare favorably to those of comparable maturity U.S. Treasury securities, on a risk- adjusted basis. For a discussion of the ratings categories of various NRSROs, see the Appendix to the Statement of Additional Information ("SAI"). Balanced Portfolio 27 Under normal market conditions, the Balanced Portfolio will invest in debt obligations with an average maturity of 10 years or less, except that the Portfolio may invest in U.S. government obligations of any maturity. The Balanced Portfolio's fixed income investments include . securities issued by the U.S. government, its agencies, instrumentalities or sponsored enterprises; . debt securities issued by companies; . mortgage-backed and asset-backed securities; and . U.S. dollar-denominated securities issued by foreign governments. Principal Risks You may lose money by investing in the Balanced Portfolio. The Balanced 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 Balanced Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . The rate of inflation may increase, resulting in higher interest rates, causing the Balanced Portfolio's debt 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 debt. . Below investment-grade securities are riskier than investment-grade securities and are more likely than investment-grade securities to decline in value due to defaults or bankruptcies. . The Balanced Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield, e.g., when the average life of a mortgage-related security is shortened through prepayment. Balanced Portfolio 28 Who May Want to Invest in the Balanced Portfolio The Balanced Portfolio may be appropriate for investors who: . seek current income coupled with asset growth potential; . are setting up trust accounts, such as charitable remainder trusts, that have minimum payout requirements. The Balanced 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. Balanced Portfolio 29 Performance The bar chart and table below illustrate the risks of investing in the Balanced 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 the returns for Class A shares of the Balanced 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. [GRAPH] Balanced Portfolio Annual Total Return (%) 1 1998 12.19 1999 -0.20 Past performance is not necessarily an indication of future results. /1/The Balanced Portfolio's year-to-date return as of June 30, 2000 was 1.66%. During the period shown in the bar chart, the highest quarterly return was 8.26% (for the quarter ended December 31, 1998) and the lowest quarterly return was (6.11)% (for the quarter ended September 30, 1999). The table shows how the average annual total returns for Class A, B and C shares of the Balanced 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, and the Lipper Balanced Fund Index, a non-weighted index of the 30 largest funds within the Lipper balanced fund investment category. The figures in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended Since Inception* December 31, 1999) 1 Year December 29, 1997 -------------------------------------------------------- Balanced Portfolio - Class A (5.65)% 2.85% -------------------------------------------------------- Balanced Portfolio - Class B (5.56)% 3.86% -------------------------------------------------------- Balanced Portfolio - Class C (1.70)% 5.25% -------------------------------------------------------- S&P 500 Index 21.03% 24.71% -------------------------------------------------------- Lipper Balanced Fund Index 8.98% 11.97%** --------------------------------------------------------
* This table does not reflect any performance information for the period December 29, 1997 through December 31, 1997. ** The information for the Lipper Balanced Fund Index reflects its performance from January 1, 1998 through December 31, 1999. Balanced Portfolio 30 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Balanced 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 0.65% 0.65% 0.65% ---------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% 0.75% 0.75% ---------------------------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 2.51% 2.51% 2.51% ----- ----- ----- ---------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 3.41% 3.91% 3.91% ---------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (2.21)% (2.21)% (2.21)% ------- ------- ------- ---------------------------------------------------------------------------- Net Expenses/2/ 1.20% 1.70% 1.70% ----- ----- ----- ----------------------------------------------------------------------------
* 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 of purchase if you purchased them at net asset value because (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the Balanced Portfolio's net expenses do not exceed the amounts indicated above. Balanced Portfolio 31 Example This Example illustrates the cost of investing in the Balanced Portfolio over various time periods. It is intended to help you compare the cost of investing in the Balanced Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Balanced Portfolio; . your investment returns 5% each year; . the Balanced 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 $666 $1,345 $2,047 $3,900 ------------------------------------------ Class B $673 $1,289 $2,024 $3,882** ------------------------------------------ Class C $273 $ 989 $1,824 $3,991 ------------------------------------------
If you do not sell your shares at the end of each period--***
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class B $173 $989 $1,824 $3,882** ------------------------------------------ Class C $173 $989 $1,824 $3,991 ------------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.20% for Class A and 1.70% for both Class B and C shares until July 31, 2001, and thereafter will equal 3.41% for Class A and 3.91% 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." Balanced Portfolio 32 International Equity Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Long-term capital appreciation. Principal Strategies Under normal market conditions, the International Equity Portfolio invests substantially all of its assets in equity securities of foreign companies, with at least 65% of its total assets invested in such securities. 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 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: . Its securities are principally traded in an emerging country. . 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. . It maintains 50% or more of its assets in one or more emerging countries. . 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 International Equity Portfolio 33 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: . To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). . 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . The value of the International Equity Portfolio's investment in forward contracts suffers from unanticipated changes in currency prices. . 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. . 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. . Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. International Equity Portfolio 34 Who May Want to Invest in the International Equity Portfolio The International Equity Portfolio may be appropriate for investors who: . are investing for the long term; . want to add an international equity component to their portfolio. The International Equity Portfolio may not be appropriate for investors who: . are not willing to accept the risks associated with foreign securities markets or currency fluctuation; . 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. [GRAPH] International Equity Portfolio Annual Total Return (%) 1 1998 25.86 1999 81.89 Past performance is not necessarily an indication of future results. /1/The International Equity Portfolio's year-to-date return as of June 30, 2000 was (12.06)%. During the period shown in the bar chart, the highest quarterly return was 60.15% (for the quarter ended December 31, 1999) and the lowest quarterly return was (14.18)% (for the quarter ended September 30, 1998). International Equity Portfolio 35 The table shows how the 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. The figures in the table reflect all applicable sales charges.
Average Annual Total Returns (for the periods ended December 31, Since Inception* 1999) 1 Year December 29, 1997 -------------------------------------------------------------------- International Equity Portfolio - Class A 71.87% 46.84% -------------------------------------------------------------------- International Equity Portfolio - Class B 75.94% 49.31% -------------------------------------------------------------------- International Equity Portfolio - Class C 79.94% 50.30% -------------------------------------------------------------------- MSCI EAFE Index 26.96% 23.41% --------------------------------------------------------------------
* This table does not reflect any performance information for the period December 29, 1997 through December 31, 1997. International Equity Portfolio 36 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 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 1.00% 1.00% 1.00% ----------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% 0.75% 0.75% ----------------------------------------------------------------------------- Other Expenses (includes a 0.25% shareholder servicing fee) 1.62% 1.62% 1.62% ------- --------- ------- ----------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.87% 3.37% 3.37% ----------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.12)% (1.12)% (1.12)% ------- --------- ------- ----------------------------------------------------------------------------- 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them within 60 days of selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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, 2001, so that the International Equity Portfolio's net expenses do not exceed the amounts indicated above. International Equity Portfolio 37 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: . you invest $10,000 in the International Equity Portfolio; . your investment returns 5% each year; . 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 $1,290 $1,887 $3,493 ------------------------------------------ Class B $728 $1,232 $1,859 $3,469** ------------------------------------------ Class C $328 $ 932 $1,659 $3,583 ------------------------------------------
If you do not sell your shares at the end of each period--***
1 Year 3 Years 5 Years 10 Years ------------------------------------------ Class B $228 $932 $1,659 $3,469** ------------------------------------------ Class C $228 $932 $1,659 $3,583 ------------------------------------------
* 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, 2001, and thereafter will equal 2.87% for Class A and 3.37% 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 38 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 95 ------------------------------------- Four stars 369 ------------------------------------- Three stars 517 ------------------------------------- Two stars 86 ------------------------------------- One star 14 -------------------------------------
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 June 30, 2000: . The S&P 500 Index (measured on a total return basis, without dividend reinvestment) increased by 500.65%. During this period, the average dividend yield of securities included in the S&P 500 Index was 2.72% and the average dividend yield of five-star stocks was 1.47%. . The ranked stocks experienced the following changes in value:
S&P STARS Category Percentage change in value ----------------------------------------------- Five stars 1,351.69% ----------------------------------------------- Four stars 565.49% ----------------------------------------------- Three stars 274.46% ----------------------------------------------- Two stars 160.34% ----------------------------------------------- One star 21.04% ---------------------------------------------
The Adviser believes that this information means only that, historically, five-star 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-star 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 39 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 ----------------------------------------------------------------------------------------------- 1 S&P 500 Index Five star stocks Five star stocks Five star stocks Five star stocks ----------------------------------------------------------------------------------------------- 2 Five star stocks S&P 500 Index S&P 500 Index S&P 500 Index S&P 500 Index ----------------------------------------------------------------------------------------------- 3 One star stocks One star stocks One star stocks One star stocks One star stocks -----------------------------------------------------------------------------------------------
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. 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. 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. 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. 40 Focus List Portfolio Bear Stearns publishes the Focus List, which is a list of stocks selected by the Bear Stearns Focus List Committee. The Committee monitors the Focus List daily, and candidates are considered based on one or more of the following criteria: market outlook, perception of the stock's sector, and the stock's current valuation relative to the market and its industry. Domestic and international stocks and ADRs rated Buy (1) or Attractive (2) are eligible for inclusion on the Focus List. Generally, the Adviser will purchase a security that has been added to the Focus List and will sell a security when the security has been removed from the Focus List. The Adviser determines how much of the Focus List Portfolio's assets to allocate to each Focus List stock. The Adviser may make changes in the allocation as investment and economic conditions change. Depending upon market conditions and to the extent the Focus List Portfolio needs to hold cash balances to satisfy shareholder redemption requests, the Adviser may not immediately purchase a new Focus List stock and/or may continue to hold one or more Focus List stocks that have been deleted from the Focus List. The Adviser will not have access to the Focus List before Bear Stearns publishes it. The Focus List Committee automatically removes from the Focus List stocks that an analyst has downgraded below Attractive. However, the Focus List Committee may delete stocks for other reasons. For example, it may delete a stock when the stock has achieved its target price range, a catalyst fails to materialize or have its expected effect, or new, more attractive opportunities arise. The Focus List may include stocks of issuers for which Bear Stearns or an affiliate performs investment banking services for which it receives fees, as well as stocks in which Bear Stearns or an affiliate makes a market and may have a long or short position. When Bear Stearns or an affiliate participates in a distribution of stock, the Adviser may be prohibited from purchasing that stock for the Focus List Portfolio. The activities of Bear Stearns or an affiliate may limit the Focus List Committee's ability to include stocks on the Focus List or the Focus List Portfolio's flexibility in purchasing and selling such stocks. The Focus List is available to other clients of Bear Stearns and its affiliates, including the Adviser. 41 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.
International S&P STARS Insiders Large Cap Small Cap Focus List Balanced Equity Portfolio Select Fund Portfolio Portfolio Portfolio Portfolio Portfolio - ----------------------------------------------------------------------------------------------------- ADRs X X X X X X - ----------------------------------------------------------------------------------------------------- Asset-backed securities X - ----------------------------------------------------------------------------------------------------- Convertible securities X X X X X X - ----------------------------------------------------------------------------------------------------- Debt securities X - ----------------------------------------------------------------------------------------------------- Equity securities X X X X X X X - ----------------------------------------------------------------------------------------------------- Mortgage-related securities X - ----------------------------------------------------------------------------------------------------- Real estate investment trusts ("REITs") X - ----------------------------------------------------------------------------------------------------- Short sales X X - -----------------------------------------------------------------------------------------------------
. 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. . 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. . 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. . 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. . Equity securities include foreign and domestic common or preferred stocks, rights and warrants. 42 . Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. . 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. . 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 exaggerate a gain or loss. 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. For temporary defensive purposes, the International Equity Portfolio may hold foreign currencies or multinational currency units. . Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. Emerging country markets are especially volatile and may result in more frequent trading. Active trading, if profitable, 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 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. 43 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 Equity Securities . 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 . 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. . 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 . 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. 44 . 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 Portfolio's securities. . 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 (Balanced Portfolio only) . Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. . Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. . Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments on a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. . Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch IBCA International 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. 45 Risks of Mortgage-Related and Asset-Backed Securities (Balanced Portfolio only) . Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the risk that, because prepayments generally occur when interest rates are falling, a Portfolio may have to reinvest the proceeds from prepayments at lower interest rates. 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 Real Estate Securities (Balanced Portfolio only) . 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. . 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 Portfolio Only . S&P STARS rankings represent the subjective determination of S&P analysts. Past performance of securities included in S&P STARS does not necessarily predict the S&P STARS Portfolio's future performance. 46 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 575 Lexington Avenue, New York, NY 10022. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading United States investment banking, securities trading and brokerage firm serving 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, 2000 of approximately $15.1 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, 2000, 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 0.57% ------------------------------------- Insiders Select Fund 0.00% ------------------------------------- Large Cap Portfolio 0.00% ------------------------------------- Small Cap Portfolio 0.05% ------------------------------------- Focus List Portfolio 0.00% ------------------------------------- Balanced Portfolio 0.00% ------------------------------------- International Equity Portfolio 0.00% -------------------------------------
Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. Each team consists of 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, 2000, the Sub-Adviser managed approximately $10.9 billion in assets. The Sub-Adviser is located at 1201 North Market Street, Suite 2300, Wilmington, DE 19801. 47 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 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. It describes the minimum investment requirements for the Portfolios, the expenses and sales charges applicable to each Class of shares and the procedures to follow if you decide to buy shares. Please read the entire Prospectus carefully before buying shares of a Portfolio. Investment Requirements Minimum Initial Investment: . Non-Retirement Account: $1,000 . Retirement Account: $500 Minimum Subsequent Investment: . Non-Retirement Account: $50 . Retirement Account: $25 48 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. 49 Relative Advantages of Each Share Class
Investor Characteristics Advantages ------------------------------------------------------------------------------- Class A . Long-term investment horizon . Lower expense structure and the and/or qualify for waiver or amount of the initial sales reduction of sales charge 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 Sales 5.50% None None Charge* ---------------------------------------------------------------------------- CDSC None** 5% to 0%, declining the 1%, if you sell longer you hold your shares within shares one year of purchase ---------------------------------------------------------------------------- Annual Expenses Lower than Class Higher than Class A Higher than B and C shares shares (Note: Class B Class A shares; shares convert to Class same as Class B A shares 8 years after shares 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them up to 60 days after selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. *** 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. 50 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
As a % of offering Amount of Investment price per share As a % of NAV ------------------------------------------------------------------ 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 (a) you purchased $1 million or more of Class A shares or (b) you purchased them up to 60 days after selling shares of a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. 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 CDSC as a % of Dollar 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. 51 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). . Current shareholders of other mutual funds not distributed by Bear, Stearns & Co. Inc., the Portfolios' distributor, that have paid a front end sales charge or were subject to a CDSC, and that buy shares of a Portfolio within 60 days of selling shares of the other mutual fund. This waiver is not available to investors who acquire Class A shares by exchange from the Money 52 Market Portfolio of The RBB Fund, Inc. To qualify for this waiver, you or your Authorized Dealer must notify Bear Stearns in writing. However, if you sell your Portfolio shares up to one year after purchase, the Portfolio will impose a CDSC on 1% of the lesser of purchase or sale price. To take advantage of the sales charge waiver, you must indicate your eligibility on your Account Information Form. If you think you may be eligible for a sales charge waiver, please contact your account representative or call PFPC Inc., the Portfolios' Transfer Agent, at 1- 800-447-1139. Reduction of Class A Sales Charges You may reduce your Class A sales charge by taking advantage of the following privileges: . Right of Accumulation. Lets you add the value of all Class A shares of the Portfolios that you currently own for purposes of calculating the sales charge on future purchases of Class A shares. You may count share purchases made by the following investors to calculate the reduced sales charge: you, your spouse and your children under the age of 21 (including shares in certain retirement accounts), and a company that you, your spouse or your children control; a trustee or other fiduciary account (including an employee benefit plan); a trustee or other fiduciary that buys shares concurrently for two or more employee benefit plans of a single employer or of affiliated employers. . Letter of Intent. Lets you buy Class A shares of any Portfolio over a 13-month period at the same sales charge as if all shares had been bought at once. You are not obligated to buy the full amount of the shares. However, you must complete the intended purchase to obtain the reduced sales load. To qualify for this plan, check the "Letter of Intent" box on the Account Information Form at the time you buy shares of any Portfolio. Waiver of CDSC The Trust will waive the CDSC of Class A, B and C shares under the following circumstances: . redemptions made within one year after the death or disability of a shareholder; . redemptions by employees participating in eligible benefit plans, 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. 53 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. 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. 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 are financial institutions that 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. 54 Purchase Procedures Purchase through the Distributor or Authorized Dealers Method of Purchase Instructions [GRAPHIC] In person/ [GRAPHIC] . Contact your account By mail representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. . For a new account, your account representative will help you to complete the application. . Mail your application or additional purchase to : PFPC Inc. Attention: The Bear Stearns Funds P.O. Box 8960 Wilmington, DE 19899-8960 . Send overnight mail to: PFPC Inc. Attention: The Bear Stearns Funds 400 Bellevue Parkway Wilmington, DE 19899 [GRAPHIC] By telephone/ . Contact your account [GRAPHIC] representative. wire . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to buy. . 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. . 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 . 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. 55 Additional Purchases Through the Transfer Agent: Method of Purchase Instructions [GRAPHIC] By mail . 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/ . On the day of purchase, call [GRAPHIC] the Transfer Agent at 1-800- 447-1139 prior to the close of wire regular trading on the NYSE (usually 4:00 p.m. Eastern Time) to give notice of the purchase and before wiring any funds. . 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. . 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. 56 Additional Information About Redemptions . Waiting period. If you buy shares by check, the Trust will wait for your check to clear (up to 15 days) before it accepts your request to sell those shares. . Wiring redemption proceeds. Upon request, the Trust will wire your proceeds ($500 minimum) to your brokerage account or a designated commercial bank account. There is a transaction fee of $7.50 for this service. Please call your account representative for information on how to wire funds to your brokerage account. If you do not have a brokerage account, call the Transfer Agent to wire funds to your bank account. . Signature guarantees. If your redemption proceeds exceed $50,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. Call the Transfer Agent at 1-800-447-1139 for information about obtaining a Medallion Program signature guarantee. . Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. . Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. . Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. The Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a combination of cash and a share of actual portfolio securities. Call the Transfer Agent for details. . 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. 57 Exchanges You may exchange shares of one Portfolio for shares of the same class of another Portfolio described in this Prospectus or the same class of another Portfolio of the Trust, usually without paying any additional sales charges. (You may obtain more information about other Portfolios of the Trust by calling the Transfer Agent at 1-800-447-1139.) You may pay a sales charge if the Portfolio you are exchanging did not impose an initial sales charge. You will not have to pay an additional sales charge if the Portfolio you are exchanging was acquired in any of the following ways: . by a previous exchange from shares bought with a sales charge; . through reinvestment of dividends 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. . The Trust may reject your exchange request. 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. . 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). . Directed distribution option. You may automatically reinvest your dividends and capital gain distributions in the same class of shares of another Portfolio or the Money Market Portfolio of The RBB Fund, Inc. You may buy Class A shares without a sales charge at the current NAV. However, if you buy Class B or Class C shares, they may be subject to a CDSC when you sell them. You may not use this service to establish a new account. . Systematic withdrawal plan. You may withdraw a set amount ($25 minimum) 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. . Reinstatement privilege. If you sell your Class A shares, you may repurchase them (or Class A shares of any other Portfolio) within 60 days without paying an additional sales charge. 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, other than the Balanced Portfolio, declares and pays dividends from its net investment income annually. The Balanced Portfolio declares and pays dividends quarterly. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: . Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account Application, you will receive your distributions this way. . Cash. The Trust will send you a check no later than seven days after the payable date. . Partial reinvestment. The Trust will automatically reinvest your dividends in additional shares of your Portfolio and pay your capital gain distributions to you in cash. Or, the Trust will automatically reinvest your capital gain distributions and send you your dividends in cash. . Directed dividends. You can automatically reinvest your dividends and distributions in the same class of shares of another Portfolio. See the description of this option in the "Shareholder Services" section above. . Direct deposit. In most cases, you can automatically transfer dividends and distributions to your bank checking or savings account. Under normal circumstances, the Transfer Agent will transfer the funds within seven days of the payment date. To receive dividends and distributions this way, the name on your bank account must be the same as the registration on your Portfolio account. You may choose your distribution method on your original Account 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. 60 Taxes Each Portfolio intends to continue to qualify as a regulated investment company, which means that it pays no federal income tax on the earnings or capital gains it distributes to its shareholders. It is important for you to be aware of the following information about the tax treatment of your investment. . Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain. . 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 Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. . Certain dividends 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) or exchange shares of a Portfolio, you must recognize any gain or loss. . Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. . You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 61 ADDITIONAL INFORMATION Performance Financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, 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 This page intentionally left blank 63 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 since its inception. 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 Net Asset Net Net Realized and Distributions Asset Value, Investment Unrealized from Net Value, Beginning Income/ Gain on Realized End of of Period (Loss)**(1) Investments**(2) Capital Gains Period -------------------------------------------------------------------------------------- Class A 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 -------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 14.92 (0.09) 2.63 (1.33) 16.13 -------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 - 3.31 (0.39) 14.92 -------------------------------------------------------------------------------------- Class B 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 March 31, 1998 17.37 (0.04) 2.53 - 19.86 -------------------------------------------------------------------------------------- Class C 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 -------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 14.86 (0.17) 2.62 (1.25) 16.06 -------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 (0.06) 3.28 (0.36) 14.86 --------------------------------------------------------------------------------------
------ * 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. 64 Financial Highlights -- S&P STARS Portfolio
Increase/(Decrease) Ratio of Net Reflected in Net Assets, Investment Expense Ratios and End of Ratio of Income/(Loss) Net Investment Total Period Expenses to to Average Income/(Loss) Due Portfolio Investment (000's Average Net Net to Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate ------------------------------------------------------------------------------------------------------------ Class A 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/) ------------------------------------------------------------------------------------------------------------ 16.87 67,491 1.50(/6/) (0.59)(/6/) 0.70 220.00(/7/) ------------------------------------------------------------------------------------------------------------ 27.68 45,059 1.50(/5/,/6/) (0.01)(/5/,/6/) 0.89(/5/) 295.97(/7/) ------------------------------------------------------------------------------------------------------------ Class B 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 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/) ------------------------------------------------------------------------------------------------------------ 16.33 37,622 2.00(/6/) (1.09) 0.70 220.00(/7/) ------------------------------------------------------------------------------------------------------------ 26.91 28,081 2.00(/5/,/6/) (0.45)(/5/,/6/) 0.92(/5/) 295.9(/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 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. 65 Financial Highlights -- Insiders Select Fund The financial highlights table is intended to help you understand the financial performance of The Insiders Select Fund since its inception. 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 Net Realized and Dividends Distributions Net Asset Value, Investment 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 31, 2000 $17.02 - $0.07 - $(0.19) $16.90 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 17.88 - (0.01) - (0.85) 17.02 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 14.58 - 6.30 - (3.00) 17.88 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 14.00 $0.02 2.48 $(0.01) (1.91) 14.58 -------------------------------------------------------------------------------------------------------- For the period June 16, 1995* through March 31, 1996 12.00 0.03 1.98 (0.01) - 14.00 -------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2000 16.75 (0.05) 0.03 - (0.19) 16.54 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 17.69 - (0.09) - (0.85) 16.75 -------------------------------------------------------------------------------------------------------- For the period January 6, 1998* through March 31, 1998 15.72 0.01 1.96 - - 17.69 -------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2000 16.74 (0.05) 0.04 - (0.19) 16.54 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 17.68 - (0.09) - (0.85) 16.74 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 14.48 (0.07) 6.21 - (2.94) 17.68 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 13.96 (0.06) 2.47 - (1.89) 14.48 -------------------------------------------------------------------------------------------------------- For the period June 16, 1995* through March 31, 1996 12.00 (0.01) 1.97 - - 13.96 --------------------------------------------------------------------------------------------------------
------ * 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. 66 Financial Highlights -- Insiders Select Fund
Increase/(Decrease) Ratio of Net Reflected in Net Assets, Investment Expense Ratios and End of Ratio of Income/(Loss) Net Investment Total Period Expenses to to Average Income/(Loss) Due Portfolio Investment (000's Average Net Net to Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - ------------------------------------------------------------------------------------------------------- Class A 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 ----------------------------------------------------------------------------------------------------- 18.31 13,860 1.65 0.11 1.82 128.42 ----------------------------------------------------------------------------------------------------- 16.75 12,132 1.65(/5/) 0.38(/5/) 1.87(/5/) 93.45 ----------------------------------------------------------------------------------------------------- Class B (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 (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 ----------------------------------------------------------------------------------------------------- 17.69 9,519 2.15 (0.38) 1.81 128.42 ----------------------------------------------------------------------------------------------------- 16.33 9,928 2.15(/5/) (0.12)(/5/) 1.92(/5/) 93.45 -----------------------------------------------------------------------------------------------------
------ 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. 67 Financial Highlights -- Large Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Large Cap Portfolio since its inception. This information reflects financial results for a single share of the Large Cap Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Large Cap Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Large Cap Portfolio's financial statements, are included in the Large Cap Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Dividends Distributions Net Asset Value, Net Net Realized and from Net from Net Value, Beginning Investment Unrealized Gain on Investment Realized End of of Period Income/ (Loss)**(/1/) Investments**(/2/) Income Capital Gains Period ---------------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, 2000 $19.74 $0.11 $(0.94) $(0.10) $(2.10) $16.71 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 20.83 0.11 0.59 (0.11) (1.68) 19.74 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.17 0.05 7.15 (0.02) (3.52) 20.83 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.13 0.04 2.28 (0.10) (0.18) 17.17 ---------------------------------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 0.06 3.10 (0.02) (0.01) 15.13 ---------------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2000 19.51 0.01 (0.93) - (2.10) 16.49 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 20.66 0.08 0.52 (0.07) (1.68) 19.51 ---------------------------------------------------------------------------------------------------------------- For the period January 28, 1998* through March 31, 1998 18.17 (0.01) 2.50 - - 20.66 ---------------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2000 19.57 0.01 (0.93) - (2.10) 16.55 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 20.66 0.07 0.53 (0.01) (1.68) 19.57 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.11 (0.03) 7.10 - (3.52) 20.66 ---------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.08 (0.02) 2.25 (0.02) (0.18) 17.11 ---------------------------------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 (0.01) 3.10 - (0.01) 15.08 ----------------------------------------------------------------------------------------------------------------
------ * 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. 68 Financial Highlights -- Large Cap Portfolio
Increase/(Decrease) Ratio of Net Reflected in Investment Expense Ratios and Ratio of Income/(Loss) Net Investment Total Net Assets, End Expenses to to Average Income/(Loss) Due Portfolio Investment of Period Average Net Net to Waivers and Turnover Return(/3/) (000's omitted) Assets(/1/) Assets(/1/) Reimbursements Rate --------------------------------------------------------------------------------------------------------- Class A (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 --------------------------------------------------------------------------------------------------------- 15.44 4,987 1.50 0.43 1.58 136.67 --------------------------------------------------------------------------------------------------------- 26.35 3,616 1.50(/5/) 0.46(/5/) 4.34(/5/) 45.28 --------------------------------------------------------------------------------------------------------- Class B (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 (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 --------------------------------------------------------------------------------------------------------- 14.87 2,986 2.00 (0.08) 1.61 136.67 --------------------------------------------------------------------------------------------------------- 25.71 3,520 2.00(/5/) (0.06)(/5/) 4.39(/5/) 45.28 ---------------------------------------------------------------------------------------------------------
------ 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. 69 Financial Highlights -- Small Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Small Cap Portfolio since its inception. 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.
Distributions Net Asset Net Realized from Net Net Asset Value, and Unrealized Realized Value, Beginning Net Investment Gain/(Loss) on Capital End of of Period Income/(Loss)**(/1/) Investments**(/2/) Gains Period --------------------------------------------------------------------------------------------------------------------- Class A 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 --------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.87 (0.10) 1.95 (0.24) 17.48 --------------------------------------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 (0.07) 4.17 (0.23) 15.87 --------------------------------------------------------------------------------------------------------------------- Class B 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 March 31, 1998 19.95 - 3.53 - 23.48 --------------------------------------------------------------------------------------------------------------------- Class C 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 --------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.79 (0.18) 1.93 (0.16) 17.38 --------------------------------------------------------------------------------------------------------------------- For the period April 3, 1995* through March 31, 1996 12.00 (0.10) 4.11 (0.22) 15.79 ---------------------------------------------------------------------------------------------------------------------
------ * 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. 70 Financial Highlights -- Small Cap Portfolio
Increase/(Decrease) Ratio of Net Reflected in Investment Expense Ratios and Ratio of Income/(Loss) Net Investment Total Net Assets, End Expenses to to Average Income/(Loss) Due Portfolio Investment of Period Average Net Net to Waivers and Turnover Return(/1/) (000's omitted) Assets(/1/) Assets(/1/) Reimbursements Rate ---------------------------------------------------------------------------------------------------------- Class A 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 ---------------------------------------------------------------------------------------------------------- 11.71 13,143 1.50 (0.81) 1.00 56.88 ---------------------------------------------------------------------------------------------------------- 34.36 6,474 1.50(/5/) (0.66)(/5/) 2.32(/5/) 40.79 ---------------------------------------------------------------------------------------------------------- Class B 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 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 ---------------------------------------------------------------------------------------------------------- 11.12 11,071 2.00 (1.31) 0.99 56.88 ---------------------------------------------------------------------------------------------------------- 33.59 6,753 2.00(/5/) (1.09)(/5/) 2.39(/5/) 40.79 ----------------------------------------------------------------------------------------------------------
------ 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. 71 Financial Highlights -- Focus List Portfolio The financial highlights table is intended to help you understand the financial performance of the Focus List Portfolio since its inception. This information reflects financial results for a single share of the Focus List Portfolio. The total returns in the table represent the rate that an investor would have gained on an investment in the Focus List Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Focus List Portfolio's financial statements, are included in the Focus List Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Asset Net Distributions Value, Investment Net Realized and from Net Net Asset Beginning Income/ Unrealized Gain on Realized Value, End of Period (Loss)**(/1/) Investments**(/2/) Capital Gains of Period ---------------------------------------------------------------------------------------------- Class A 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 31, 1998 12.00 (0.01) 1.41 - 13.40 ---------------------------------------------------------------------------------------------- Class B 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 31, 1998 12.00 (0.01) 1.39 - 13.38 ---------------------------------------------------------------------------------------------- Class C 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 31, 1998 12.00 (0.01) 1.39 - 13.38 ----------------------------------------------------------------------------------------------
------ * 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. 72 Financial Highlights -- Focus List Portfolio
Increase/(Decrease) Ratio of Reflected in Net Investment Expense Ratios and Ratio of Income/(Loss) Net Investment Total Net Assets, End Expenses to to Average Income/(Loss) Due Investment of Period Average Net Net to Waivers and Portfolio Return(/3/) (000's omitted) Assets(/1/) Assets(/1/) Reimbursements Turnover Rate ------------------------------------------------------------------------------------------------------ Class A 22.46% $22,580 1.40% (0.63)% 1.33% 56.26% ------------------------------------------------------------------------------------------------------ 29.47 6,542 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 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 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. 73 Financial Highlights -- Balanced Portfolio The financial highlights table is intended to help you understand the financial performance of the Balanced Portfolio since its inception. This information reflects financial results for a single share of the Balanced Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Balanced Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Balanced Portfolio's financial statements, are included in the Balanced Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Distributions Net Asset Dividends from Net Net Asset Value, Net Net Realized and from Net Realized Value, Beginning Investment Unrealized Gain on Investment Capital End of of Period Income**(/1/) Investments**(/2/) Income Gains Period -------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, 2000 $13.11 $0.39 $(0.54) $(0.41) - $12.55 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.93 0.34 0.18 (0.33) $(0.01) 13.11 -------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 0.06 0.91 (0.04) - 12.93 -------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2000 13.07 0.37 (0.58) (0.39) - 12.47 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.92 0.29 0.16 (0.29) (0.01) 13.07 -------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 0.05 0.90 (0.03) - 12.92 -------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2000 13.07 0.37 (0.58) (0.39) - 12.47 -------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.92 0.29 0.16 (0.29) (0.01) 13.07 -------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 0.05 0.90 (0.03) - 12.92 --------------------------------------------------------------------------------------------------------
------ * 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. 74 Financial Highlights -- Balanced Portfolio
Increase/(Decrease) Reflected in Ratio of Expense Ratios and Ratio of Net Investment Net Investment Total Net Assets, End Expenses to Income to Income Due to Portfolio Investment of Period Average Net Average Waivers and Turnover Return(/3/) (000's omitted) Assets Net Assets(/1/) Reimbursements Rate ------------------------------------------------------------------------------------------------- Class A (1.21)% $3,789 1.20% 2.77% 2.21% 86.27% ------------------------------------------------------------------------------------------------- 4.07 4,495 1.20 2.65 2.08 45.98 ------------------------------------------------------------------------------------------------- 8.04 3,852 1.20(/4/) 2.47(/4/) 3.25(/4/) 12.72 ------------------------------------------------------------------------------------------------- Class B (1.68) 1,873 1.70 2.27 2.21 86.27 ------------------------------------------------------------------------------------------------- 3.56 1,811 1.70 2.15 2.08 45.98 ------------------------------------------------------------------------------------------------- 7.92 1,044 1.70(/4/) 1.96(/4/) 3.30(/4/) 12.72 ------------------------------------------------------------------------------------------------- Class C (1.68) 1,583 1.70 2.27 2.21 86.27 ------------------------------------------------------------------------------------------------- 3.56 1,089 1.70 2.15 2.08 45.98 ------------------------------------------------------------------------------------------------- 7.92 858 1.70(/4/) 1.95(/4/) 3.33(/4/) 12.72 -------------------------------------------------------------------------------------------------
------ 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. 75 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 Dividends Distributions Value, Investment Net Realized and from Net from Net Net Asset Beginning Income/ Unrealized Gain on Investment Realized Value, End of Period (Loss)**(/1/) Investments**(/2/) Income Gains of Period -------------------------------------------------------------------------------------------------------------- Class A For the fiscal year ended March 31, 2000 $15.14 $(0.05) $12.98 - $(0.23) $27.84 -------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 13.77 (0.03) 1.40 -+ - 15.14 -------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 0.01 1.76 - - 13.77 -------------------------------------------------------------------------------------------------------------- Class B For the fiscal year ended March 31, 2000 15.05 (0.10) 12.80 - (0.23) 27.52 -------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 13.75 (0.02) 1.32 -+ - 15.05 -------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 - 1.75 - - 13.75 -------------------------------------------------------------------------------------------------------------- Class C For the fiscal year ended March 31, 2000 15.05 (0.09) 12.79 - (0.23) 27.52 -------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 13.75 (0.02) 1.32 -+ - 15.05 -------------------------------------------------------------------------------------------------------------- For the period December 29, 1997* through March 31, 1998 12.00 - 1.75 - - 13.75 --------------------------------------------------------------------------------------------------------------
------ * 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. 76 Financial Highlights -- International Equity Portfolio
Increase/(Decrease) Ratio of Net Reflected in Investment Expense Ratios and Ratio of Income/(Loss) Net Investment Total Net Assets, End Expenses to to Average Income/(Loss) Due Portfolio Investment of Period Average Net Net to Waivers and Turnover Return(/3/) (000's omitted) Assets(/1/) Assets(/1/) Reimbursements Rate --------------------------------------------------------------------------------------------------- Class A 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 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 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. 77 The Bear Stearns Funds 575 Lexington Avenue New York, NY 10022 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND DISBURSEMENT AGENT Bear, Stearns & Co. Inc. PFPC Inc. 245 Park Avenue Bellevue Corporate Center New York, NY 10167 400 Bellevue Parkway Wilmington, DE 19809 INVESTMENT ADVISER Bear Stearns Asset Management Inc. 575 Lexington Avenue COUNSEL New York, NY 10022 Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, NY 10022 INVESTMENT SUB-ADVISER (INTERNATIONAL EQUITY PORTFOLIO) INDEPENDENT AUDITORS Marvin & Palmer Associates, Inc. Deloitte & Touche LLP 1201 North Market Street, Suite 2300 Two World Financial Center Wilmington, DE 19801 New York, NY 10281 ADMINISTRATOR Bear Stearns Funds Management Inc. 575 Lexington Avenue New York, NY 10022 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 78 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. You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns Worldwide Web site at http://www.bearstearns.com. Investment Company Act File No. 811-8798 BSF-P-015-02 The Bear Stearns Funds Prospectus Dated July 28, 2000 Equity Funds .S&P STARS Portfolio . .The Insiders Select Fund . .Large Cap Value Portfolio . .Small Cap Value Portfolio . .Focus List Portfolio . .Balanced Portfolio . .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.575 Lexington Avenue New York, NY 10022 1-800-447-1139 [LOGO OF BEAR STEARNS] Table of Contents ................................................................................ Risk/Return Summaries 1 ................................................ S&P STARS Portfolio The Insiders Select Fund Large Cap Value Portfolio Small Cap Value Portfolio Focus List Portfolio Balanced Portfolio International Equity Portfolio Investments 29 ................................................ Risk Factors 33 ................................................ Management of the Portfolios 36 ................................................ Investment Adviser Portfolio Management Team How the Portfolios Value Their Shares 37 ................................................ Investing in the Portfolios 38 ................................................ How to Buy Shares How to Sell Shares Exchanges Dividends, Distributions and Taxes 41 ................................................ Additional Information 43 ................................................ Financial Highlights 44
................................................ 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: . not deposits or obligations of any bank; . not insured by the Federal Deposit Insurance Corporation; . 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 To achieve the investment objective of the S&P STARS Portfolio, Bear Stearns Asset Management Inc., the investment adviser for each Portfolio ("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. . 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 that are listed on U.S. exchanges ("ADRs") that, at their time of initial purchase, were ranked five stars or, at their time of short sale, were ranked one star. . 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. 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. The S&P STARS Portfolio may invest up to 15% of its total assets without regard to STARS ranking to increase exposure to additional sectors or take advantage of investment opportunities in securities of issuers that S&P may not follow. 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. However, if S&P downgrades a security held by the S&P STARS Portfolio from five or four stars to three stars, 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, 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 1,100 issuers and evaluates the short-term (up to 12 months) appreciation potential of the reviewed stocks, as shown below. ***** 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 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . A small- or middle-capitalization 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- 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. . Short sales may involve substantial risk and may involve leverage, which may increase potential losses. . 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: . are investing for the long term; . want to add an equity component to their portfolio. The S&P STARS 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 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. [GRAPH] S&P STARS Portfolio Annual Total Return(%)/1/ 1996 28.42% 1997 18.59% 1998 40.33% 1999 38.20% 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, 2000 was 16.49%. During the period shown in the bar chart, the highest quarterly return was 28.79% (for the quarter ended December 31, 1998) and the lowest quarterly return was (11.51)% (for the quarter ended September 30, 1998). The table shows how the average annual total return for Class Y shares of the S&P STARS 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.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year August 7, 1995 ------------------------------------------------------ S&P STARS Portfolio--Class Y 38.20% 29.11% ------------------------------------------------------ S&P 500 Index 21.03% 26.64% ------------------------------------------------------
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 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 0.43% ------- -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.18% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.18)% ------- -------------------------------------------------------------------- Net Expenses/1/ 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, 2001, 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: . you invest $10,000 in the S&P STARS Portfolio; . your investment returns 5% each year; . 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 $357 $632 $1,416 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2001, and thereafter will equal 1.18%. S&P STARS Portfolio 4 The Insiders Select Fund ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, The Insiders Select Fund invests at least 85% of 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. The Adviser anticipates that the issuers principally will be mid- capitalization companies (companies that under current market conditions have market capitalizations that range from $2 billion to $10 billion at the time of purchase). The Insiders Select Fund will invest in U.S. equity securities that the Adviser believes will equal or exceed the performance of the Standard & Poor's MidCap 400 Stock Index (the "S&P MidCap 400 Index"). The dollar-weighted average market capitalization of stocks in the S&P MidCap 400 Index was approximately $3.9 billion as of June 30, 2000. The Insiders Select Fund may invest in stocks that are not included in the S&P MidCap 400 Index. In selecting investments for The Insiders Select Fund, the Adviser analyzes . trading in a company's securities by corporate insiders, officers, directors and significant stockholders; . published company reports prepared by financial analysts, including revisions to earnings predictions; and . a company's corporate finance activities, including stock repurchase programs, dividend policies and new securities issuance. Insiders, analysts and the company may send signals that the Adviser analyzes to produce valuable information about the prospects for individual companies. In its analysis, the Adviser uses only data that is available to the public. The Adviser obtains the data on insider trading activity from CDA/Investnet, among other sources, which compiles this information from publicly available SEC filings. In addition to the factors described above, the Adviser also 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. 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 5 Prospectus. Some or all of these risks may adversely affect The Insiders Select Fund's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . A middle-capitalization 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. . 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. 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: . are investing for the long term; . 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: . 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. [GRAPH] The Insiders Select Fund Annual Total Return(%)/1/ 1996 21.89% 1997 30.18% 1998 9.82% 1999 9.64% Past performance is not necessarily an indication of future results. /1/The Insiders Select Fund's year-to-date return as of June 30, 2000, was (4.30)%. The Insiders Select Fund 6 During the period shown in the bar chart, the highest quarterly return was 16.45% (for the quarter ended December 31, 1998) and the lowest quarterly return was (16.36)% (for the quarter ended September 30, 1998). 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 (for the periods ended December Since Inception 31, 1999) 1 Year June 20, 1995 ------------------------------------------------------------ Insiders Select Fund -- Class Y 9.64% 18.15% ------------------------------------------------------------ S&P MidCap 400 Index 14.74% 21.56% ------------------------------------------------------------
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) (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/1/ 1.00% -------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% -------------------------------------------------------------------- Other Expenses 0.96% ------ -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.96% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.81)% ------ -------------------------------------------------------------------- Net Expenses/2/ 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, 2001, so that The Insiders Select Fund's net expenses do not exceed the amount indicated above. The Insiders Select Fund 7 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: . you invest $10,000 in The Insiders Select Fund; . your investment returns 5% each year; . 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 $537 $982 $2,200 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.15% until July 31, 2001 and thereafter will equal 1.96%. The Insiders Select Fund 8 Large Cap Value Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Large Cap Value Portfolio ("Large Cap Portfolio") invests at least 65% all 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 Large Cap 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 Large Cap 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 Large Cap Portfolio invests will vary depending on market conditions. As of June 30, 2000, the weighted average market capitalization of issuers of securities held by the Large Cap Portfolio was greater than $65 billion. Principal Risks You may lose money by investing in the Large Cap Portfolio. The Large 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 Large Cap Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability . 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. Large Cap Portfolio 9 Who May Want to Invest in the Large Cap Portfolio The Large Cap Portfolio may be appropriate for investors who: . are investing for the long term; . want to add a large-cap equity component to their portfolio. The Large Cap 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 Large Cap 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. [GRAPH] Large Cap Value Portfolio Annual Total Return(%)/11/ 1996 14.87% 1997 31.64% 1998 16.24% 1999 0.79% Past performance is not necessarily an indication of future results. /1/The Large Cap Portfolio's year-to-date return as of June 30, 2000 was (2.29)%. During the period shown in the bar chart, the highest quarterly return was 17.75% (for the quarter ended June 30, 1997) and the lowest quarterly return was (12.61)% (for the quarter ended September 30, 1998). The table shows how the average annual total return for Class Y shares of the Large Cap 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.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year September 11, 1995 --------------------------------------------------------- Large Cap Portfolio--Class Y 0.79% 16.15% --------------------------------------------------------- S&P 500 Index 21.03% 26.57% ---------------------------------------------------------
Large Cap Portfolio 10 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Large 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 2.02% ------ -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.77% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.77)% ------ -------------------------------------------------------------------- Net Expenses/1/ 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, 2001 so that the Large Cap Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Large Cap Portfolio over various time periods. It is intended to help you compare the cost of investing in the Large Cap Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Large Cap Portfolio; . your investment returns 5% each year; . the Large 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 Y $102 $691 $1,307 $2,970 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2001, and thereafter will equal 2.77%. Large Cap Portfolio 11 Small Cap Value Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Small Cap Value Portfolio ("Small Cap Portfolio") invests at least 65% of its total assets in equity securities of companies with market capitalizations (at time of purchase) of up to $2 billion ("small companies") that the Adviser identifies as value companies. Within this 65% category, the Small Cap 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 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, 2000, the weighted average market capitalization of issuers whose securities were held by the Small Cap Portfolio was approximately $1.1 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result . . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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 12 . 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. . 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: . are investing for the long term; . want to add a small-cap equity component to their portfolio. The Small Cap Portfolio may not be appropriate for investors who: . want to invest only in larger, more established companies; . 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 13 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. [GRAPH] Small Cap Value Portfolio Annual Total Return(%)/1/ 1996 15.89% 1997 33.28% 1998 -0.93% 1999 14.67% Past performance is not necessarily an indication of future results. /1/The Small Cap Portfolio's year-to-date return as of June 30, 2000 was 5.20%. During the period shown in the bar chart, the highest quarterly return was 22.15% (for the quarter ended December 31, 1998) and the lowest quarterly return was (26.02)% (for the quarter ended September 30, 1998). The table shows how the average annual total return for Class Y shares of the Small Cap Portfolio for one year 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 (for the periods ended Since Inception December 31, 1999) 1 Year June 22, 1995 ------------------------------------------------------ Small Cap Portfolio--Class Y 14.67% 17.20% ------------------------------------------------------ Russell 2000 Index 21.29% 15.23% ------------------------------------------------------
Small Cap Portfolio 14 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 0.90% ------ -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.65% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (0.65)% ------ -------------------------------------------------------------------- Net Expenses/1/ 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, 2001, 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: . you invest $10,000 in the Small Cap Portfolio; . your investment returns 5% each year; . 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 $457 $836 $1,900 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.00% until July 31, 2001, and thereafter will equal 1.65%. Small Cap Portfolio 15 Focus List Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Capital appreciation. Principal Strategies Under normal market conditions, the Focus List Portfolio will invest at least 65% of its total assets in the common stocks of U.S. and foreign issuers that, at the time of purchase, are included on the Bear Stearns Focus List (the "Focus List"). The Focus List Portfolio may invest up to 35% of its total assets in stocks that are not on the Focus List. The Adviser may select non-Focus List securities, for example, when the Adviser determines that Focus List stocks are illiquid, would cause the Focus List Portfolio to be overweighted in a particular sector or overly concentrated in a particular industry, or for other reasons. Using a rating system of "1" through "5," the Bear Stearns Equity Research Department, consisting of 90 analysts who cover common stocks of more than 1,100 U.S. and foreign companies, assigns the following ratings: 1 (Buy), 2 (Attractive), 3 (Neutral), 4 (Avoid), 5 (Sell). More than 600 stocks are rated Buy or Attractive. The Focus List typically consists of 20 stocks rated Buy or Attractive. The Adviser determines how much of the Focus List Portfolio's assets to allocate to each Focus List stock. The Bear Stearns Research Department and the Research Stock Selection Committee (comprised of senior Research Department personnel) will assign a Buy rating to stocks when they believe the stock will significantly outperform the market over the next three to six months because of a catalyst or near-term event that they expect will trigger upward movement in the stock's price. These catalysts may include a change in management, the introduction of a new product or a change in the industry outlook. An Attractive rating means that an analyst has determined that the stock has solid long-term growth prospects and is undervalued in comparison to comparable companies. Principal Risks You may lose money by investing in the Focus List Portfolio. The Focus List Portfolio is also subject to the following principal risks, more fully described in "Risk Factors" in this Prospectus. Some or all of these risk factors may affect the Focus List Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. Focus List Portfolio 16 . 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. The Focus List 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 Focus List Portfolio more susceptible to price changes of securities of a particular issuer. Who May Want to Invest in the Focus List Portfolio The Focus List Portfolio may be appropriate for investors who: . are investing for the long term; . are seeking an equity component for their portfolio. The Focus List Portfolio may not be appropriate for investors who: . are not willing to take any risk that they may experience share price fluctuations, assume the risks associated with stocks selected by the Bear Stearns Focus List Committee or lose money on their investment. Focus List Portfolio 17 Performance Class Y shares of the Focus List Portfolio have not yet commenced operations. The bar chart and table below illustrate the risks of investing in the Focus List 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. [GRAPH] Focus List Portfolio Annual Total Return(%)/1/ 1998 33.64% 1999 0.00% Past performance is not necessarily an indication of future results. /1/The Focus List Portfolio's year-to-date return as of June 30, 2000 was (4.80)%. During the period shown in the bar chart, the highest quarterly return was 32.75% (for the quarter ended December 31, 1998) and the lowest quarterly return was (10.65)% (for the quarter ended September 30, 1998). The table shows how the average annual total return for Class A shares of the Focus List 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. The figures shown in the table do not reflect sales charges applicable to Class A shares.
Average Annual Total Returns (for the periods ended Since Inception* December 31, 1999) 1 Year December 29, 1997 --------------------------------------------------------- Focus List Portfolio - Class A 26.30% 29.77% --------------------------------------------------------- S&P 500 Index 21.03% 24.71% ---------------------------------------------------------
* This table does not reflect any performance information for the period December 29, 1997 through December 31, 1997. Focus List Portfolio 18 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Focus List 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 0.65% --------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% --------------------------------------------------------------------- Other Expenses 1.58% ----- --------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.23% --------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.33)% ----- --------------------------------------------------------------------- Net Expenses/1/ 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 Focus List Portfolio for the fiscal year ending March 31, 2001. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2001, 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 Focus List Portfolio over various time periods. It is intended to help you compare the cost of investing in the Focus List Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Focus List Portfolio; . your investment returns 5% each year; . the Focus List 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 $92 $569 $1,073 $2,461 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.90% until July 31, 2001, and thereafter will equal 2.23%. Focus List Portfolio 19 Balanced Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Long-term capital growth and current income. Principal Strategies The Balanced Portfolio seeks capital appreciation primarily through the equity component of its portfolio while investing in fixed income securities primarily to lessen overall portfolio volatility and to provide income for regular quarterly dividends. The percentage of the Balanced Portfolio invested in equity and fixed- income securities will vary from time to time as the Adviser evaluates their relative attractiveness based on market valuations, economic growth and inflation forecasts. When allocating equity and fixed income investments, the Adviser takes into account the Balanced Portfolio's intention to pay regular quarterly dividends. The amount of quarterly dividends may fluctuate depending on prevailing interest rates, dividend policies of issuers and how the Adviser allocates the Balanced Portfolio's assets, among other things. Under normal market conditions, the Balanced Portfolio will invest at least 90% of its total assets in equity and fixed income securities. Equity Securities. Under normal market conditions, the Balanced Portfolio invests between 40% and 60% of its total assets in equity securities. Of this amount, the Balanced Portfolio may invest up to 10% of its 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 Balanced Portfolio may invest must be rated at least "investment grade" by an NRSRO at the time of purchase. The Adviser uses "fundamental research" approach to investing in equity securities. The Adviser looks for equity securities that have the best prospects for long-term capital growth. The Adviser examines fundamental research factors, including price-to-book ratios, price-to-earnings ratios and price-to-cash-flow ratios relative to companies in the S&P 500 Index. The Adviser considers factors such as the company's projected three-to- five year earnings growth rate, 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. Fixed Income Securities. Under normal market conditions, the Balanced Portfolio invests between 40% and 60% of its total assets in fixed income securities. The Balanced Portfolio invests primarily in high quality debt obligations that have been rated "A-" or higher by S&P or "A3" or better by Moody's Investors Service ("Moody's"). The Balanced Portfolio may also invest in debt obligations that are rated below these categories but considered investment grade by Moody's or S&P. In addition, the Balanced Portfolio may invest up to 5% of its total assets in higher-risk, below investment-grade debt securities rated no lower than "B" by an NRSRO or that the Adviser considers to be of comparable quality. The Adviser looks for debt obligations that offer attractive returns that compare favorably to those of comparable maturity U.S. Balanced Portfolio 20 Treasury securities, on a risk-adjusted basis. For a discussion of the ratings categories of various NRSROs, see the Appendix to the Statement of Additional Information ("SAI"). Under normal market conditions, the Balanced Portfolio will invest in debt obligations with an average maturity of 10 years or less, except that the Portfolio may invest in U.S. government obligations of any maturity. The Balanced Portfolio's fixed income investments include . securities issued by the U.S. government, its agencies, instrumentalities or sponsored enterprises; . debt securities issued by companies; . mortgage-backed and asset-backed securities; and . U.S. dollar-denominated securities issued by foreign governments. Principal Risks You may lose money by investing in the Balanced Portfolio. The Balanced 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 Balanced Portfolio's net asset value, yield and/or total return: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . The rate of inflation may increase, resulting in higher interest rates, causing the Balanced Portfolio's debt 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. . 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 Balanced Portfolio may have to reinvest interest or sale proceeds at lower interest rates, thereby reducing its yield, e.g., when the average life of a mortgage-related security is shortened through prepayment. Who May Want to Invest in the Balanced Portfolio The Balanced Portfolio may be appropriate for investors who: . seek current income coupled with asset growth potential; Balanced Portfolio 21 . are setting up trust accounts, such as charitable remainder trusts, that have minimum payout requirements. The Balanced 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 Balanced Portfolio by showing 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. [GRAPH] Balanced Portfolio Annual Total Return(%)/1/ 1998 12.32% 1999 0.30% Past performance is not necessarily an indication of future results. /1/The Balanced Portfolio's year-to-date return as of June 30, 2000 was 1.88%. During the period shown in the bar chart, the highest quarterly return was 8.41% (for the quarter ended December 31, 1998) and the lowest quarterly return was (5.98)% (for the quarter ended September 30, 1999). The table shows how the average annual total return for Class Y shares of the Balanced Portfolio 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, and the Lipper Balanced Fund Index, a non-weighted index of the 30 largest funds within the Lipper balanced fund investment category.
Average Annual Total Returns (for the periods ended Since Inception December 31, 1999) 1 Year January 6, 1998 ----------------------------------------------------- Balanced Portfolio - Class Y 0.30 6.18% ----------------------------------------------------- S&P 500 Index 21.03 25.93% ----------------------------------------------------- Lipper Balanced Fund Index 8.98 11.97%* -----------------------------------------------------
* The information for the Lipper Balanced Fund Index reflects its performance from January 1, 1998 through December 31, 1999. Balanced Portfolio 22 Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Balanced 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 0.65% -------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% -------------------------------------------------------------------- Other Expenses 2.26% ------ -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.91% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (2.21)% ------ -------------------------------------------------------------------- Net Expenses/1/ 0.70% ------ --------------------------------------------------------------------
* 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, 2001, so that the Balanced Portfolio's net expenses do not exceed the amount indicated above. Example This Example illustrates the cost of investing in the Balanced Portfolio over various time periods. It is intended to help you compare the cost of investing in the Balanced Portfolio with the cost of investing in other mutual funds. The Example assumes that: . you invest $10,000 in the Balanced Portfolio; . your investment returns 5% each year; . the Balanced 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 $72 $691 $1,337 $3,074 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 0.70% until July 31, 2001, and thereafter will equal 2.91%. Balanced Portfolio 23 International Equity Portfolio ................................................................................ RISK/RETURN SUMMARY Investment Objective Long-term capital appreciation. Principal Strategies Under normal market conditions, the International Equity Portfolio invests substantially all of its assets in equity securities of foreign companies with at least 65% of its total assets invested in such securities. 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 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: . Its securities are principally traded in an emerging country. . It derives at least 50% of its total revenue from providing goods or services in emerging countries, or sales made in emerging countries. . It maintains 50% or more of its assets in one or more emerging countries. . 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 International Equity Portfolio 24 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: . To "lock in" the U.S. dollar price of a security denominated in a foreign currency (transaction hedge). . To protect against an anticipated decline in the foreign currency in which a portfolio security is denominated against the U.S. dollar (position hedge). . 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: . The market value of portfolio securities may decline. . A particular strategy may not be executed effectively or otherwise generate the intended result. . A security's value will fluctuate in response to events affecting an issuer's profitability or viability. . 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. . The value of the International Equity Portfolio's investment in forward contracts suffers from unanticipated changes in currency prices. . 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. . 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. . Issuers in emerging countries typically are subject to less government regulation than their counterparts in the United States. International Equity Portfolio 25 Who May Want to Invest in the International Equity Portfolio The International Equity Portfolio may be appropriate for investors who: . are investing for the long term; . want to add an international equity component to their portfolio. The International Equity Portfolio may not be appropriate for investors who: . are not willing to accept the risks associated with foreign securities markets or currency fluctuation; . 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 have not yet commenced operations. 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. [GRAPH] International Equity Portfolio Annual Total Return (%)/1/ 1998 25.86% 1999 81.89% Past performance is not necessarily an indication of future results. /1/The International Equity Portfolio's year-to-date return as of June 30, 2000 was (12.06)%. During the period shown in the bar chart, the highest quarterly return was 60.15% (for the quarter ended December 31, 1999) and the lowest quarterly return was (14.18)% (for the quarter ended September 30, 1998). The table shows how the average annual total return 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 International Equity Portfolio 26 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 Since Inception* (for the periods ended December 31, 1999) 1 Year December 29, 1997 -------------------------------------------------------------------- International Equity Portfolio -- Class A 81.89% 51.04% -------------------------------------------------------------------- MSCI EAFE Index 26.96% 23.41% --------------------------------------------------------------------
* This table does not reflect any performance information for the period 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 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 1.00% -------------------------------------------------------------------- Distribution (12b-1) Fees 0.00% -------------------------------------------------------------------- Other Expenses 1.87% ------ -------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 2.87% -------------------------------------------------------------------- Fee Waiver and Expense Reimbursement (1.62)% ------ -------------------------------------------------------------------- Net Expenses/1/ 1.25% ------ --------------------------------------------------------------------
* 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 the International Equity Portfolio for the fiscal year ending March 31, 2001. The Adviser has agreed to waive a portion of its fee and reimburse certain expenses until at least July 31, 2001, so that the International Equity Portfolio's net expenses do not exceed the amount indicated above. International Equity Portfolio 27 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: . you invest $10,000 in the International Equity Portfolio; . your investment returns 5% each year; . 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 $718 $1,290 $1,887 $3,493 -----------------------------------------
* This Example assumes that net portfolio operating expenses will equal 1.25% until July 31, 2001, and thereafter will equal 2.87%. International Equity Portfolio 28 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 star 95 ---------------------------- Four star 369 ---------------------------- Three star 517 ---------------------------- Two star 86 ---------------------------- One star 14 ----------------------------
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 June 30, 2000: . The S&P 500 Index (measured on a total return basis, without dividend reinvestment) increased by 500.65%. During this period, the average dividend yield of securities included in the S&P 500 Index was 2.72% and the average dividend yield of five-star stocks was 1.47%. . The ranked stocks experienced the following changes in value:
STARS Category Percentage change in value --------------------------------------- Five stars 1.351.69% --------------------------------------- Four stars 565.49% --------------------------------------- Three stars 274.46% --------------------------------------- Two stars 160.34% --------------------------------------- One star 21.04% ---------------------------------------
The Adviser believes that this information means only that, historically, five-star 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-star 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 29 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 ------------------------------------------------------------------------------------------- 1 S&P 500 Index Five star stocks Five star stocks Five star stocks Five star stocks ------------------------------------------------------------------------------------------- 2 Five star stocks S&P 500 Index S&P 500 Index S&P 500 Index S&P 500 Index ------------------------------------------------------------------------------------------- 3 One star stocks One star stocks One star stocks One star stocks One star 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. 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. 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. 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. Focus List Portfolio Bear Stearns publishes the Focus List, which is a list of stocks selected by the Bear Stearns Focus List Committee. The Committee monitors the Focus List daily, and candidates are considered 30 based on one or more of the following criteria: market outlook, perception of the stock's sector, and the stock's current valuation relative to the market and its industry. Domestic and international stocks and ADRs rated Buy (1) or Attractive (2) are eligible for inclusion on the Focus List. Generally, the Adviser will purchase a security that has been added to the Focus List and will sell a security when the security has been removed from the Focus List. The Adviser determines how much of the Focus List Portfolio's assets to allocate to each Focus List stock. The Adviser may make changes in the allocation as investment and economic conditions change. Depending upon market conditions and to the extent the Focus List Portfolio needs to hold cash balances to satisfy shareholder redemption requests, the Adviser may not immediately purchase a new Focus List stock and/or may continue to hold one or more Focus List stocks that have been deleted from the Focus List. The Adviser will not have access to the Focus List before Bear Stearns publishes it. The Focus List Committee automatically removes from the Focus List stocks that an analyst has downgraded below Attractive. However, the Focus List Committee may delete stocks for other reasons. For example, it may delete a stock when the stock has achieved its target price range, a catalyst fails to materialize or have its expected effect, or new, more attractive opportunities arise. The Focus List may include stocks of issuers for which Bear Stearns or an affiliate performs investment banking services for which it receives fees, as well as stocks in which Bear Stearns or an affiliate makes a market and may have a long or short position. When Bear Stearns or an affiliate participates in a distribution of stock, the Adviser may be prohibited from purchasing that stock for the Focus List Portfolio. The activities of Bear Stearns or an affiliate may limit the Focus List Committee's ability to include stocks on the Focus List or the Focus List Portfolio's flexibility in purchasing and selling such stocks. The Focus List is available to other clients of Bear Stearns and its affiliates, including the Adviser. 31 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.
Insiders International S&P STARS Select Large Cap Small Cap Focus List Balanced Equity Portfolio Fund Portfolio Portfolio Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------- ADRs X X X X X X - ------------------------------------------------------------------------------------------------------- Asset-backed securities X - ------------------------------------------------------------------------------------------------------- Convertible securities X X X X X X - ------------------------------------------------------------------------------------------------------- Debt securities X - ------------------------------------------------------------------------------------------------------- Equity securities X X X X X X X - ------------------------------------------------------------------------------------------------------- Mortgage-related securities X - ------------------------------------------------------------------------------------------------------- Real estate investment trusts ("REITs") X - ------------------------------------------------------------------------------------------------------- Short sales X X - -------------------------------------------------------------------------------------------------------
. 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. . 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. . 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. . 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. . Equity securities include foreign and domestic common or preferred stocks, rights and warrants. . Mortgage-related securities represent interests in pools of mortgage loans made by lenders like savings and loan institutions, mortgage bankers, commercial banks and others. 32 . 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. . 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 exaggerate a gain or loss. 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. For temporary defensive purposes, the International Equity Portfolio may hold foreign currencies or multinational currency units. . Portfolio turnover. The Adviser may trade actively to achieve a Portfolio's goals. Emerging country markets are especially volatile and may result in more frequent trading. Active trading, if profitable, 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 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 . 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. 33 . 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 . 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 . 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. . 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 . 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. . 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. 34 . 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 (Balanced Portfolio only) . Interest rate risk. The value of a debt security typically changes in the opposite direction from a change in interest rates. When interest rates go up, the value of a debt security typically goes down. When interest rates go down, the value of a debt security typically goes up. Generally, the longer the maturity of a security, the more sensitive it is to changes in interest rates. . Inflation risk is the risk that inflation will erode the purchasing power of the cash flows generated by debt securities. Fixed-rate debt securities are more susceptible to this risk than floating-rate debt securities. . Reinvestment risk is the risk that when interest rates are declining, a Portfolio will have to reinvest interest income or prepayments on a security at lower interest rates. In a declining interest rate environment, lower reinvestment rates and price gains resulting from lower interest rates will offset each other to some extent. . Credit (or default) risk is the risk that the issuer of a debt security will be unable to make timely payments of interest or principal. Credit risk is measured by NRSROs such as S&P, Fitch IBCA International 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. Risks of Mortgage-Related and Asset-Backed Securities (Balanced Portfolio only) . Prepayment risk. Prepayments of principal on mortgage-related securities affect the average life of a pool of mortgage-related securities. The level of interest rates and other factors may affect the frequency of mortgage prepayments. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool of mortgage-related securities. Prepayment risk is the 35 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 Real Estate Securities (Balanced Portfolio only) . 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. . 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 Portfolio Only . S&P STARS rankings represent the subjective determination of S&P analysts. Past performance of securities included in S&P STARS does not necessarily predict the S&P STARS Portfolio's future performance. 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 575 Lexington Avenue, New York, NY 10022. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear, Stearns & Co. Inc., is a leading United States investment banking, securities trading and brokerage firm serving 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, 2000 of approximately $15.1 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. 36 For the fiscal year ended March 31, 2000, 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 0.57% ------------------------------------- Insiders Select Fund 0.00% ------------------------------------- Large Cap Portfolio 0.00% ------------------------------------- Small Cap Portfolio 0.05% ------------------------------------- Focus List Portfolio 0.00% ------------------------------------- Balanced Portfolio 0.00% ------------------------------------- International Equity Portfolio 0.00% -------------------------------------
Portfolio Management Team The Adviser uses a team approach to manage each Portfolio. The members of each team together are primarily responsible for the day-to-day management of each Portfolio's investments. No single individual is responsible for managing a Portfolio. Each team consists of 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, 2000, the Sub-Adviser managed approximately $10.9 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 Trust's Board of Trustees. The NAV for each class is calculated by adding up the total value of the relevant 37 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 buying and selling shares of the Portfolios. Please read the entire Prospectus carefully before buying Class Y shares of a Portfolio. How to Buy Shares The minimum initial investment is $3,000,000; there is no minimum for subsequent investments. You may buy Class Y shares of a Portfolio through your account representative at a broker-dealer with whom the Distributor has entered into a sales agreement (an "Authorized Dealer") or the Transfer Agent by wire only. To buy Class Y shares of a Portfolio by Federal Reserve wire, call the Transfer Agent at 1-800-447-1139 or call your account representative. If you do not wire Federal Funds, you must have the wire converted into Federal Funds, which usually takes one business day after receipt of a bank wire. The Transfer Agent will not process your investment until it receives Federal Funds. The following procedure will help assure prompt receipt of your Federal Funds wire: 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. 38 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 . You may sell shares on any business day through the Distributor, Authorized Dealers or the Transfer Agent. . When the Trust receives your redemption requests in proper form, it will sell your shares at the next determined net asset value. . The Trust will 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 In person . Visit your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. By telephone . Call your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. By mail . Mail your redemption request to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. By wire . Submit wiring instructions to your account representative. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. Redemption Through the Transfer Agent Method of Redemption Instructions By mail . Mail your redemption request to: PFPC Inc. Attention: The Bear Stearns Funds [name of Portfolio] P.O. Box 8960 Wilmington, DE 19899-8960 By telephone . Call the Transfer Agent at 1-800-447-1139. . Specify the name of the Portfolio, class of shares and the number or dollar amount of shares that you wish to sell. 39 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 $50,000, or if you instruct the Trust to send the proceeds to someone other than the record owner at the record address, or if you are a corporation, partnership, trust or fiduciary, your signature must be guaranteed by any eligible guarantor institution. Call the Transfer Agent at 1-800- 447-1139 for information about obtaining a Medallion Program signature guarantee. . Telephone policies. You may authorize the Transfer Agent to accept telephone instructions. If you do, the Transfer Agent will accept instructions from people who it believes are authorized to act on your behalf. The Transfer Agent will use reasonable procedures (such as requesting personal identification) to ensure that the caller is properly authorized. Neither the Portfolio nor the Transfer Agent will be liable for losses for following instructions reasonably believed to be genuine. . Redemption by mail may cause a delay. During times of extreme economic or market conditions, you may experience difficulty in contacting your account representative by telephone to request a redemption of shares. If this occurs, please consider using the other redemption procedures described in this Prospectus. Alternative procedures may take longer to sell your shares. . Automatic redemption; redemption in kind. If the value of your account falls below $750 (for reasons other than changes in market conditions), the Trust may automatically liquidate your account and send you the proceeds. The Trust will send you a notice at least 60 days before doing this. The Trust also reserves the right to redeem your shares "in kind." For example, if you sell a large number of shares and the Portfolio is unable to sell securities to raise cash, the Trust may send you a combination of cash and a share of actual portfolio securities. Call the Transfer Agent for details. . 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.) 40 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. . The Trust may reject your exchange request. 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, other than the Balanced Portfolio, declares and pays dividends from its net investment income annually. The Balanced Portfolio declares and pays dividends quarterly. The Portfolios will distribute short-term capital gains, as necessary, and normally will pay any long-term capital gains once a year. You can receive dividends or distributions in one of the following ways: . Reinvestment. You can automatically reinvest your dividends and distributions in additional shares of your Portfolio. If you do not indicate another choice on your Account 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 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. 41 . 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. . 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. It is important for you to be aware of the following information about the tax treatment of your investment. . Ordinary dividends from a Portfolio are taxable as ordinary income; distributions from a Portfolio's long-term capital gains are taxable as capital gain. . 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 Portfolios that are attributable to interest on certain U.S. government obligations may be exempt from certain state and local income taxes. The extent to which ordinary dividends are attributable to these U.S. government obligations will be provided on the tax statements you receive from a Portfolio. . Certain dividends 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) or exchange shares of a Portfolio, you must recognize any gain or loss. . Because your tax treatment depends on your purchase price and tax position, you should keep your regular account statements for use in determining your tax. . You should review the more detailed discussion of federal income tax considerations in the SAI. The Trust provides this tax information for your general information. You should consult your own tax adviser about the tax consequences of investing in a Portfolio. 42 ADDITIONAL INFORMATION Performance Financial publications, such as Business Week, Forbes, Money or SmartMoney, may compare a Portfolio's performance to the performance of various indexes and investments for which reliable performance data is available. These publications may also compare a Portfolio's performance to averages, performance rankings, or other information prepared by recognized mutual fund statistical services, such as Lipper Inc. Shareholder Communications The Trust may eliminate duplicate mailings of Portfolio materials to shareholders who reside at the same address, 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. 43 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 since its inception. 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 Focus List Portfolio and the International Equity Portfolio have not yet commenced operations.
Net Net Asset Net Net Realized and Dividends Distributions Asset Value, Investment 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 Y 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 - --------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 14.97 (0.02) 2.66 - (1.38) 16.23 - --------------------------------------------------------------------------------------------------- For the period August 7, 1995* through March 31, 1996 14.13 0.07 1.20 $(0.03) (0.40) 14.97 - ---------------------------------------------------------------------------------------------------
- ------ * 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. 44 Financial Highlights -- S&P STARS Portfolio
Increase/(Decrease) Net Ratio of Net Reflected in Assets, Investment Expense Ratios and End of Ratio of Income/(Loss) Net Investment Total Period Expenses to to Average Income/(Loss) Due Portfolio Investment (000's Average Net Net to Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - ------------------------------------------------------------------------------------------------- Class Y 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(/6/) (0.32)(/6/) 0.38 172.78(/7/) - ------------------------------------------------------------------------------------------------- 17.48 14,763 1.00(/6/) (0.10)(/6/) 0.70 220.00(/7/) - ------------------------------------------------------------------------------------------------- 9.09(/4/) 8,779 1.00(/5/,/6/) 0.82(/4/,/5/,/6/) 0.99(/4/,/5/) 295.97(/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 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. 45 Financial Highlights -- Insiders Select Fund The financial highlights table is intended to help you understand the financial performance of The Insiders Select Fund since its inception. 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 Net Asset Dividends Distributions Asset Value, Net Net Realized and from Net from Net Value, Beginning Investment Unrealized Gain on Investment Realized End of of Period Income**(/1/) Investments**(/2/) Income Capital Gains Period - ---------------------------------------------------------------------------------------------------- Class Y 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 - ---------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 14.02 0.08 2.49 (0.02) (1.91) 14.66 - ---------------------------------------------------------------------------------------------------- For the period June 20, 1995* through March 31, 1996 12.12 0.07 1.87 (0.04) - 14.02 - ----------------------------------------------------------------------------------------------------
- ------ * 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. 46 Financial Highlights -- Insiders Select Fund
Increase/(Decrease) Net Ratio of Net Reflected in Assets, Investment Expense Ratios and End of Ratio of Income/(Loss) Net Investment Total Period Expenses to to Average Income/(Loss) Due Portfolio Investment (000's Average Net Net to Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - --------------------------------------------------------------------------------------- Class Y 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 - --------------------------------------------------------------------------------------- 18.81 1,557 1.15 0.60 1.81 128.42 - --------------------------------------------------------------------------------------- 15.98(/4/) 1,293 1.15(/5/) 0.97(/4/,/5/) 2.04(/4/,/5/) 93.45 - ---------------------------------------------------------------------------------------
- ------ 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. 47 Financial Highlights -- Large Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Large Cap Portfolio since its inception. This information reflects financial results for a single share of the Large Cap Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Large Cap Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Large Cap Portfolio's financial statements, are included in the Large Cap Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Net Asset Dividends Distributions Asset Value, Net Net Realized and from Net from Net Value, Beginning Investment Unrealized Gain on Investment Realized End of of Period Income**(/1/) Investments**(/2/) Income Capital Gains Period - --------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, 2000 $19.78 $0.22 $(0.97) $(0.20) $(2.10) $16.73 - --------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 20.84 0.17 0.65 (0.20) (1.68) 19.78 - --------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.18 0.26 7.05 (0.13) (3.52) 20.84 - --------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.12 0.23 2.17 (0.16) (0.18) 17.18 - --------------------------------------------------------------------------------------------------- For the period September 11, 1995* through March 31, 1996 13.98 0.07 1.16 (0.08) (0.01) 15.12 - ---------------------------------------------------------------------------------------------------
- ------ * 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. 48 Financial Highlights -- Large Cap Portfolio
Increase/(Decrease) Net Ratio of Reflected in Assets, Net Expense Ratios and End of Ratio of Investment Net Investment Total Period Expenses to Income to Income Due to Portfolio Investment (000's Average Net Average Net Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - -------------------------------------------------------------------------------------- Class Y (4.51)% $3,438 1.00% 0.98% 1.77% 55.66% - -------------------------------------------------------------------------------------- 4.29 4,741 1.00 1.08 1.46 38.27 - -------------------------------------------------------------------------------------- 45.27 7,263 1.00 0.83 1.76 61.75 - -------------------------------------------------------------------------------------- 16.04 6,109 1.00 1.00 1.50 136.67 - -------------------------------------------------------------------------------------- 8.75(/4/) 3,413 1.00(/5/) 0.76(/4/,/5/) 4.41(/4/,/5/) 45.28
- -------------------------------------------------------------------------------- - ------ 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. 49 Financial Highlights -- Small Cap Portfolio The financial highlights table is intended to help you understand the financial performance of the Small Cap Portfolio since its inception. 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 Net Asset Net Realized and Distributions Asset Value, Net Unrealized from Net Value, Beginning Investment Gain/(Loss) on Realized End of of Period (Loss)**(/1/) Investments**(/2/) Capital Gains Period - ----------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, 2000 $18.03 $(0.05) $6.72 $(1.47) $23.23 - ----------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 23.65 (0.02) (4.66) (0.94) 18.03 - ----------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1998 17.47 (0.04) 8.06 (1.84) 23.65 - ----------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1997 15.85 (0.05) 1.97 (0.30) 17.47 - ----------------------------------------------------------------------------------------- For the period June 22, 1995* through March 31, 1996 13.09 - 3.05 (0.29) 15.85 - -----------------------------------------------------------------------------------------
- ------ * 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. 50 Financial Highlights -- Small Cap Portfolio
Increase/(Decrease) Net Ratio of Net Reflected in Assets, Investment Expense Ratios and End of Ratio of Income/(Loss) Net Investment Total Period Expenses to to Average Income/(Loss) Due Portfolio Investment (000's Average Net Net to Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - ---------------------------------------------------------------------------------------- Class Y 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 - ---------------------------------------------------------------------------------------- 12.19 16,724 1.00 (0.31)(/4/,/5/) 1.00 56.88 - ---------------------------------------------------------------------------------------- 23.52(/4/) 8,989 1.00(/5/) - 2.45(/4/,/5/) 40.79 - ----------------------------------------------------------------------------------------
- ------ 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. 51 Financial Highlights -- Balanced Portfolio The financial highlights table is intended to help you understand the financial performance of the Balanced Portfolio since its inception. This information reflects financial results for a single share of the Balanced Portfolio. The total returns in the table represent the rate that an investor would have gained or lost on an investment in the Balanced Portfolio (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, whose report, along with the Balanced Portfolio's financial statements, are included in the Balanced Portfolio's annual report, which is available by calling the Trust at 1-800-766-4111.
Net Net Asset Dividends Distributions Asset Value, Net Net Realized and from Net from Net Value, Beginning Investment Unrealized Gain on Investment Realized End of of Period Income**(/1/) Investments**(/2/) Income Capital Gains Period - --------------------------------------------------------------------------------------------------- Class Y For the fiscal year ended March 31, 2000 $13.16 $0.40 $(0.49) $(0.43) - $12.64 - --------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 1999 12.95 0.37 0.21 (0.36) $(0.01) 13.16 - --------------------------------------------------------------------------------------------------- For the period January 6, 1998* through March 31, 1998 12.05 0.06 0.88 (0.04) - 12.95 - ---------------------------------------------------------------------------------------------------
- ------ * 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. 52 Financial Highlights -- Balanced Portfolio
Increase/(Decrease) Net Ratio of Reflected in Assets, Net Expense Ratios and End of Ratio of Investment Net Investment Total Period Expenses to Income to Income Due to Portfolio Investment (000's Average Net Average Net Waivers and Turnover Return(/3/) omitted) Assets(/1/) Assets(/1/) Reimbursements Rate - ------------------------------------------------------------------------------------- Class Y (0.75)% $6,801 0.70% 3.27% 2.21% 86.27% - ------------------------------------------------------------------------------------- 4.59 10,403 0.70 3.15 2.08 45.98 - ------------------------------------------------------------------------------------- 7.80(/4/) 5,685 0.70(/5/) 2.98(/4/,/5/) 3.12(/4/,/5/) 12.72 - -------------------------------------------------------------------------------------
- ------ 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. 53 The Bear Stearns Funds 575 Lexington Avenue New York, NY 10022 1-800-766-4111 DISTRIBUTOR TRANSFER & DIVIDEND Bear, Stearns & Co. Inc. DISBURSEMENT AGENT 245 Park Avenue PFPC Inc. New York, NY 10167 Bellevue Corporate Center INVESTMENT ADVISER 400 Bellevue Parkway Wilmington, DE 19809 Bear Stearns Asset Management Inc. COUNSEL 575 Lexington Avenue Kramer Levin Naftalis & Frankel LLP New York, NY 10022 919 Third Avenue New York, NY 10022 INVESTMENT SUB-ADVISER (INTERNATIONAL EQUITY INDEPENDENT AUDITORS PORTFOLIO) Deloitte & Touche LLP Marvin & Palmer Associates, Two World Financial Center Inc. New York, NY 10281 1201 North Market Street, Suite 2300 Wilmington, DE 19801 ADMINISTRATOR Bear Stearns Funds Management Inc. 575 Lexington Avenue New York, NY 10022 CUSTODIANS 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. . 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. You may also obtain a copy of a Portfolio's prospectus from the Bear Stearns Worldwide Web site at http://www.bearstearns.com. Investment Company Act File No. 811-8798 BSF-P-017-02 PART B THE BEAR STEARNS FUNDS STATEMENT OF ADDITIONAL INFORMATION Prime Money Market Portfolio S&P STARS Portfolio Focus List Portfolio Income Portfolio The Insiders Select Fund Balanced Portfolio High Yield Total Return Portfolio Large Cap Value Portfolio International Equity Portfolio Emerging Markets Debt Portfolio Small Cap Value Portfolio
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES July 28, 2000 This Statement of Additional Information ("SAI"), which is not a prospectus, supplements and should be read in conjunction with the current relevant prospectus (the "Prospectus") dated July 28, 2000 of The Bear Stearns Funds (the "Trust"), as each may be revised from time to time, offering shares of the portfolios listed above (each, a "Portfolio"). To obtain a free copy of such Prospectus, please write to the Trust at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960; call the Trust at 1-800-447-1139 or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1- 800-766-4111. Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a wholly owned subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's investment adviser. Marvin & Palmer Associates, Inc. (the "Sub-Adviser") has been engaged to provide investment advisory services, including portfolio management, to the International Equity Portfolio subject to the supervision of BSAM. BSAM and the Sub-Adviser are collectively referred to herein as the "Advisers." Bear Stearns Funds Management Inc. ("BSFM"), a wholly owned subsidiary of The Bear Stearns Companies Inc., is the administrator of the Portfolios. Bear Stearns, an affiliate of BSAM, serves as distributor of each Portfolio's shares. TABLE OF CONTENTS
Page Investment and Management Policies.................................................... 1 Management of the Trust............................................................... 48 Management Arrangements............................................................... 51 Purchase and Redemption of Shares..................................................... 60 Determination of Net Asset Value...................................................... 66 Taxes................................................................................. 68 Dividends -- Money Market Portfolio................................................... 76 Portfolio Transactions................................................................ 77 Performance Information............................................................... 81 Code of Ethics........................................................................ 83 Information about the Trust........................................................... 84 Custodians, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors.. 93 Financial Statements.................................................................. 94
Appendix.................................................................... A-1
2 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") Emerging Markets Debt Portfolio ("EMD Portfolio") Equity Funds: ------------- S&P STARS Portfolio The Insiders Select Fund Large Cap Value Portfolio ("Large Cap Portfolio") Small Cap Value Portfolio ("Small Cap Portfolio") Focus List Portfolio Balanced Portfolio International Equity Portfolio The investment objectives and principal investment policies of each Portfolio are described in the Prospectus. Each Portfolio's investment objective cannot be changed without approval by the holders of a majority of such Portfolio's outstanding voting shares (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")). A Portfolio's investment objective may not be achieved. The following Portfolios are non-diversified: The Insiders Select Fund and the S&P STARS, Focus List and EMD Portfolios. The other Portfolios are diversified. See "Investment and Management Policies -- Management Policies -- Non-Diversified Status." INVESTMENT AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the sections in the Prospectus entitled "Risk/Return Summary," "Investments" and "Risk Factors." Unless otherwise stated, the indicated percentage relates to a Portfolio's total assets that may be committed to the stated investment, measured at the time the Portfolio makes the investment. New financial products and risk management techniques continue to be developed, and each Portfolio may use these new investments and techniques to the extent consistent with its investment objective and policies. Asset-Backed Securities. The Money Market, Income, High Yield, EMD, ----------------------- Balanced and International Equity Portfolios each may invest in asset-backed securities. The High Yield and Balanced Portfolios each may invest up to 5% and 10%, respectively, of total assets in asset-backed securities. Asset-backed securities represent participations in, or are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (credit card) agreements and other categories of receivables. Such assets are securitized through the use of trusts and special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued by a financial institution unaffiliated with the trust or corporation, or other credit enhancements may be present. 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, 2 foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge a certain percentage of their assets, as fixed from time to time by the appropriate regulatory authority, by depositing assets with a designated bank within the state; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of federal and state branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, the Advisers carefully evaluate such investments on a case-by- case basis. Bank Debt. The High Yield and EMD Portfolios each may invest up to --------- 15% and 20%, respectively, of its total assets in Participations and Assignments, defined below. Bank debt includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring or in connection with recapitalizations, acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans that provide temporary or "bridge" financing to a borrower pending the sale of identified assets, the arrangement of longer-term loans or the issuance and sale of debt obligations. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions, including banks ("Lenders"). These investments take the form of participations in loans ("Participations") or of assignments of all or a portion of loans from third parties ("Assignments"). Participations differ both from public and private debt securities and from Assignments. In Participations, an investor has a contractual relationship only with the Lender, not with the borrower. As a result, the investor has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, an investor generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the investor may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. Thus, the investor assumes the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender, an investor may be treated as a general creditor of the Lender and may not 3 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 investors participate in it. The lack of a liquid secondary market may have an adverse impact on the value of such instruments and will have an adverse impact on an investor's ability to dispose of particular Assignments or Participations in response to a specific event, such as deterioration in the creditworthiness of the borrower. In addition to the creditworthiness of the borrower, an investor's ability to receive payment of principal and interest is also dependent on the creditworthiness of any institution (i.e., the Lender) interposed between the investor and the borrower. Borrowing. Each Portfolio, other than the EMD and Income Portfolios, --------- may borrow in an amount up to 33-1/3% of its total assets (including the amount borrowed), less all liabilities and indebtedness other than the borrowing. The EMD Portfolio may, solely for temporary or emergency purposes, borrow in an amount up to 15% of its total assets (including the amount borrowed), less all liabilities and indebtedness other than the borrowing. The Income Portfolio currently intends to borrow money only for temporary or emergency (net leveraging) purposes, in an amount up to 15% of the value of its total assets. A Portfolio may not purchase securities when borrowings exceed 5% of its total assets. Borrowings create leverage, a speculative factor. To the extent the income derived from the assets obtained with borrowed funds exceeds the interest and other expenses that a Portfolio will have to pay, the Portfolio's net income will be greater than if borrowing were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of borrowing, the net income of the Portfolio will be less than if borrowing were not used, and, therefore, the amount available for distribution to shareholders as dividends will be reduced. Brady Bonds. The Income, High Yield and International Equity ----------- Portfolios may invest in Brady bonds. Debt obligations commonly known as "Brady bonds" are created through the exchange of existing commercial bank loans to foreign entities for new obligations in connection with debt restructurings under a plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady bonds have been issued in connection with the restructuring of the bank loans, for example, of the governments of Mexico, Venezuela and Argentina. As a consequence of substantial volatility in commodity prices and a dramatic increase in interest rates in the early 1980s, many emerging market countries defaulted on syndicated bank loans made during the 1970s and early 1980s. Much of the debt owed by governments to commercial banks was subsequently restructured, involving the exchange of outstanding bank indebtedness for Brady bonds. They may be collateralized or uncollateralized and issued in various currencies (although most are dollar-denominated) and are actively traded in the over-the-counter secondary market. As a pre-condition to issuing Brady bonds, debtor nations are generally required to agree to monetary and fiscal reform measures prescribed by the World Bank or the International Monetary Fund, including liberalization of trade and foreign investments, privatization of state-owned enterprises and setting targets for public spending and borrowing. These policies and programs are designed to improve the debtor country's ability to service its external obligations and promote its growth and development. 4 Dollar-denominated, collateralized Brady bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal due at maturity by U.S. Treasury zero coupon obligations with the same maturity as the Brady bonds. Interest payments on these Brady bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the "residual risk"). In the event of a default with respect to collateralized Brady bonds as a result of which the payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon obligations held as collateral for the payment of principal will not be distributed to investors, nor will such obligations be sold and the proceeds distributed. The collateral will be held by the collateral agent to the scheduled maturity of the defaulted Brady bonds, which will continue to be outstanding, at which time the face amount of the collateral will equal the principal payments which would have then been due on the Brady bonds in the normal course. In addition, in light of the residual risk of Brady bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady bonds, investments in Brady bonds are considered speculative. Commercial Paper and Other Short-Term Corporate Obligations. Each ----------------------------------------------------------- Portfolio may invest in commercial paper and other short-term obligations. Commercial paper consists of unsecured promissory notes issued by banks, corporations and other borrowers. Such instruments are usually discounted, although some are interest-bearing. Except as noted below with respect to variable amount master demand notes, issues of commercial paper normally have maturities of less than nine months and fixed rates of return. Variable rate demand notes include variable amount master demand notes, which are obligations that permit a Portfolio to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, a Portfolio may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and the borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, a Portfolio's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, the Advisers will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and a Portfolio may invest in them only if at the time of investment the borrower meets the criteria that the Trust's Board of Trustees (the "Board") has established. Convertible Securities. Each Portfolio, other than the Money Market ---------------------- and Focus List Portfolios, may invest in convertible securities. The Insiders Select Fund and the Large Cap, Small Cap, Balanced and International Equity Portfolios each may invest in convertible debt securities that are rated no lower than "BBB" by Standard & Poor's ("S&P") or "Baa" by Moody's Investors Service ("Moody's"), or if unrated by these rating organizations, determined to be of comparable quality by the Advisers. The Balanced Portfolio may invest up to 20% of its total assets in convertible securities. 5 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 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 each of the EMD, International Equity and Balanced Portfolios may invest up to 70%, 35% and 60%, respectively, 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 each of the Balanced and International Equity Portfolios may invest up to 5% of its net assets in these instruments. Custodial receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. government, its agencies, instrumentalities, political subdivisions or authorities. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATs"). For certain securities law purposes, custodial receipts are not considered U.S. government securities. Distressed Securities. The EMD Portfolio may invest in distressed --------------------- securities and the High Yield Portfolio may invest up to 20% of its total assets in these securities. Distressed securities are issued by financially troubled or bankrupt companies ("financially troubled issuers") or companies whose securities are, in the view of the Adviser, currently undervalued, out-of-favor or price depressed relative to their long-term potential for growth and income ("operationally troubled issuers"). The securities of financially and operationally troubled issuers may require active monitoring and at times may require the Adviser to participate in bankruptcy or reorganization proceedings on behalf of a Portfolio. To the extent that the Adviser becomes involved in such proceedings, a Portfolio may have a more active participation in the affairs of the issuer than is generally 6 assumed by an investor and such participation may subject the Portfolio to the litigation risks described below. However, no Portfolio invests in the securities of financially or operationally troubled issuers for the purpose of exercising day-to-day management of any issuer's affairs. Bankruptcy and Other Proceedings -- Litigation Risks. When a company seeks relief under the Federal Bankruptcy Code (or has a petition filed against it), an automatic stay prevents all entities, including creditors, from foreclosing or taking other actions to enforce claims, perfect liens or reach collateral securing such claims. Creditors who have claims against the company prior to the date of the bankruptcy filing must petition the court to permit them to take any action to protect or enforce their claims or their rights in any collateral. Such creditors may be prohibited from doing so if the court concludes that the value of the property in which the creditor has an interest will be "adequately protected" during the proceedings. If the bankruptcy court's assessment of adequate protection is inaccurate, a creditor's collateral may be wasted without the creditor being afforded the opportunity to preserve it. Thus, even if an investor holds a secured claim, it may be prevented from collecting the liquidation value of the collateral securing its debt, unless relief from the automatic stay is granted by the court. Security interests held by creditors are closely scrutinized and frequently challenged in bankruptcy proceedings and may be invalidated for a variety of reasons. For example, security interests may be set aside because, as a technical matter, they have not been perfected properly under the Uniform Commercial Code or other applicable law. If a security interest is invalidated, the secured creditor loses the value of the collateral and because loss of the secured status causes the claim to be treated as an unsecured claim, the holder of such claim will almost certainly experience a significant loss of its investment. While the Advisers will scrutinize any security interests, the security interests may be challenged vigorously and found defective in some respect, or a Portfolio may not be able to prevail against the challenge. Debt may be disallowed or subordinated to the claims of other creditors if the creditor is found guilty of certain inequitable conduct resulting in harm to other parties with respect to the affairs of a company filing for protection from creditors under the Federal Bankruptcy Code. Creditors' claims may be treated as equity if they are deemed to be contributions to capital, or if a creditor attempts to control the outcome of the business affairs of a company prior to its filing under the Bankruptcy Code. If a creditor is found to have interfered with the company's affairs to the detriment of other creditors or shareholders, the creditor may be held liable for damages to injured parties. While a Portfolio will attempt to avoid taking the types of action that would lead to equitable subordination or creditor liability, such claims may be asserted and the Portfolio may not be able to defend against them successfully. While the challenges to liens and debt described above normally occur in a bankruptcy proceeding, the conditions or conduct that would lead to an attack in a bankruptcy proceeding could in certain circumstances result in actions brought by other creditors of the debtor, shareholders of the debtor or even the debtor itself in other state or federal proceedings. As is the case in a bankruptcy proceeding, such claims may be asserted and a Portfolio may not be able to defend against them successfully. To the extent that a Portfolio assumes an active role in any legal proceeding involving the debtor, the Portfolio may be prevented from disposing of securities issued by the debtor due to the Portfolio's possession of material, non-public information concerning the debtor. Equity Securities. The Insiders Select Fund and the S&P STARS, Large ----------------- Cap and Small Cap Portfolios each must invest at least 85% of its total assets in equities: the Focus List and International Equity Portfolios must each invest at least 90% and 65%, respectively, of its total assets in 7 equities; and the Balanced Portfolio must invest between 40% and 60% of its total assets in equities. The Income, High Yield and EMD Portfolios each may invest 35%, 20% and 30%, respectively, of its total assets in equity securities, including distressed securities, as described above. These securities include foreign and domestic common stocks or preferred stocks, rights and warrants and debt securities or preferred stock 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, High Yield and EMD Portfolios each must invest at least 65%, 80% and 70%, respectively, of its total assets in fixed income securities; and the Balanced Portfolio must invest between 40% and 60% of its total assets in fixed income securities. The Insiders Select Fund and the S&P STARS, Large Cap and Small Cap Portfolios each may invest up to 15% of its total assets in fixed income securities. The Focus List and International Equity Portfolios each may invest up to 10% and 35%, respectively, of its total assets in fixed income securities. Fixed-income securities include certain corporate debt obligations and U.S. government securities. Although interest-bearing securities are investments that promise a stable stream of income, the prices of such securities typically are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Thus, if interest rates have increased from the time a security was purchased, such security, if sold, might be sold at a price less than its cost. Similarly, if interest rates have declined from the time a security was purchased, such security, if sold, might be sold at a price greater than its cost. In either instance, if the security was purchased at face value and held to maturity, no gain or loss would be realized. Certain securities purchased by a Portfolio, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. Emerging Market Countries. The Income, High Yield, EMD, Balanced and ------------------------- International Equity Portfolios each may invest in the securities of issuers located in countries that are considered to be emerging or developing ("emerging countries") by the World Bank, the International Finance Corporation, or the United Nations and its authorities. 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 Country Loans. The EMD Portfolio may invest in ----------------------------- emerging market country loans. Dollar-denominated fixed and floating rate loans may be arranged through private negotiations between one or more financial institutions and an obligor in an emerging market country ("Emerging Country Loans"). In connection with purchasing participations, an investor generally will have no right to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of setoff against the borrower, and an investor may not directly benefit from any collateral supporting the Emerging Country Loan in which it has purchased the participation. As a result, an investor will assume the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, an investor may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. The EMD Portfolio 8 will acquire participations only if the lender interpositioned between the Portfolio and the borrower is determined by the Adviser to be creditworthy. When the EMD Portfolio purchases assignments from lenders, the Portfolio will acquire direct rights against the borrower of the Emerging Country Loan. However, since assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the EMD Portfolio as the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender. In addition, certain Emerging Country Loans may be or may become subject to agreements to restructure the obligations. These agreements occasionally require the owners of the obligations to contribute additional capital. In such cases, an investor, as a participant, may be required to contribute its pro-rata portion of the funds demanded even though it may have insufficient assets to make such contribution. If this were to occur, the EMD Portfolio could be forced to liquidate loan participations or sub-participations at unfavorable prices to avoid the new money obligations. Emerging Market Securities. The Income, High Yield, EMD, Balanced 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 holders of emerging market country debt securities in the event of default under commercial bank loan agreements. 9 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, EMD and ----------------------------- International Equity Portfolios each may invest in foreign government securities to the extent that these Portfolios may invest in fixed income securities, as described in "Fixed Income Securities" above. Investment in sovereign debt obligations involves special risks not present in debt obligations of U.S. corporate issuers. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due in accordance with the terms of such debt, and an investor may have limited recourse in the event of a default. Periods of economic uncertainty may result in volatile sovereign debt market prices. A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders and the political constraints to which a sovereign debtor may 10 be subject. When an emerging country government defaults on its debt obligations, the investor must pursue any remedies in the courts of the defaulting party itself. Certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank, and may be unwilling or unable to make repayments as they become due. Below-investment- grade debt securities are generally unsecured and may be subordinated to the claims of other creditors, resulting in a heightened risk of loss due to default. Foreign Securities. Each Portfolio may invest in foreign securities. ------------------ The International Equity Portfolio must invest at least 65% (and may invest up to 100%) of its total assets in foreign securities. The High Yield Portfolio may invest up to 25% of its total assets in foreign securities, the Large Cap and Small Cap Portfolios each may invest up to 10% of its total assets in these securities and the Balanced Portfolio may invest up to 5% of its total assets in these securities. Investing in foreign securities involves certain special considerations, including those set forth below, which are not typically associated with investing in U.S. dollar-denominated or quoted securities of U.S. issuers. Investments in foreign securities usually involve currencies of foreign countries. Accordingly, a Portfolio's investment in foreign securities may be affected by changes in currency rates and in exchange control regulations and costs incurred in converting among various currencies. A Portfolio may also be subject to currency exposure as a result of its investment in currency or currency futures. Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the 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, 11 or diplomatic developments which could affect the Portfolio's investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Investment in foreign companies, foreign branches of U.S. banks, foreign banks, or other foreign issuers, may take the form of ownership of securities issued by such entities or may take the form of sponsored and unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") or other similar instruments representing securities of foreign issuers. An ADR is a negotiable receipt, usually issued by a U.S. bank, that evidences ownership of a specified number of foreign securities on deposit with a U.S. depository and entitles the shareholder to all dividends and capital gains of the underlying securities. ADRs are traded on U.S. exchanges or in the U.S. over-the-counter market and, generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security. In the case of sponsored ADRs, the issuer of the underlying foreign security and the depositary enter into a deposit agreement, which sets out the rights and responsibilities of the issuer, the depositary and the ADR holder. Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions, thereby ensuring that ADR holders will be able to exercise voting rights through the depositary with respect to deposited securities. In addition, the depositary usually agrees to provide shareholder communications and other information to the ADR holder at the request of the issuer of the deposited securities. In the case of an unsponsored ADR, there is no agreement between the depositary and the issuer and the depositary is usually under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through voting rights to ADR holders in respect of deposited securities. With regard to unsponsored ADRs, there may be an increased possibility that the Portfolio would not become aware of or be able to respond to corporate actions such as stock splits or rights offerings in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Illiquid Securities. Each Portfolio, other than the Money Market ------------------- Portfolio, may invest up to 15% of its net assets in illiquid securities. The Money Market Portfolio may invest up to 10% of its assets in these securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Limitations on resale may have an adverse effect on the marketability of portfolio securities and an investor might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. An investor might also seek to have such restricted securities registered in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can 12 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 Balanced Portfolio may invest -------------------------------- up to 5% of its net assets in inverse floating rate securities. The interest rate on leveraged inverse floating rate debt instruments ("inverse floaters") resets in the opposite direction from the market rate of interest to which the inverse floater is indexed . An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Accordingly, the duration of an inverse floater may exceed its stated final maturity. Certain inverse floaters may be deemed to be illiquid securities for purposes of the Balanced Portfolio's 15% limitation on investments in such securities. Investment in Other Investment Companies. In accordance with the 1940 ---------------------------------------- Act, the Income and EMD Portfolios each may invest a maximum of up to 10% of the value of its total assets in securities of other investment companies, and the Portfolio may own up to 3% of the total outstanding voting stock of any one investment company. In addition, up to 5% of the value of the Portfolio's total assets may be invested in the securities of any one investment company. 13 Money Market Instruments. Each Portfolio may invest in money market ------------------------ instruments. The S&P STARS, Large Cap and Small Cap Portfolios each may invest 15% of its total assets in these instruments. The Balanced and International Equity Portfolios each may invest 20% and 35%, respectively, of its total assets in these instruments. A Portfolio may invest in money market instruments, including U.S. government obligations, U.S. Treasury bills and commercial paper that is (a) rated at the time of purchase in the highest category by 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, Fitch IBCA or Duff; or (c) if unrated, of comparable quality. A Portfolio may also invest in bank obligations, including, without limitation, time deposits, bankers' acceptances and certificates of deposit, which may be general obligations of the parent bank or may be limited to the issuing branch by the terms of the specific obligations or by government regulation. Banks are subject to extensive governmental regulations, which may limit both the amount and types of loans which may be made and interest rates which may be charged. In addition the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry. Mortgage-Related Securities. The Money Market, Income, High Yield, --------------------------- EMD, Balanced and International Equity Portfolios each may invest in mortgage- related securities. The Balanced Portfolio may invest up to 25% of its total assets in these securities. Mortgage-related securities are backed by mortgage obligations including, among others, conventional 30-year fixed rate mortgage obligations, graduated payment mortgage obligations, 15-year mortgage obligations, and adjustable-rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments of principal (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-related securities are often subject to more rapid prepayment of principal than their stated maturity indicates. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass- throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. A Portfolio may purchase mortgage-related securities at a premium or at a discount. The Income Portfolio may invest in stripped mortgage-related securities that are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities. Each has a specified percentage of the underlying security's principal or interest payments. Mortgage securities may be partially stripped, so that each class receives some interest and some principal, or they may be completely stripped. In that case, all of the interest is distributed to holders of an "interest-only" security, and all of the principal is distributed to holders of a "principal-only" security. Strips can be created for pass-through certificates or collateralized mortgage obligations 14 ("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, EMD, --------------------- Balanced 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. The Balanced Portfolio may invest up to 25% of its total assets in these securities. During the roll period, the seller loses the right to receive principal and interest paid on the securities sold. An investor would benefit, however, to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase or fee income plus the interest earned on the cash proceeds of the securities sold until the settlement date for the forward purchase. The use of this technique will diminish investment performance unless such benefits exceed the income, capital appreciation and gain or loss due to mortgage prepayments that would have been realized on the securities sold as part of the mortgage dollar roll. The Balanced Portfolio will hold and maintain in a segregated account until the settlement date cash or liquid securities in an amount equal to the forward purchase price. Successful use of mortgage dollar rolls depends on the Adviser's ability to predict correctly interest rates and mortgage prepayments. For financial reporting and tax purposes, the Balanced Portfolio treats mortgage dollar rolls as two separate transactions: one involving the purchase of a security and a separate transaction involving a sale. The Balanced Portfolio currently does not intend to enter into mortgage dollar rolls that are accounted for as a financing. 15 Municipal Obligations. The Income and High Yield Portfolios each may --------------------- invest up to 25% and 5% of total assets, respectively, in municipal obligations. The Balanced Portfolio may invest up to 5% of its net assets in these securities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligation and purchased and sold separately. The Portfolios may invest in municipal obligations, the ratings of which correspond with the ratings of other permissible investments. Real Estate Investment Trusts ("REITs"). The Balanced Portfolio may --------------------------------------- invest up to 10% of its total assets in REITs, which are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment companies such as the Portfolio, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Internal Revenue Code of 1986, as amended (the "Code"). A Portfolio will indirectly bear its proportionate share of any expenses incurred by REITs in which it invests in addition to the expenses paid by the Portfolio. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self- liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks. Repurchase Agreements. Each Portfolio may enter into repurchase --------------------- agreements. The Balanced Portfolio may invest up to 20% of its total assets in repurchase agreements. Repurchase agreements are a type of secured lending and typically involve the acquisition of debt securities from a financial institution, such as a bank, savings and loan association or broker-dealer, which then agrees to repurchase the security at a specified resale price on an agreed future date (ordinarily one week or less). The difference between the purchase and resale prices generally reflects the market interest rate for the term of the agreement. A Portfolio's custodian or sub-custodian will have custody of, and will hold in a segregated account, securities that the Portfolio acquires under a repurchase agreement. Repurchase 16 agreements are considered by the SEC to be loans. If the seller defaults, a Portfolio might suffer a loss to the extent the proceeds from the sale of the securities underlying the repurchase agreement are less than the repurchase price. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, a Portfolio will enter into repurchase agreements only with counterparties whose short-term paper is rated no lower than "A1/P1" or whose corporate parent has a rating of no lower than "A1/P1" with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which each Portfolio may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. The Adviser will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. A Portfolio will consider on an ongoing basis the creditworthiness of the institutions with which it enters into repurchase agreements. Reverse Repurchase Agreements. The High Yield and EMD Portfolios each ----------------------------- may borrow by entering into reverse repurchase agreements, pursuant to which, it would sell portfolio securities to financial institutions, such as banks and broker-dealers, and agree to repurchase them at an agreed upon date, price and interest payment. When effecting reverse repurchase transactions, securities of a dollar amount equal in value to the securities subject to the agreement will be maintained in a segregated account with the custodian. A reverse repurchase agreement involves the risk that the market value of the portfolio securities sold by a Portfolio may decline below the price of the securities it must repurchase, which price is fixed at the time the Portfolio enters into such agreement. Standby Commitment Agreements. The EMD Portfolio may invest in ----------------------------- standby commitment agreements, which commit an investor, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the investor at the option of the issuer. The price and coupon of the security are fixed at the time of the commitment. At the time of entering into the agreement an investor receives a commitment fee, regardless of whether the security is ultimately issued, which is typically approximately 0.50% of the aggregate purchase price of the security that the investor has committed to purchase. The EMD Portfolio will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and price that is considered advantageous. The EMD Portfolio will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restriction on resale, will not exceed 10% of its assets determined at the time of the acquisition of such commitment or security. The EMD Portfolio will at all times maintain a segregated account with its custodian of cash or liquid securities in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the purchase price of the securities underlying the commitment. Securities subject to a standby commitment may not be issued and the value of a security, if issued, on the delivery date may be more or less than its purchase price. Because the issuance of the security underlying the commitment is at the option of the issuer, the EMD Portfolio may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, any commitment fee previously paid and expensed will be recorded as income on the expiration date of the standby commitment. 17 Structured Securities. Each Portfolio, other than the Money Market --------------------- Portfolio, may invest in structured or indexed securities. The Balanced Portfolio may invest up to 5% of its total assets in these securities. Structured securities (sometimes referred to as hybrid securities or indexed securities) are considered derivative instruments. The value of the principal of and/or interest on structured securities is linked to, or determined by, reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the "Reference") or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, result in the loss of a Portfolio's investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may entail a greater degree of market risk than other types of fixed-income securities. Structured securities may also be more volatile, less liquid and more difficult to accurately price than less complex securities. Trade Claims. The High Yield and EMD Portfolios each may invest in ------------ trade claims. Trade claims are non-securitized rights of payment arising from obligations other than borrowed funds. Trade claims typically arise when, in the ordinary course of business, vendors and suppliers extend credit to a company by offering payment terms. Generally, when a company files for bankruptcy protection, payments on trade claims cease and the claims are subject to compromise along with the other debts of the company. Trade claims typically are bought and sold at a discount reflecting the degree of uncertainty with respect to the timing and extent of recovery. In addition to the risks otherwise associated with low-quality obligations, trade claims have other risks, including (i) the possibility that the amount of the claim may be disputed by the debtor, (ii) the debtor may have a variety of defenses to assert against the claim under the bankruptcy code, (iii) volatile pricing due to a less liquid market, including a small number of brokers for trade claims and a small universe of potential buyers, (iv) the possibility that a Portfolio may be obligated to purchase a trade claim larger than initially anticipated and (v) the risk of failure of sellers of trade claims to indemnify a Portfolio against loss due to the bankruptcy or insolvency of such sellers. The negotiation and enforcement of rights in connection with trade claims may result in substantial legal expenses to a Portfolio, which may reduce return on such investments. It is not unusual for trade claims 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. 18 Warrants and Stock Purchase Rights. The EMD Portfolio may invest in ---------------------------------- warrants and stock purchase rights. The Insiders Select Fund and the S&P STARS, Large Cap, Small Cap, Balanced and International Equity Portfolios each may invest up to 5% of its total assets in these instruments. Warrants or rights (other than those acquired in units or attached to other securities) entitle the holder to buy equity securities at a specific price for a specific period of time. Warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer. When-Issued and Forward Commitments. Each Portfolio, other than the ----------------------------------- Money Market, EMD and International Equity Portfolios, may invest up to 33-1/3% of its total assets in when-issued or forward commitment transactions. The Money Market and International Equity Portfolios each may invest up to 25% and 20% of its total assets, respectively, in these transactions. The EMD Portfolio may invest up to 15% of its assets in when, as and if issued securities. A Portfolio may purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis. These transactions involve a commitment by the Portfolio to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such commitments are not traded on exchanges. A Portfolio will purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Portfolio may dispose of or negotiate a commitment after entering into it. A Portfolio may realize a capital gain or loss in connection with these transactions. For purposes of determining a Portfolio's duration, the maturity of when-issued or forward commitment securities will be calculated from the commitment date. A Portfolio is required to hold and maintain in a segregated account with the Portfolio's custodian until three days prior to the settlement date, cash and liquid securities in an amount sufficient to meet the purchase price. Alternatively, the Portfolio may enter into offsetting contracts for the forward sale of other securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. The issuance of certain securities depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization, leveraged buyout or debt restructuring ("when, as and if issued securities"). As a result, the period from the trade date to the issuance date may be considerably longer than a typical when-issued trade. Each when-issued transaction specifies a date upon which the commitment to enter into the relevant transaction will terminate if the securities have not been issued on or before such date. In some cases, however, the securities may be issued prior to such termination date, but may not be deliverable until a period of time thereafter. If the anticipated event does not occur and the securities are not issued, a Portfolio would be entitled to retain any funds committed for the purchase, but the Portfolio may have foregone investment opportunities during the term of the commitment. Zero Coupon, Pay-In-Kind Or Deferred Payment Securities. Each ------------------------------------------------------- Portfolio may invest in zero coupon securities and each Portfolio, other than the International Equity Portfolio, may invest in pay-in-kind and other discount securities. Zero coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. While interest payments are not made on such securities, holders of such securities are deemed to have received annually "accreted income." A 19 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 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. 20 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 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 21 securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Portfolio's NAV. Medium rated, below investment-grade and comparable unrated securities tend to offer higher yields than higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. Since these securities generally involve greater risks of loss of income and principal than higher rated securities, investors should consider carefully the relative risks associated with investment in securities which carry medium to lower ratings and in comparable unrated securities. In addition to the risk of default, there are the related costs of recovery on defaulted issues. A Portfolio may attempt to reduce these risks through portfolio diversification and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends and corporate developments. Downgraded Debt Securities. Subsequent to its purchase by a -------------------------- Portfolio, a debt issue may cease to be rated or its rating may be reduced below the minimum required for purchase. Neither event will require the sale of such securities by a Portfolio, but the Advisers will consider such event in determining whether the Portfolio should continue to hold the securities. To the extent that the ratings given by Moody's, S&P, Fitch IBCA or Duff & Phelps Credit Rating Co. ("Duff") may change as a result of changes in such organizations or their rating systems, a Portfolio will attempt to use comparable ratings as standards for its investments in accordance with the investment policies contained in the Prospectus and this SAI. Options, in General. Each Portfolio (other than the Money Market ------------------- Portfolio) may, but is not required to, use derivatives to reduce risk or enhance return, including options on securities and financial indices. A Portfolio may invest up to 5% of its total assets, represented by the premium paid, in the purchase of put and call options. A Portfolio may write covered put or call option contracts in an amount up to 20% of its net assets at the time such option contracts are written. Options on Securities. A Portfolio may purchase put and call options --------------------- and write covered put and call options on debt and equity securities, financial indices (including stock indices), U.S. and foreign government debt securities and foreign currencies. These may include options traded on U.S. or foreign exchanges and options traded on U.S. or foreign over-the-counter markets ("OTC options"), including OTC options with primary U.S. government securities dealers recognized by the Federal Reserve Bank of New York. The purchaser of a call option has the right, for a specified period of time, to purchase the securities subject to the option at a specified price (the "exercise price" or "strike price"). By writing a call option, a Portfolio becomes obligated during the term of the option, upon exercise of the option, to deliver the underlying securities to the purchaser against receipt of the exercise price. When a Portfolio writes a call option, it loses the potential for gain on the underlying securities in excess of the exercise price of the option during the period that the option is open. A Portfolio may purchase call options on securities in order to fix the cost of a future purchase. A Portfolio also may purchase call options as a means of enhancing returns by, for example, participating in an anticipated price increase of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying security, use of this strategy would serve to limit a Portfolio's potential loss to the option premium paid; conversely, if the market price of the underlying security increases above the exercise price and the 22 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. 23 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 24 procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. See "Illiquid Securities." A Portfolio may write only "covered" options. This means that so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the option or an option to purchase the same underlying securities, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option a segregated account consisting of cash or other liquid securities, marked-to-market daily, having a value equal to or greater than the exercise price of the option. Options on Securities Indices. A Portfolio also may purchase and ----------------------------- write call and put options on securities indices in an attempt to hedge against market conditions affecting the value of securities that the Portfolio owns or intends to purchase. Through the writing or purchase of index options, a Portfolio can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike security options, all settlements are in cash and gain or loss depends upon price movements in the market generally (or in a particular industry or segment of the market), rather than upon price movements in individual securities. Price movements in securities will probably not correlate perfectly with movements in the level of an index and, therefore, the Portfolio bears the risk that a loss on an index option would not be completely offset by movements in the price of such securities. When a Portfolio writes an option on a securities index, it will be required to deposit with its custodian, and mark-to-market, eligible securities equal in value to 100% of the exercise price in the case of a put, or the contract value in the case of a call. In addition, where a Portfolio writes a call option on a securities index at a time when the contract value exceeds the exercise price, the Portfolio will segregate and mark-to-market, until the option expires or is closed out, cash or cash equivalents equal in value to such excess. Options on a securities index involve risks similar to those risks relating to transactions in financial futures contracts described below. Also, an option purchased by the Portfolio may expire worthless, in which case the Portfolio would lose the premium paid therefor. Options Straddles. A Portfolio may purchase and write covered ----------------- straddles on securities or bond indices. A long straddle is a combination of a call and a put option purchased on the same security where the exercise price of the put is less than or equal to the exercise price of the call. A Portfolio would enter into a long straddle when the Adviser believes that it is likely that the price of the underlying security will be more volatile during the term of the options than the option pricing implies. A short straddle is a combination of a call and a put written on the same security where the exercise price of the put is less than or equal to the exercise price of the call and where the same issue of security or currency is considered cover for both the put and the call. A Portfolio would enter into a short straddle when the Adviser believes that it is unlikely that the price of the underlying security will be as volatile during the term of the options as the option pricing implies. In the case of a straddle written by a 25 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 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 26 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 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. 27 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 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." 28 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 maintain a segregated asset account with its custodian (or a futures commission merchant) sufficient to cover the Portfolio's obligations with respect to such futures contracts, which will consist of cash and liquid securities marked-to-market daily, in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Portfolio with the custodian (or a futures commission merchant) with respect to such futures contracts. Offsetting the contract by another identical contract eliminates the segregation requirement. With respect to options on futures, there are no segregation requirements for options that are purchased and owned by a Portfolio. However, written options, since they involve potential obligations of the Portfolio, may require segregation of its assets if the options are not "covered" as described under "Options on Futures Contracts." If a Portfolio writes a call option that is not "covered," it must segregate and maintain with the custodian (or a futures commission merchant) for the term of the option cash or liquid securities equal to the fluctuating value of the optioned futures. If a Portfolio writes a put option that is not "covered," the segregated amount would have to be at all times equal in value to 29 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 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. 30 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 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. 31 If a Portfolio purchases an option on a futures contract, it has the right but not the obligation, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call or a short position if the option is a put) at a specified exercise price at any time during the option exercise period. Unlike purchasing an option, which is similar to purchasing insurance to protect against a possible rise or fall of security prices or currency values, the writer or seller of an option undertakes an obligation upon exercise of the option to either buy or sell the underlying futures contract at the exercise price. The writer of a call option has the obligation upon exercise to assume a short futures position and a writer of a put option has the obligation to assume a long futures position. Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account which represents the amount by which the market price of the futures contract at exercise exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. If there is no balance in the writer's margin account, the option is "out of the money" and will not be exercised. A Portfolio, as the writer, has income in the amount it was paid for the option. If there is a margin balance, the Portfolio will have a loss in the amount of the balance less the premium it was paid for writing the option. When a Portfolio writes a put or call option on futures contracts, the option must either be "covered" or, to the extent not "covered," will be subject to segregation requirements. A Portfolio will be considered "covered" with respect to a call option it writes on a futures contract if the Portfolio owns the securities or currency which is deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option. A Portfolio will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option. To the extent a Portfolio is not "covered" as described above with respect to written options, it will segregate and maintain with its custodian for the term of the option cash or liquid securities as described under "Limitations of the Purchase and Sale of the Futures Contracts and Related Options -- Segregation Requirements." Uses of Options on Futures Contracts. Options on futures contracts ------------------------------------ would be used for bona fide hedging, risk management and return enhancement purposes. Position Hedging. A Portfolio may purchase put options on interest rate, currency or other financial index futures contracts to hedge its portfolio against the risk of a decline in the market value of the securities it owns. Anticipatory Hedging. A Portfolio may also purchase call options on futures contracts as a hedge against an increase in the value of securities it intends to acquire. Writing a put option on a futures contract may serve as a partial anticipatory hedge against an increase in the value of securities a Portfolio intends to acquire. If the futures price at expiration of the option is above the exercise price, a Portfolio retains the full amount of the option 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 32 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. 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. 33 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 34 result in successful hedging through the use of futures contracts over the short term. In addition, activities of large traders in both the futures and securities markets involving arbitrage and other investment strategies may result in temporary price distortions. (3) Positions in futures contracts may be closed out only on an exchange or board of trade that provides a secondary market for such futures contracts. Although each Portfolio intends to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract at any particular time. In such event, it may not be possible to close a futures position, and in the event of adverse price movements, a Portfolio would continue to be required to make variation margin payments. (4) As is the case with options, a Portfolio's activities in the futures markets may result in higher fund turnover rates and additional transaction costs in the form of added brokerage commissions; however, the Portfolio may save on commissions by using futures contracts or options thereon as a hedge rather than buying or selling individual securities or currencies in anticipation or as a result of market movements. Guideline for Futures. No Portfolio will purchase or sell futures --------------------- contracts if, immediately thereafter, the sum of the amount of initial margin deposits on the Portfolio's existing futures positions and initial margin deposits would exceed 5% of the market value of the Portfolio's total assets. This guideline may be modified by the board without shareholder vote. Adoption of this guideline will not limit the percentage of the Portfolio's assets at risk to 5%. Forward Foreign Currency Contracts. Each Portfolio, other than the ---------------------------------- Money Market Portfolio, may enter into forward contracts. The High Yield Portfolio may invest up to 5% of its total assets in these instruments. A Portfolio may engage in foreign currency hedging strategies, including among others, settlement hedging, transaction hedging, position hedging, proxy hedging and cross-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 35 poor correlation may exist between movements in the exchange rates of the foreign currencies underlying the Portfolio's proxy hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio assets that are the subject of such proxy-hedges are denominated. A Portfolio may enter into forward contracts to shift its investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Portfolio had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Portfolio to assume the risk of fluctuations in the value of the currency it purchases. Successful use of currency management strategies will depend on the Adviser's skill in analyzing currency values. Currency management strategies may substantially change a Portfolio's investment exposure to changes in currency exchange rates and could result in losses to the Portfolio if currencies do not perform as the Adviser anticipates. For example, if a currency's value rose at a time when the Adviser had hedged a Portfolio by selling that currency in exchange for dollars, the Portfolio would not participate in the currency's appreciation. If the Adviser hedges currency exposure through proxy hedges, a Portfolio could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if the Adviser increases a Portfolio's exposure to a foreign currency and that currency's value declines, the Portfolio will realize a loss. The Adviser's use of currency management strategies may not be advantageous to a Portfolio and the Adviser may not hedge at appropriate times. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are generally charged at any stage for trades. 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 36 make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction. Settlement of hedging transactions involving foreign currencies might be required to take place within the country issuing the underlying currency. Thus, a Portfolio might be required to accept or make delivery of the underlying foreign currency in accordance with any U.S. or foreign regulations regarding the maintenance of foreign banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country. A Portfolio may also 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 37 denominated. A Portfolio may from time to time seek to protect, during the period prior to the remittance, the value of the amount of interest, dividends and net realized capital gains received or to be received in a local currency that it intends to remit out of the foreign country by investing in high-quality short-term U.S. dollar-denominated debt securities of such country and/or participating in the forward currency market for the purchase of U.S. dollars in the country. Suitable U.S. dollar-denominated investments may not be available at the time the Adviser wishes to use them to hedge amounts to be remitted. In addition, dollar-denominated securities may not be available in some or all emerging countries, that the forward currency market for the purchase of U.S. dollars in many emerging countries is not highly developed and that in certain emerging countries no forward market for foreign currencies currently exists or that such market may be closed to investment by a Portfolio. A separate account of a Portfolio consisting of cash or liquid securities equal to the amount of the Portfolio's assets that could be required to consummate forward contracts, when required under applicable laws, will be established with the Portfolio's Custodian. For the purpose of determining the adequacy of the assets in the account, the deposited assets will be valued at market or fair value. If the market or fair value of such assets declines, additional cash or assets will be placed in the account daily so that the value of the account will equal the amount of such commitments by the Portfolio. The segregated account will be marked-to-market on a daily basis. Although the contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate these contracts. In such event, a Portfolio's ability to utilize forward foreign currency exchange contracts may be restricted. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the Portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. 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. 38 At or before the maturity date of a forward contract requiring a Portfolio to sell a currency, the Portfolio may either sell the portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Portfolio will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, a Portfolio may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. A Portfolio would realize a gain or loss as a result of entering into such an offsetting forward currency contract under either circumstance to the extent the exchange rate or rates between the currencies involved moved between the execution dates of the first contract and the offsetting contract. The cost to a Portfolio of engaging in forward currency contracts will vary with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. The use of forward currency contracts will not eliminate fluctuations in the prices of the underlying securities a Portfolio owns or intends to acquire, but it will fix a rate of exchange in advance. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase. Although a Portfolio will value its assets daily in terms of U.S. dollars, the Portfolio does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Portfolio may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. A Portfolio generally will not enter into a forward contract with a term of greater than one year. Swaps, Caps, Floors and Collars. The Income, High Yield, EMD, Large ------------------------------- Cap, Small Cap and Balanced Portfolios each may engage in swaps. The High Yield and the Balanced Portfolios each may invest up to 5% of its total assets in these instruments. A Portfolio may enter into currency swaps, mortgage swaps, index swaps and interest rate swaps, caps, floors and collars. A Portfolio may enter 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 39 receive payments of interest on a notional principal amount from the party selling the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates. A Portfolio will enter into interest rate, mortgage and index swaps only on a net basis, which means that the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Interest rate, index and mortgage swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate, index and mortgage swaps is limited to the net amount of interest payments that a Portfolio is contractually obligated to make. If the other party to an interest rate, index or mortgage swap defaults, a Portfolio's risk of loss consists of the net amount of interest payments that the Portfolio is contractually entitled to receive. In contrast, currency swaps usually involve the delivery of a gross payment stream in one designated currency in exchange for the gross payment stream in another designated currency. Therefore, the entire payment stream under a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. To the extent that the net amount payable under an interest rate, index or mortgage swap and the entire amount of the payment stream payable by a Portfolio under a currency swap or an interest rate floor, cap or collar is held in a segregated account consisting of cash or liquid assets; the Adviser believes that swaps do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Portfolio's borrowing restrictions. A Portfolio will not enter into swap transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to a swap transaction, a Portfolio will have contractual remedies pursuant to the agreements related to the transaction. The use of interest rate, mortgage, index and currency swaps, as well as interest rate caps, floors and collars, is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Adviser is incorrect in its forecasts of market values, interest rates and currency exchange rates, the investment performance of a Portfolio would be less favorable than it would have been if this investment technique were not used. The SEC currently takes the position that swaps, caps, floors and collars are illiquid and thus subject to a Portfolio's 15% limitation on investments in illiquid securities. Lending Portfolio Securities. Each Portfolio, other than the Money ---------------------------- Market Portfolio, may lend its portfolio securities. The High Yield Portfolio may lend portfolio securities with a market value of up to 30% of its total assets and each other Portfolio that can lend portfolio securities can do so 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 40 borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the lender must be able to terminate the loan at any time; (4) the lender must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the lender may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Board must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. The Portfolios (other than the EMD Portfolio) have appointed Custodial Trust Company ("CTC"), an affiliate of BSAM, as Lending Agent. CTC receives a transaction fee for its services. The Trust, CTC, Bear Stearns and other affiliates have applied to the SEC for an exemptive order that would, among other things, permit 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 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, Large Cap and Small Cap Portfolios may engage in short sales. Short sales are transactions in which an investor sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the investor must borrow the security to make delivery to the buyer. The investor then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the investor. Until the security is replaced, the investor is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, an investor also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until a Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing liquid securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the 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. 41 A Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. A Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest a Portfolio may be required to pay in connection with a short sale. Each Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by a Portfolio. Each Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of a Portfolio's net assets. No Portfolio may sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. No Portfolio may sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. Short Sales "Against the Box." The Insiders Select Fund and the ------------------------------ Income, S&P STARS, Large Cap, Small Cap and Balanced Portfolios at no time will have more than 15% of the value of its net assets in deposits on short sales against the box and neither the High Yield Portfolio nor the International Equity Portfolios at any time will have more than 25% of its net assets in deposits on short sales against the box. A Portfolio may make short sales "against the box," a transaction in which a Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date, at which time a Portfolio delivers be security to close the short position. A Portfolio receives the net proceeds from the short sales. It currently is anticipated that each Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Additional Information about the S&P STARS Portfolio's Investment ----------------------------------------------------------------- Strategies. As described in the Prospectus, the S&P STARS Portfolio need not - ---------- sell a security whose S&P STARS ranking has been downgraded and the Portfolio may purchase additional shares of a four star security that was rated five stars at the time it was initially purchased. If the S&P STARS ranking of that security is downgraded to three stars or less, however, that security is counted toward the 15% of total assets that the S&P STARS Portfolio may invest without regard to STARS ranking. Similarly, the S&P STARS Portfolio need not buy back a one star security it has sold short if the STARS ranking of the security is upgraded and the Portfolio may sell short additional shares of a two star security that was rated one star at the time it was initially sold short. If the S&P STARS ranking of that security is upgraded to three or more stars, however, that security is counted toward the 15% of total assets that the S&P STARS Portfolio may invest without regard to STARS ranking. At any time that the S&P STARS Portfolio's holdings of securities rated three stars (or less) and/or short positions in securities rated three stars (or more) exceed 15% of its total assets, the Portfolio may not acquire or sell short additional shares of such securities until the amount so invested declines below 15% of total assets. Investment Restrictions. Each Portfolio has adopted certain ----------------------- investment restrictions as fundamental policies. These restrictions cannot be changed without the approval of a majority of the Portfolio's outstanding voting shares (as defined in the 1940 Act). Investment restrictions that are not 42 fundamental policies may be changed by vote of a majority of the Trustees at any time. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. Fundamental Restrictions 1. Concentration The Money Market Portfolio may not purchase any securities which would cause 25% or more of the value of its total assets at the time of such purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that there is no limitation with respect to investments in U.S. government securities or in bank instruments issued by domestic banks. The Insiders Select Fund and the Income, High Yield, S&P STARS, Large Cap, Small Cap, Focus List, Balanced and International Equity Portfolios each may not purchase any securities which would cause 25% or more of the value of its total assets at the time of such purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that there is no limitation with respect to investments in U.S. government securities. The EMD Portfolio may not invest more than 25% of the value of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry. This limitation is not applicable to investments in obligations of the U.S. government or any of its agencies or instrumentalities. For purposes of the EMD Portfolio's Investment Restriction relating to Concentration, as long as the staff of the SEC considers securities issued or guaranteed as to principal and interest by any single foreign government or any supranational organization in the aggregate to be securities of issuers in the same industry, the Portfolio intends to comply with such SEC staff position. 2. Diversification The Money Market Portfolio may not purchase securities of any one issuer if as a result more than 5% of the value the Portfolio's assets would be invested in the securities of such issuer, except that up to 25% of the value of the Portfolio's total assets may be invested without regard to such 5% limitation and provided that there is no limitation with respect to investments in U.S. government securities and domestic bank instruments. The Income, Large Cap and Small Cap Portfolios each may not invest more than 5% of its assets in the obligations of any single issuer, except that up to 25% of the value of the Portfolio's total assets may be invested, and securities issued or guaranteed by the U.S. government, or its agencies or sponsored enterprises may be purchased, without regard to any such limitation. 3. Single Issuer The Income, Large Cap and Small Cap Portfolios each may not hold more than 10% of the outstanding voting securities of any single issuer. This Investment Restriction applies only with respect to 75% of the Portfolio's total assets. 43 4. Commodities The Money Market Portfolio may not purchase or sell commodities contracts, or invest in oil, gas or mineral exploration or development programs or in mineral leases. The EMD Portfolio may not purchase or sell commodities or commodity contracts, except that the Portfolio may (a) purchase and sell futures contracts, including those relating to securities, currencies and indices, and (b) purchase and sell currencies or securities on a forward commitment or delayed-delivery basis. Each Portfolio, other than the Money Market and EMD Portfolios, may not invest in commodities, except that each such Portfolio may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 5. Real Estate The Money Market Portfolio may not purchase or sell real estate or real estate limited partnerships, provided that the Portfolio may purchase securities of issuers which invest in real estate or interests therein. The EMD Portfolio may not purchase, hold or deal in real estate, including limited partnership interests, or oil, gas or other mineral leases, although the Portfolio may purchase and sell securities that are secured by real estate or interests therein and may purchase mortgage-related securities and may hold and sell real estate acquired by the Portfolio as a result of the ownership of securities. Each Portfolio, other than the Money Market and EMD Portfolios, may not purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but each such Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 6. Borrowing The Money Market Portfolio may not borrow money, except that the Portfolio may (i) borrow money for temporary or emergency purposes from banks or, subject to specific authorization by the SEC, from funds advised by the Adviser to an affiliate of the Adviser, and (ii) engage in reverse repurchase agreements; provided that (i) and (ii) in combination do not exceed one-third of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings). The EMD Portfolio may not borrow money, except from banks, and only if after such borrowing there is asset coverage of at least 300% for all borrowings of the Portfolio; or mortgage, pledge or hypothecate its assets except in connection with such borrowings. This restriction shall not prevent the Portfolio from entering into reverse repurchase agreements, provided that reverse repurchase agreements and any other transactions constituting borrowing by the Portfolio may not exceed 10% of the Portfolio's total assets. In the event that the asset coverage for the Portfolio's borrowings falls below 300%, the Portfolio will reduce within three days the amount of its borrowings in order to provide for 300% asset coverage. (For the purpose of this restriction, collateral arrangements with respect to the writing of options, and, if applicable, futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets and neither such arrangements nor the 44 purchase or sale of futures are deemed to be the issuance of a senior security for purposes of the Investment Limitation related to Senior Securities.) Each Portfolio, other than the Money Market and EMD Portfolios, may not borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33-1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entry into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 7. Lending The Money Market Portfolio may not make loans, except that the Portfolio may (i) purchase or hold debt obligations in accordance with its investment objective and policies, (ii) enter into repurchase agreements for securities, (iii) subject to specific authorization by the SEC, lend money to other funds advised by the Adviser or an affiliate of the Adviser. The EMD Portfolio may not make loans, except that the Portfolio may (a) purchase and hold debt instruments (including bonds, debentures or other debt instruments or interests therein, government obligations, short-term commercial paper, certificates of deposit and bankers acceptances) in accordance with its investment objectives and policies, (b) invest in emerging country loans, participations and assignments, (c) enter into repurchase agreements with respect to portfolio securities, and (d) make loans of portfolio securities. Each Portfolio, other than the Money Market and EMD Portfolios, may not make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, each such Portfolio may lend its portfolio securities in an amount not to exceed 33-1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the SEC and the Board. 8. Underwriting The Money Market Portfolio may not act as an underwriter of securities, except insofar as the Portfolio may be deemed an underwriter under applicable securities laws in selling portfolio securities. The EMD Portfolio may not underwrite securities of other issuers, except insofar as the Portfolio may be deemed to be an underwriter under the Securities Act in selling portfolio securities. Each Portfolio, other than the Money Market and EMD Portfolios, may not act as an underwriter of securities of other issuers, except to the extent each such Portfolio may be deemed an underwriter under the Securities Act, by virtue of disposing of portfolio securities. 9. Senior Securities The Money Market, High Yield, Large Cap, Focus List, Balanced and International Equity Portfolios each may not issue any senior security (as such term is defined in Section 18(f) of the 1940 Act) except that (a) each such Portfolio may engage in transactions that may result in the issuance of senior securities to the extent permitted under applicable regulations and interpretations of the 1940 Act or an exemptive order; (b) each such Portfolio may acquire other securities, the acquisition of which 45 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). The EMD Portfolio may not issue any senior security (as such term is defined in Section 18(f) of the 1940 Act) except as otherwise permitted in the Investment Restrictions related to Borrowing, Short Sales and Lending; and, in the case of the Investment Restrictions related to Short Sales and Lending, provided the coverage requirements enunciated by the SEC are followed. 10. Margin The Insiders Select Fund and the Income, S&P STARS, Large Cap and Small Cap Portfolios each may not purchase securities on margin, but each such Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 11. Unseasoned Issuers The S&P STARS Portfolio may not purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments, in all such companies to exceed 5% of the value of its total assets. 12. Management or Control The S&P STARS Portfolio may not invest in the securities of a company for the purpose of exercising management or control, but it will vote the securities it owns in its portfolio as a shareholder in accordance with its views. Non-Fundamental Restrictions. 1. Pledging Assets Each Portfolio, other than the Money Market and EMD Portfolios may not pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 2. Options The Money Market Portfolio may not write or sell puts, calls, straddles, spreads or combinations thereof. 46 The Insiders Select Fund and the Income, S&P STARS, Large Cap and Small Cap Portfolios each may not purchase, sell or write puts, calls or combinations thereof, except as described in the Prospectus and SAI. 3. Other Investment Companies The Money Market Portfolio may not purchase securities of other investment companies except as permitted under the 1940 Act or in connection with a merger, consolidation, acquisition, or reorganization. Each Portfolio, other than the Money Market and EMD Portfolios, may not purchase securities of other investment companies, except to the extent permitted under the 1940 Act. 4. Unseasoned Issuers The EMD Portfolio may not invest more than 10% of the value of its total assets in securities of issuers having a record, together with predecessors, of less then three years of continuous operation. The Insiders Select Fund and the Large Cap Portfolio each may not purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets. 5. Management or Control The EMD Portfolio may not make investments for the purpose of exercising control or management. Investments by the Portfolio in wholly owned investment entities created under the laws of certain countries will not be deemed the making of investments for the purpose of exercising control or management. The Insiders Select Fund and the Large Cap and Small Cap Portfolios each may not invest in the securities of a company for the purpose of exercising management or control, but each such Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 6. Illiquid Securities The Money Market Portfolio may not knowingly invest more than 10% of the value of its assets in securities that may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. The Insiders Select Fund and the Income, S&P STARS, Large Cap and Small Cap Portfolios each may not enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. The High Yield, Focus List, Balanced and International Equity Portfolios each may not knowingly invest more than 15% of the value of its assets in securities that may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. 47 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, Focus List, Balanced and International Equity Portfolios each may not purchase securities on margin, but each such Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 8. Short Sales The EMD Portfolio may not make short sales of securities, except short sales against-the-box, or maintain a short position. (The Portfolio does not currently intend to make short sales against-the-box.) The Focus List, Balanced and International Equity Portfolios each may not make short sales of securities, other than short sales "against the box." 9. Investments while Borrowing. The Money Market, High Yield, Focus List, Balanced and International Equity Portfolios each may not make additional investments when borrowing exceeds 5% of Portfolio assets. 10. Warrants The Money Market Portfolio may not invest in warrants. MANAGEMENT OF THE TRUST Trustees and officers of the Trust, together with information as to their principal business occupations during at least the last five years, are shown below. There 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
- --------------------------------------------------------------------------------------------------------- Position Name, (age) and address with Trust Principal Occupation - --------------------------------------------------------------------------------------------------------- Peter M. Bren (65) Trustee President of The Bren Co. (realty). 126 East 56th Street New York, NY 10021 - ---------------------------------------------------------------------------------------------------------
48 TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------------------------------- Position Name, (age) and address with Trust Principal Occupation - --------------------------------------------------------------------------------------------------------- Doni L. Fordyce (40) * Trustee Since 1996, Senior Managing Director of Bear 575 Lexington Avenue and Stearns; until 1996, Vice President, Asset New York, NY 10022 President Management Group, Goldman, Sachs & Co. - --------------------------------------------------------------------------------------------------------- John S. Levy (64) Trustee Since 1996, Managing Partner, Fayerweather Fayerweather Capital Partners Capital Partners (a private investment partnership); 595 Madison Avenue from 1984 to 1995, Managing Director and Chief New York, NY 10022 Administrative Officer of the Financial Services Division of Lehman Brothers Inc. and Senior Executive Vice President and Co-Director of International Division of Shearson Lehman/American Express. - --------------------------------------------------------------------------------------------------------- Michael Minikes (56) * Trustee, Senior Managing Director of Bear Stearns; Treasurer 245 Park Avenue Chairman of and Director of The Bear Stearns Companies Inc.; New York, NY 10167 the Board since 1997, Chairman of the Board of Trustees of the Trust; since 1999, Co-President of Bear, Stearns Securities Corp. - --------------------------------------------------------------------------------------------------------- M.B. Oglesby, Jr. (57) Trustee Since 1999, Consultant and Chairman of Oglesby 700 13th St., N.W., Suite 400 Properties, Inc.; since 1997, President and Chief Washington, D.C. 20005 Executive Officer, Association of American Railroads; from 1996 to 1997, Vice Chairman of Cassidy & Associates; from 1989 to 1996, Senior Vice President of RJR Nabisco, Inc.; from 1988 to 1989, White House Deputy Chief of Staff. - --------------------------------------------------------------------------------------------------------- Robert E. Richardson (58) Trustee Retired; from 1990 to 1999, Vice President, 20 Auger Drive Broker/Dealer Department, Mellon Bank, N.A. Suffern, NY 10901 - --------------------------------------------------------------------------------------------------------- Robert Steinberg (54) * Trustee Senior Managing Director of Bear Stearns and 245 Park Avenue Co-Director of its Risk Arbitrage Department; New York, NY 10167 Chairman of Bear Stearns International Credit Committee; Director of The Bear Stearns Companies Inc. - --------------------------------------------------------------------------------------------------------- Alan J. Dixon (71) * Advisory Since 1993, Partner, Bryan Cave (St. Louis law firm); 7535 Claymont Court, Apt. #2 Trustee from 1981 to 1992, United States Senator from Belleville, IL 62223 Illinois. - --------------------------------------------------------------------------------------------------------- Barry Sommers Executive Since 1997, Managing Director and Head of Marketing 575 Lexington Avenue Vice President and Sales for the Trust; from 1995 to 1997, Vice New York, NY 10022 President, Mutual Fund Sales, Goldman, Sachs & Co. - ---------------------------------------------------------------------------------------------------------
49 TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------------------------------- Position Name, (age) and address with Trust Principal Occupation - --------------------------------------------------------------------------------------------------------- Stephen A. Bornstein (56) Vice Managing Director of Bear Stearns, Legal Department; 575 Lexington Avenue President and since 1997, General Counsel, BSAM. New York, NY 10022 Secretary - --------------------------------------------------------------------------------------------------------- Frank J. Maresca (41) Vice Since 1997, Managing Director of Bear Stearns; 575 Lexington Avenue President and Associate Director prior thereto; since 1997, Chief New York, NY 10022 Treasurer Executive Officer and President of BSFM; Executive Vice President prior thereto. - --------------------------------------------------------------------------------------------------------- Vincent L. Pereira (34) Assistant Since 1999, Managing Director of Bear Stearns; 575 Lexington Avenue Treasurer Associate Director prior thereto; since 1997, New York, NY 10022 Executive Vice President, Treasurer and Secretary of BSFM; Vice President of BSFM prior thereto. - ---------------------------------------------------------------------------------------------------------
Prior to March 31, 2000, the Trust paid its Trustees and Advisory Trustee who are not employees of BSAM or its affiliates an annual retainer of $10,000 and a per meeting fee of $500 and reimbursed them for their expenses. The Trust does not compensate its officers. The following table shows the aggregate amount of compensation paid to each Trustee by the Trust for the fiscal year ended March 31, 2000. TRUSTEE COMPENSATION
(3) Pension or (5) (2) Retirement (4) Total Aggregate Benefits Accrued Estimated Compensation (1) Compensation as Part of Annual Benefits from the Trust Name of Board Member from Trust * Trust's Expenses from Retirement Paid to Board Members - --------------------- ------------ ---------------- --------------- --------------------- Peter M. Bren $10,500 None None $10,500 Alan J. Dixon $12,000 None None $12,000 Doni L. Fordyce None None None None John S. Levy ** $ 500 None None $ 500 John R. McKernan, Jr. *** $12,000 None None $12,000 Michael Minikes None None None None M.B. Oglesby, Jr. $12,000 None None $12,000 Robert E. Richardson ** $ 500 None None $ 500 Robert M. Steinberg + None None None None
* Amount does not include reimbursed expenses for attending Board meetings. ** Messrs. Levy and Richardson commenced service on the Board as of February 7, 2000. 50 *** Mr. McKernan resigned from the Board effective April 17, 2000. + Mr. Steinberg commenced service on the Board as of April 17, 2000. Effective April 1, 2000, the Trust pays its Trustees and Advisory Trustees who are not employees of BSAM or its affiliates an annual retainer of $12,500, $1,000 per in-person meeting, $750 per telephone meeting, $500 per Audit Committee meeting (whether in-person or by telephone), and will reimburse them for their expenses. Board members and officers of the Trust, as a group, owned less than 1% of any Portfolio's shares outstanding on June 30, 2000. The Board maintains an Audit Committee, whose members currently are Messrs. Bren (Chairman), Levy and Oglesby. The function of the Audit Committee is to recommend independent auditors and monitor accounting and financial matters. For so long as the Plan described in the section entitled "Management Arrangements-Distribution Plans" remains in effect, the Trustees who are not "interested persons" of the Trust, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Trust. The Board has adopted a retirement policy that (i) requires a Trustee to retire before reaching the age of 75 and (ii) prohibits a Trustee who has reached the age of 72 from standing for re-election to the Board. No meetings of shareholders of the Trust will be held for the sole purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Under the 1940 Act, shareholders of record of not less than two- thirds of the outstanding shares of the Trust may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. Under the Trust's Agreement and Declaration of Trust, the Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any such Trustee when requested in writing to do so by the shareholders of record of not less than 10% of the Trust's outstanding shares. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Management of the Portfolios." Information in this section relating to fees and expenses paid by the EMD Portfolio prior to July 29, 1999 represents amounts paid by the Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of Bear Stearns Investment Trust, another investment company that was managed by BSAM ("BSIT"). General. On December 3, 1997, BSFM, the registered investment adviser ------- of the Portfolios, changed its name to BSAM. On December 4, 1997, BSFM formed a new corporate entity under the laws of Delaware to conduct mutual fund administrative work for the Trust and other affiliated and non-affiliated investment companies. S&P STARS Portfolio. Prior to June 25, 1997, the Portfolio invested ------------------- all of its assets into the S&P STARS Master Series of S&P STARS Fund (the "Master Series"), rather than directly in a portfolio of securities in an arrangement typically referred to as a "master-feeder" structure. Active 51 portfolio management was performed at the Master Series level and BSFM was retained by the Master Series rather than the Portfolio. At a meeting held on June 18, 1997, a majority of the shareholders of the Portfolio approved an investment advisory contract between BSAM and the Portfolio and BSAM began active management of the Portfolio's investments. Historical information provided below for periods prior to June 25, 1997 pertaining to items such as advisory fees, portfolio turnover, and brokerage expenses reflects those items as incurred by the Master Series. Investment Advisory Agreement. BSAM provides investment advisory ----------------------------- services to each Portfolio pursuant to an Amended and Restated Investment Advisory Agreement with the Trust approved by a majority of each Portfolio's shareholders on April 17, 2000. The Advisory Agreement has an initial term of two years from the date of execution and will continue 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 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, President, Chairman of the Board and Director; Robert S. Reitzes, Portfolio Manager and Senior Managing Director; Doni L. Fordyce, Director, Chief Operating Officer, Executive Vice President and Senior Managing Director; Stephen A. Bornstein, General Counsel, Executive Vice President and Managing Director; and Warren J. Spector and Robert M. Steinberg, Directors. The following factors characterize BSAM's overall investment operations: . disciplined fundamental analysis augmented by identifying catalysts for improved financial results; . first-hand knowledge of company management; . focus on long-term market efficiency and timeliness; not timing; . active portfolio management with disciplined sell strategy; and . direct 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. 52 Advisory Fees. The following table shows the monthly fees that the Trust has agreed to pay BSAM for advisory services to the Portfolios, at the indicated annual percentage of the value of a Portfolio's average daily net assets. Advisory Fee - ----------------------------------------------------------------------------------------------------------- Money Market Portfolio 0.20% - ----------------------------------------------------------------------------------------------------------- Income Portfolio 0.45% - ----------------------------------------------------------------------------------------------------------- High Yield Portfolio 0.60% - ----------------------------------------------------------------------------------------------------------- EMD Portfolio 1.00% of assets up to $50 million, 0.85% of assets between $50 million and $100 million and 0.55% of assets above $100 million - ----------------------------------------------------------------------------------------------------------- S&P STARS Portfolio 0.75% - ----------------------------------------------------------------------------------------------------------- Focus List Portfolio 0.65% - ----------------------------------------------------------------------------------------------------------- Large Cap Portfolio 0.75% - ----------------------------------------------------------------------------------------------------------- Small Cap Portfolio 0.75% - ----------------------------------------------------------------------------------------------------------- Insiders Select Fund 1.00% - ----------------------------------------------------------------------------------------------------------- Balanced Portfolio 0.65% - ----------------------------------------------------------------------------------------------------------- International Equity 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 Performance Basic Performance Total (Net of Expenses Including Advisory Fees) and Fee Adjustment Fee Percentage Change in the S&P MidCap 400 Index (%) Rate (%) (%) - --------------------------------------------------------------------------------------------------------------------- +3.00 percentage points or more 1.00% 0.50% 1.50% - --------------------------------------------------------------------------------------------------------------------- +2.75 percentage points or more but less than + 3.00 percentage points 1.00% 0.40% 1.40% - --------------------------------------------------------------------------------------------------------------------- +2.50 percentage points or more but less than + 2.75 percentage points 1.00% 0.30% 1.30% - --------------------------------------------------------------------------------------------------------------------- +2.25 percentage points or more but less than + 2.50 percentage points 1.00% 0.20% 1.20% - --------------------------------------------------------------------------------------------------------------------- +2.00 percentage points or more but less than + 2.25 percentage points 1.00% 0.10% 1.10% - --------------------------------------------------------------------------------------------------------------------- Less than + 2.00 percentage points but more than -2.00 percentage points 1.00% 00.0% 1.00% - --------------------------------------------------------------------------------------------------------------------- - -2.00 percentage points or less but more than -2.25 percentage points 1.00% -0.10% 0.90% - --------------------------------------------------------------------------------------------------------------------- - -2.25 percentage points or less but more than -2.50 percentage points 1.00% -0.20% 0.80% - --------------------------------------------------------------------------------------------------------------------- - -2.50 percentage points or less but more than -2.75 percentage points 1.00% -0.30% 0.70% - --------------------------------------------------------------------------------------------------------------------- - -2.75 percentage points or less but more than -3.00 percentage points 1.00% -0.40% 0.60% - --------------------------------------------------------------------------------------------------------------------- - -3.00 percentage points or less 1.00% -0.50% 0.50% - ---------------------------------------------------------------------------------------------------------------------
53 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 - -------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Paid Waived Paid Waived Paid Waived - ----------------------------------------------------------------------------------------------------------------------------- Money Market $ 244,099 $ 937,253 $ 33,827 $400,797 $ 0 $ 120,582 - ----------------------------------------------------------------------------------------------------------------------------- Income $ 0 $ 58,835 $ 0 $ 50,882 $ 0 $ 91,715 - ----------------------------------------------------------------------------------------------------------------------------- High Yield $ 48,217 $ 601,201 $ 25,136 $416,687 $ 0 $ 28,723** - ----------------------------------------------------------------------------------------------------------------------------- EMD $ 94,451 $ 297,720 $ 88,623 $335,209 $208,721 $ 227,031+ - ----------------------------------------------------------------------------------------------------------------------------- S&P STARS $4,111,635 $1,311,869 $1,291,152 $716,763 $617,316 $ 645,637 - ----------------------------------------------------------------------------------------------------------------------------- Insiders $ 0 $ 229,835 $ 759 $321,688 $ 0 $ 157,031 Select Fund - ----------------------------------------------------------------------------------------------------------------------------- Large Cap $ 0 $ 148,333 $ 0 $165,850 $ 0 $ 140,641 - ----------------------------------------------------------------------------------------------------------------------------- Small Cap $ 33,542 $ 417,207 $ 67,550 $400,694 $ 0 $ 425,409 - ----------------------------------------------------------------------------------------------------------------------------- Focus List $ 0 $ 152,064 $ 0 $ 63,550 $ 0 $ 6,748*** - ----------------------------------------------------------------------------------------------------------------------------- Balanced $ 0 $ 122,347 $ 0 $101,976 $ 0 $ 12,178*** - ----------------------------------------------------------------------------------------------------------------------------- International Equity $ 0 $ 265,757 $ 0 $114,148 $ 0 $ 14,726*** - -----------------------------------------------------------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31, 1998. ** From January 2, 1998 (commencement of investment operations) to March 31, 1998. *** From December 29, 1997 (commencement of investment operations) to March 31, 1998. + This amount includes an administration fee that BSAM paid to BSFM. In addition, BSAM reimbursed the following amounts for the last three fiscal years ended March 31, in order to maintain applicable voluntary expense limitations.
EXPENSES REIMBURSED BY BSAM - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Money Market $ 85,804 $142,863 $ 191,174* - ------------------------------------------------------------------------------- Income $350,343 $299,061 $ 275,119 - ------------------------------------------------------------------------------- High Yield $ 27,552 $121,391 $ 41,870** - ------------------------------------------------------------------------------- EMD $ 83,010 $137,134 $ 158,832 - -------------------------------------------------------------------------------
54
EXPENSES REIMBURSED BY BSAM - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Insiders Select Fund $ 98,749 $ 42,908 $164,325 - ------------------------------------------------------------------------------- Large Cap $205,073 $157,111 $185,275 - ------------------------------------------------------------------------------- Small Cap $ 28,144 $ 28,865 $ 20,648 - ------------------------------------------------------------------------------- Focus List $158,778 $218,241 $ 46,255*** - ------------------------------------------------------------------------------- Balanced $293,853 $224,243 $ 46,910*** - ------------------------------------------------------------------------------- International Equity $ 94,639 $157,011 $ 44,515*** - -------------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31, 1998. ** From January 2, 1998 (commencement of investment operations) to March 31, 1998. *** From December 29, 1997 (commencement of investment operations) to March 31, 1998. 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 has an initial term of two years from the date of execution and will continue 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 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, 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 55 dollar arrangement with a third party. The Consent Order, among other things, censured the Sub-Adviser and Mr. Marvin and ordered the Sub-Adviser to pay disgorgement and prejudgment interest in the aggregate amount of $976,980. The Sub-Adviser and Mr. Marvin were ordered to pay civil money penalties in the amounts of $50,000 and $25,000, respectively. Neither the Sub-Adviser nor Mr. Marvin is prohibited from acting as, or being associated with, an investment adviser. Administration Agreement. BSFM provides certain administrative ------------------------ services to the Trust pursuant to the Administration Agreement with the Trust dated February 22, 1995, as revised April 11, 1995, June 2, 1997, September 8, 1997, February 4, 1998 and July 29, 1999. The Administration Agreement was last approved as of February 7, 2000 and thereafter will be subject to annual approval by (i) the Board or (ii) vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Portfolio, provided that in either event its continuance also is approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement may be terminated without penalty on 60 days' notice by the Board or by vote of the holders of a majority of the Portfolio's shares or, upon not less than 90 days' notice, by BSFM. As to each Portfolio, the Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). For administrative services, the Trust has agreed to pay BSFM a monthly fee at the annual rate of 0.15% of the average daily net assets of each Portfolio other than the Money Market Portfolio. The Trust has agreed to pay BSFM a monthly fee at the annual rate of 0.05% of the average 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 - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Money Market $ 295,338 $108,656 $ 30,167 * - ------------------------------------------------------------------------------- Income $ 19,612 $ 16,960 $ 30,572 - ------------------------------------------------------------------------------- High Yield $ 162,354 $110,456 $ 7,181 ** - ------------------------------------------------------------------------------- EMD+ $ 52,054 $ 0 $ 0 - ------------------------------------------------------------------------------- S&P STARS $1,084,891 $401,582 $252,557 - ------------------------------------------------------------------------------- Insiders Select Fund $ 60,652 $ 68,666 $ 35,492 - ------------------------------------------------------------------------------- Large Cap $ 29,667 $ 33,079 $ 28,128 - ------------------------------------------------------------------------------- Small Cap $ 95,666 $ 99,413 $ 85,085 - ------------------------------------------------------------------------------- Focus List $ 35,090 $ 14,665 $ 1,557 *** - ------------------------------------------------------------------------------- Balanced $ 28,234 $ 23,533 $ 2,810 *** - ------------------------------------------------------------------------------- International Equity $ 48,520 $ 17,122 $ 2,209 *** - -------------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31, 1998. ** From January 2, 1998 (commencement of investment operations) to March 31, 1998. *** From December 29, 1997 (commencement of investment operations) to March 31, 1998. + Prior to July 29, 1999, BSAM paid BSFM administration fees from BSAM's management fee. Administrative Services Agreement. PFPC provides certain --------------------------------- administrative services to the Portfolios pursuant to the Administrative Services Agreement with the Trust dated February 22, 56 1995, as revised September 8, 1997 and July 29, 1999. The Administrative Services Agreement may be terminated upon 60 days' notice by the Trust or PFPC. PFPC may assign its rights or delegate its duties under the Administrative Services Agreement to any wholly owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Trust 30 days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Trust to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide information requested by the Trust in connection with such delegation. For administrative and accounting services, the Trust has agreed to pay PFPC a monthly fee, on behalf of each Portfolio (other than the Money Market Portfolio), equal to an annual rate of 0.10% of the Portfolio's average daily net assets up to $200 million, 0.075% of the next $200 million, 0.05% of the next $200 million and 0.03% of net assets above $600 million, subject to a minimum annual fee of $150,000 per Portfolio (other than the Money Market Portfolio). The Trust has agreed to pay PFPC a monthly fee, on behalf of the Money Market Portfolio, equal to an annual rate of 0.075% of the Portfolio's average daily net assets up to $150 million, 0.04% of the next $150 million, 0.02% of the next $300 million and 0.0125% of net assets above $600 million, subject to a minimum monthly fee of $6,250. The following table shows the administrative services fees that the Portfolios paid to PFPC for the last three fiscal years ended March 31.
ADMINISTRATION FEES PAID TO PFPC - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Money Market $241,645 $139,740 $ 39,813* - ------------------------------------------------------------------------------- Income $ 98,573 $103,612 $ 98,944 - ------------------------------------------------------------------------------- High Yield $137,872 $105,728 $ 5,468** - ------------------------------------------------------------------------------- EMD $ 92,010 $ 92,305 $ 80,121 - ------------------------------------------------------------------------------- S&P STARS $496,050 $256,593 $ 197,706 - ------------------------------------------------------------------------------- Insiders Select Fund $127,821 $127,397 $ 123,259 - ------------------------------------------------------------------------------- Large Cap $ 91,804 $100,173 $ 100,107 - ------------------------------------------------------------------------------- Small Cap $145,164 $147,784 $ 134,255 - ------------------------------------------------------------------------------- Focus List $ 90,839 $ 50,847 $ 5,214*** - ------------------------------------------------------------------------------- Balanced $108,840 $ 64,618 $ 5,367*** - ------------------------------------------------------------------------------- International Equity $108,251 $ 55,768 $ 5,215*** - -------------------------------------------------------------------------------
* From July 14, 1997 (commencement of investment operations) to March 31, 1998. ** From January 2, 1998 (commencement of investment operations) to March 31, 1998. *** From December 29, 1997 (commencement of investment operations) to March 31, 1998. Distribution Plans. Rule 12b-1 adopted by the SEC under Section 12 of ------------------ the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. On April 17, 2000, the Trust's shareholders approved amended and restated distribution plans with respect to Class A, Class B 57 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, 2000 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 Payments Broker-dealers Distributor - ------------------------------------------------------------------------------- Income $16,785 $ 9,709 $ 7,076 - ------------------------------------------------------------------------------- High Yield $200,757 $ 83,549 $ 117,208 - ------------------------------------------------------------------------------- EMD $107,258 $ 81,406 $ 25,852 - ------------------------------------------------------------------------------- S&P STARS $1,728,411 $701,844 $1,026,567 - ------------------------------------------------------------------------------- Insiders Select Fund $107,664 $ 71,237 $ 36,427 - -------------------------------------------------------------------------------
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RULE 12b-1 PAYMENTS Class A - ------------------------------------------------------------------------------- Total Payments Broker-dealers Distributor - ------------------------------------------------------------------------------- Large Cap $45,082 $ 28,990 $ 16,092 - ------------------------------------------------------------------------------- Small Cap $103,526 $ 65,951 $ 37,575 - ------------------------------------------------------------------------------- Focus List $60,899 $ 14,096 $ 46,803 - ------------------------------------------------------------------------------- Balanced $22,544 $ 7,545 $ 14,999 - ------------------------------------------------------------------------------- International Equity $101,146 $ 18,325 $ 82,821 - -------------------------------------------------------------------------------
RULE 12b-1 PAYMENTS Class B - ------------------------------------------------------------------------------- Total Payments Broker-dealers Distributor - ------------------------------------------------------------------------------- Income $ 19,239 $ 1,467 $ 17,772 - ------------------------------------------------------------------------------- High Yield $ 257,571 $29,968 $ 227,603 - ------------------------------------------------------------------------------- EMD $ 17,496 $ 2,395 $ 15,101 - ------------------------------------------------------------------------------- S&P STARS $1,298,365 $60,256 $1,238,109 - ------------------------------------------------------------------------------- Insiders Select Fund $ 75,266 $11,807 $ 63,459 - ------------------------------------------------------------------------------- Large Cap $ 17,711 $ 2,320 $ 15,391 - ------------------------------------------------------------------------------- Small Cap $ 33,413 $ 4,499 $ 28,914 - ------------------------------------------------------------------------------- Focus List $ 62,809 $ 7,975 $ 54,834 - ------------------------------------------------------------------------------- Balanced $ 20,560 $ 3,370 $ 17,190 - ------------------------------------------------------------------------------- International Equity $ 58,422 $ 7,507 $ 50,915 - -------------------------------------------------------------------------------
RULE 12b-1 PAYMENTS Class C - ------------------------------------------------------------------------------- Total Payments Broker-dealers Distributor - ------------------------------------------------------------------------------- Income $ 20,394 $ 14,011 $ 6,383 - ------------------------------------------------------------------------------- High Yield $ 250,616 $112,557 $138,060 - ------------------------------------------------------------------------------- EMD $ 23,447 $ 18,060 $ 5,387 - ------------------------------------------------------------------------------- S&P STARS $1,623,394 $845,923 $777,471 - ------------------------------------------------------------------------------- Insiders Select Fund $ 104,263 $ 90,468 $ 13,795 - ------------------------------------------------------------------------------- Large Cap $ 47,396 $ 40,177 $ 7,219 - ------------------------------------------------------------------------------- Small Cap $ 122,343 $100,379 $ 21,964 - ------------------------------------------------------------------------------- Focus List $ 49,326 $ 28,207 $ 21,119 - ------------------------------------------------------------------------------- Balanced $ 15,911 $ 9,786 $ 6,125 - ------------------------------------------------------------------------------- International Equity $ 62,755 $ 35,740 $ 27,015 - -------------------------------------------------------------------------------
59 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, 2001. These limits do not include any taxes, brokerage commissions, interest on borrowings and extraordinary expenses. Activities of BSAM and its Affiliates and Other Accounts Managed by ------------------------------------------------------------------- BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the - ---- management of, or their interests in, other accounts and other activities of BSAM and Bear Stearns may present conflicts of interest with respect to the Portfolios or limit the Portfolios' investment activities. BSAM, Bear Stearns and its affiliates engage in proprietary trading and advise accounts and funds which have investment objectives similar to those of the Portfolios and/or which engage in and compete for transactions in the same types of securities, currencies and instruments as the Portfolios. BSAM, Bear Stearns and its affiliates will not have any obligation to make available any accounts managed by them, for the benefit of the management of the Portfolios. The results of the Portfolios' investment activities, therefore, may differ from those of Bear Stearns and its affiliates and it is possible that the Portfolios could sustain losses during periods in which BSAM, Bear Stearns and its affiliates and other accounts achieve significant profits on their trading for proprietary and other accounts. From time to time, the Portfolios' activities may be limited because of regulatory restrictions applicable to Bear Stearns and its affiliates, and/or their internal policies designed to comply with such restrictions. PURCHASE AND REDEMPTION OF SHARES The following information supplements and should be read in conjunction with the sections in the Prospectus entitled "How to Buy Shares" and "How to Sell Shares." Information in this section relating to sales and redemption charges retained by Bear Stearns with respect to the EMD 60 Portfolio prior to July 29, 1999 represent amounts related to sales and redemptions of the Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT. Distributor. Bear Stearns serves as the Portfolios' distributor on a ----------- best efforts basis pursuant to an agreement dated February 22, 1995, as revised September 8, 1997, February 4, 1998 and July 29, 1999, which is renewable annually. 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 - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Income - ------- FESL -- A $ 26,800 $ 35,200 $ 11,400 CDSC -- B $ 14,400 $ 600 $ 0 CDSC -- C $ 200 $ 2,000 $ 100 - ------------------------------------------------------------------------------- High Yield - ----------- FESL -- A $ 235,700 $ 525,500 $ 155,700* CDSC -- A $ 20,900 $ 9,000 $ 0 CDSC -- B $ 173,100 $ 58,800 $ 0 CDSC -- C $ 20,400 $ 33,700 $ 0 - ------------------------------------------------------------------------------- EMD - ---- FESL -- A $ 49,800 $ 46,300 $ 88,900 CDSC -- B $ 17,000 $ 13,000 $ 0 CDSC -- C $ 100 $ 2,200 $ 1,900 - ------------------------------------------------------------------------------- S&P STARS - ---------- FESL -- A $6,677,300 $2,061,000 $1,022,800 CDSC -- B $ 352,600 $ 68,300 $ 0 CDSC -- C $ 59,800 $ 24,500 $ 25,800 - ------------------------------------------------------------------------------- Insiders Select - ---------------- Fund ---- FESL -- A $ 71,400 $ 389,100 $ 236,000 CDSC -- B $ 91,900 $ 69,800 $ 0 CDSC -- C $ 2,900 $ 14,400 $ 2,600 - ------------------------------------------------------------------------------- Large Cap - ---------- FESL -- A $ 52,500 $ 86,200 $ 68,300 CDSC -- B $ 12,900 $ 9,000 $ 0 CDSC -- C $ 500 $ 4,500 $ 600 - -------------------------------------------------------------------------------
61
SALES LOADS RETAINED BY BEAR STEARNS - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Small Cap - ---------- FESL -- A $ 78,500 $ 165,300 $ 214,800 CDSC -- B $ 16,700 $ 14,200 $ 0 CDSC -- C $ 1,700 $ 7,600 $ 4,100 - ------------------------------------------------------------------------------- Focus List - ----------- FESL -- A $ 271,400 $ 111,800 $ 71,600** CDSC -- B $ 41,500 $ 30,300 $ 0 CDSC -- C $ 2,200 $ 700 $ 0 - ------------------------------------------------------------------------------- Balanced - --------- FESL -- A $ 23,600 $ 43,000 $ 32,300** CDSC -- A $ 300 $ 0 $ 0 CDSC -- B $ 2,600 $ 0 $ 0 CDSC -- C $ 200 $ 1,500 $ 0 - ------------------------------------------------------------------------------- International Equity - --------------------- FESL -- A $ 641,600 $ 92,700 $ 58,100** CDSC -- B $ 19,900 $ 6,700 $ 0 CDSC -- C $ 4,200 $ 700 $ 0 - -------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998. ** From December 29, 1997 (commencement of investment operations) to March 31, 1998. Purchase Order Delays. The effective date of a purchase order may --------------------- be delayed if PFPC, the Portfolios' transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. Sales Loads-Class A. ------------------- The sales charge may vary depending on the dollar amount invested in each Portfolio. The public offering price for Class A shares of each Portfolio is the NAV of that class plus a sales load, which is imposed in accordance with the following schedules. FRONT END SALES LOAD SCHEDULE AND DEALER CONCESSIONS Fixed Income Funds
- -------------------------------------------------------------------------------------------------------------- TOTAL SALES LOAD ------------------------------------------ Amount of Transaction As a % of offering As a % of NAV Dealer concessions as price 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
62
- -------------------------------------------------------------------------------------------------------------- TOTAL SALES LOAD ------------------------------------------ Amount of Transaction As a % of offering As a % of NAV Dealer concessions as price per share a % of offering price - -------------------------------------------------------------------------------------------------------------- $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 offering As a % of NAV Dealer concessions as price per share a % of offering price - ------------------------------------------------------------------------------------------------------- Less than $50,000 5.50% 5.82% 5.25% $50,000 to less than $100,000 4.75 4.99 4.25 $100,000 to less than $250,000 3.75 3.90 3.25 $250,000 to less than $500,000 2.75 2.83 2.50 $500,000 to less than $1,000,000 2.00 2.04 1.75 $1,000,000 to less than $3,000,000* 0.00 0.00 1.25 $3,000,000 to less than $5,000,000 0.00 0.00 0.75 $5,000,000 and above 0.00 0.00 0.50
________ * There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares up to one year after the date of purchase, a CDSC of 1.00% will be imposed at the time of redemption. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. As described in the Prospectus, an investor may buy Class A shares of a Portfolio at NAV if the purchase is (a) for $1,000,000 or more or (b) made within 60 days of selling a mutual fund that charges a sales load or is subject to a CDSC and not distributed by Bear Stearns. 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 63 (iii) retirement and deferred compensation plans, and trusts used to fund such plans, including, but not limited to, plans or trusts defined in sections 401(a), 403(b) or 457 of the Code, and "rabbi trusts," provided, in each case, the purchase transaction is effected through such broker. The broker may charge a fee for transactions in Portfolio shares. In connection with such purchases, Bear Stearns will offer to pay dealers, from its own resources, the following percentages of the amount purchased: 1.25% of purchases up to $2,999,999; 0.75% of purchases between $3,000,000 and $4,999,999; and 0.50% of purchases above $5,000,000. Set forth below is an example of the method of computing the offering price per share of the Class A shares of each Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the NAV of the Class A shares on March 31, 2000. COMPUTATION OF OFFERING PRICE Fixed Income Funds
- ----------------------------------------------------------- High Income Yield EMD - ----------------------------------------------------------- NAV $11.53 $ 9.78 $10.58 - ----------------------------------------------------------- Sales Charge - 4.50% (4.71% of 0.54 0.46 0.50 NAV) - ----------------------------------------------------------- Offering Price $12.07 $10.24 $11.08 - -----------------------------------------------------------
Equity Funds
- ------------------------------------------------------------------------------------------------------------------- S&P Insiders Large Small Focus Int'l STARS Select Cap Cap List Balanced Equity - ------------------------------------------------------------------------------------------------------------------- NAV $36.42 $16.90 $16.71 $23.10 $21.21 $12.55 $27.84 - ------------------------------------------------------------------------------------------------------------------- Sales Charge - 5.50% (5.82% of 2.12 0.98 0.97 1.34 1.23 0.73 1.62 NAV) - ------------------------------------------------------------------------------------------------------------------- Offering Price $38.54 $17.88 $17.68 $24.44 $22.44 $13.28 $29.46 - -------------------------------------------------------------------------------------------------------------------
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 64 Portfolio to the detriment of the existing shareholders. In this event, the securities would be valued in the same manner as the Portfolio is valued. If the recipient sold such securities, brokerage charges would be incurred. Alternative Sales Arrangements - Class A, Class B, Class C and Class Y ---------------------------------------------------------------------- Shares. The availability of three classes of shares to individual investors - ------ permits an investor to choose the method of purchasing shares that is more beneficial to the investor depending on the amount of the purchase, the length of time the investor expects to hold shares and other relevant circumstances. Investors should understand that the purpose and function of the deferred sales charge and asset-based sales charge with respect to Class B and Class C shares are the same as those of the initial sales charge with respect to Class A shares. Any salesperson or other person entitled to receive compensation for selling Portfolio shares may receive different compensation with respect to one class of shares than the other. Bear Stearns will not accept any order of $500,000 or more of Class B shares or $1 million or more of Class C shares, on behalf of a single investor (not including dealer "street name" or omnibus accounts) because generally it will be more advantageous for that investor to purchase Class A shares of a Portfolio instead. A fourth class of shares may be purchased only by certain institutional investors at NAV (the "Class Y shares"). The four classes of shares each represent an interest in the same portfolio investments of a Portfolio. However, each class has different shareholder privileges and features. The net income attributable to Class A, Class B and Class C shares and the dividends payable on these shares will be reduced by incremental expenses borne solely by that class, including the asset- based sales charge to which these Classes are subject. The methodology for calculating the NAV, dividends and distributions of each Portfolio's Class A, B, C and Y shares recognizes two types of expenses. Expenses that are directly attributable to a class are allocated equally to each outstanding share within that class. Such expenses include (a) Distribution Plan and Shareholder Servicing Plan fees, (b) printing and postage expenses related to preparing and distributing Portfolio materials, shareholder reports, prospectuses and proxies to current shareholders of a specific class; (c) SEC and state registration fees incurred by a specific class; (d) the expense of administrative personnel and services as required to support the shareholders of a specific class; (e) litigation or legal expenses relating solely to a specific class; and (f) Trustees' fees incurred as a result of issues relating to a specific class. Any expenses of a Portfolio not allocated to a particular class is allocated to each class of the Portfolio on the basis of the NAV of that class in relation to the net asset value of the Portfolio. The Adviser, Distributor, Administrator and any other provider of services to the Trust may waive or reimburse the expenses of a particular class or classes, as long as such waiver does not result in cross subsidization between the classes. None of the instructions described elsewhere in the Prospectus or SAI for the purchase, redemption, reinvestment, exchange, or transfer of shares of a Portfolio, the selection of classes of shares, or the reinvestment of dividends apply to Class Y shares. Money Market Portfolio. The regulations of the Comptroller of the ---------------------- Currency provide that funds held in a fiduciary capacity by a national bank approved by the Comptroller to exercise fiduciary powers must be invested in accordance with the instrument establishing the fiduciary relationship and local law. The Trust believes that the purchase of Money Market Portfolio shares by such national banks acting on behalf of their fiduciary accounts is not contrary to applicable regulations if consistent with the particular account and proper under the law governing the administration of the account. 65 DETERMINATION OF NET ASSET VALUE The following information supplements and should be read in conjunction with the section in the Prospectus entitled "How to Buy Shares." Valuation of Portfolio Securities. A Portfolio's NAV is calculated --------------------------------- separately for each class by dividing the total value of the assets belonging to the Portfolio attributable to a class, less the value of any class-specific liabilities charged to the Portfolio by the total number of the Portfolio's shares of that class outstanding. "Assets belonging to" a Portfolio consist of the consideration received upon the issuance of Portfolio shares together with all income, earnings, profits and proceeds derived from the investment thereof, including any proceeds from the sale of such investments, any funds or payments derived from any reinvestment of such proceeds and a portion of any general assets of the Trust not belonging to a particular Portfolio. Assets belonging to a Portfolio are charged with the direct liabilities of the Portfolio and with a share of the general liabilities of the Trust allocated on a daily basis in proportion to the relative net assets of the Portfolio and the Trust's other portfolios. Determinations made in good faith and in accordance with generally accepted accounting principles by the Board as to the allocation of any assets or liabilities with respect to a Portfolio are conclusive. Money Market Portfolio. The Money Market Portfolio uses the amortized cost method of valuation to compute the NAV of its shares for purposes of sales and redemptions. Under this method, the Portfolio values each of its portfolio securities at cost on the date of purchase and thereafter assumes a constant proportionate amortization of any discount or premium until maturity of the security. As a result, the value of the portfolio security for purposes of determining NAV normally does not change in response to fluctuating interest rates. While the amortized cost method seems to provide certainty in portfolio valuation, it may result in valuations of the Portfolio's securities that are higher or lower than the market value of such securities. In connection with its use of amortized cost valuation, the Money Market Portfolio limits the dollar-weighted average maturity of its portfolio to not more than 90 days and does not purchase any instrument with a remaining maturity of more than thirteen months (397 days) (with certain exceptions). The Board has also established procedures pursuant to rules promulgated by the SEC that are intended to stabilize the Portfolio's NAV for purposes of sales and redemptions at $1.00. Such procedures include the determination, at such intervals as the Board deems appropriate, of the extent, if any, to which the Portfolio's NAV calculated by using available market quotations deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1%, the Board will consider promptly what action, if any, should be initiated. If the Board believes that the amount of any deviation from the Portfolio's $1.00 amortized cost price per share may result in material dilution or other unfair results to investors, it will take such steps as it considers appropriate to eliminate or reduce to the extent reasonably practicable any such dilution or unfair results. These steps may include selling portfolio instruments prior to maturity to realize capital gains or losses or to shorten the Portfolio's average portfolio maturity, redeeming shares in kind, reducing or withholding dividends, or utilizing a net asset value per share determined by using available market quotations. Fixed Income Funds. Substantially all Fixed Income Fund investments (including short-term investments) are valued each business day by one or more independent pricing services (the "Pricing Services") approved by the Board. Securities valued by the Pricing Services for which quoted bid prices in the judgment of the Pricing Services are readily available and are representative of the bid side of the market are valued at the mean between the quoted bid prices (as obtained by the Pricing Services from dealers in such securities) and asked prices (as calculated by a 66 Pricing Service based upon its evaluation of the market for such securities). Any assets or liabilities initially expressed in terms of foreign currency will be converted into U.S. dollars at the prevailing market rates for purposes of calculating NAV. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world for such foreign securities, the calculation of NAV does not take place contemporaneously with the determination of prices of such securities. Other investments valued by a Pricing Service are carried at fair value as determined by the Pricing Service, based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Short-term investments that are not valued by a Pricing Service are carried at amortized cost, which approximates the investments' value. Other investments that are not valued by a Pricing Service are valued at the average of the most recent bid and asked prices in the market in which such investments are primarily traded, or at the last sales price for securities traded primarily on an exchange or the national securities market. In the absence of reported sales of investments traded primarily on an exchange or the national securities market, the average of the most recent bid and asked prices is used. Bid price is used when no asked price is available. Expenses and fees, including the investment advisory, administration and distribution fees, are accrued daily and taken into account for the purpose of determining the NAV of a Fixed Income Fund's shares. Because of the differences in operating expenses incurred by each class, the per share NAV of each class may differ. Foreign currency exchange rates are generally determined prior to the close of the NYSE. Occasionally, events affecting the value of foreign securities and such exchange rates occur between the time at which they are determined and the close of the NYSE, which events will not be reflected in a computation of a Portfolio's net asset value. If events materially affecting the value of such securities or assets or currency exchange rates occurred during such time period, the securities or assets would be valued at their fair value as determined in good faith by or under the direction of the Board. The foreign currency exchange transactions of a Portfolio conducted on a spot basis will be valued at the spot rate for purchasing or selling currency prevailing on the foreign exchange market. All cash, receivables and current payables are carried on a Portfolio's books at their face value. Equity Fund securities, including written covered call options, are valued at the last sale price on the securities exchange or national securities market on which such securities primarily are traded. Securities not listed on an exchange or national securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices, except in the case of open short positions where the asked price is used for valuation purposes. Bid price is used when no asked price is available. Any assets or liabilities initially expressed in terms of foreign currency will be converted into U.S. dollars at the prevailing market rates for purposes of calculating NAV. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world for such foreign securities, the calculation of NAV does not take place contemporaneously with the determination of prices of such securities. Forward currency contracts will be valued at the current cost of offsetting the contract. Short-term investments are carried at amortized cost, which approximates value. Any securities or other assets for which recent market quotations are not readily available are valued at fair value as determined in good faith by the Board. Expenses and fees, including the investment advisory, administration and distribution fees, are accrued daily and taken into account for the purpose of determining the NAV of an Equity Portfolio's shares. Because of the differences in operating expenses incurred by each class, the per share NAV of each class will differ. 67 General. Restricted securities, as well as securities or other assets for which market quotations are not readily available, or are not valued by a pricing service approved by the Board, are valued at fair value as determined in good faith by the Trust's Valuation Committee, pursuant to procedures approved by the Board. The Board will review the method of valuation quarterly. In making their good faith valuation of restricted securities, the Valuation Committee generally will take the following factors into consideration: (i) restricted securities which are, or are convertible into, securities of the same class of securities for which a public market exists usually will be valued at market value less the same percentage discount at which purchased (the Board will revise this discount periodically if it believes that the discount no longer reflects the value of the restricted securities); (ii) restricted securities not of the same class as securities for which a public market exists usually will be valued initially at cost; and (iii) any subsequent adjustment from cost will be based upon considerations deemed relevant by the Valuation Committee. New York Stock Exchange Closings. The holidays (as observed) on which -------------------------------- the New York Stock Exchange is closed currently are: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. TAXES The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Dividends, Distributions and Taxes." Information set forth in the Prospectus and this SAI that relates to federal taxation is only a summary of certain key federal tax considerations generally affecting purchasers of shares of the Portfolios. The following is only a summary of certain additional tax considerations generally affecting each Portfolio and its shareholders that are not described in the Prospectus. No attempt has been made to present a complete explanation of the federal tax treatment of the Portfolios or the implications to shareholders, and the discussions here and in each Portfolio's prospectus are not intended as substitutes for careful tax planning. Accordingly, potential purchasers of shares of the Portfolios are urged to consult their tax advisers with specific reference to their own tax circumstances. In addition, the tax discussion in the Prospectus and this SAI is based on tax law in effect on the date of the Prospectuses and this SAI; such laws and regulations may be changed by legislative, judicial, or administrative action, sometimes with retroactive effect. 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 68 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, 2000, the Money Market, High Yield and EMD Portfolios had capital loss carryforwards of $34,543; $175,885 and $780,615, respectively, each of which expires in 2007. As of March 31, 2000, the Money Market, Income, High Yield, EMD, Insiders Select and Focus List Portfolios had capital loss carryforwards of $1,279; $127,545; $5,284,854; $2,855,992; $393,572 and $203,196, respectively, each of which expires in 2008. 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 2000 is 5.79%). The Portfolios will use their best efforts to avoid having an ownership change. However, because of circumstances which may be beyond the control or knowledge of a Portfolio, there can be no assurance that a Portfolio will not have, or has not already had, an ownership change. If a Portfolio has or has had an ownership change, then 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 69 property by the Portfolio and a contemporaneous contract to sell substantially identical property in the future; (2) the transaction is a straddle within the meaning of Section 1092 of the Code; (3) the transaction is one that was marketed or sold to the Portfolio on the basis that it would have the economic characteristics of a loan but the interest-like return would be taxed as capital gain; or (4) the transaction is described as a conversion transaction in the Treasury Regulations. The amount of such gain that is treated as ordinary income generally will not exceed the amount of the interest that would have accrued on the net investment for the relevant period at a yield equal to 120% of the federal long-term, mid-term, or short-term rate, depending on the type of instrument at issue, reduced by the sum of: (1) prior inclusions of ordinary income items from the conversion transaction and (2) the capitalized interest on acquisition indebtedness under Code Section 263(g). However, if a Portfolio has a built-in loss with respect to a position that becomes a part of a conversion transaction, the character of such loss will be preserved upon a subsequent disposition or termination of the position. No authority exists that indicates that the character of the income treated as ordinary under this rule will not pass through to the Portfolios' shareholders. In general, for purposes of determining whether capital gain or loss recognized by a Portfolio on the disposition of an asset is long-term or short- term, the holding period of the asset may be affected (as applicable, depending on the type of the Portfolio involved) if (1) the asset is used to close a short sale (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Portfolio as part of a straddle (which term generally excludes a situation where the asset is stock and Portfolio grants a qualified covered call option (which, among other things, must not be deep-in-the-money) with respect thereto), or (3) the asset is stock and the Portfolio grants an in- the-money qualified covered call option with respect thereto. In addition, a Portfolio may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position. 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 70 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 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. 71 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. 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 72 (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 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. 73 Conversely, if a Portfolio elects to retain its net capital gain, the Portfolio will be subject to tax thereon (except to the extent of any available capital loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain its net capital gain, it is expected that the Portfolio also will elect to have shareholders of record on the last day of its taxable year treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will be required to report his pro rata share of such gain on his tax return as long-term capital gain, will receive a refundable tax credit for his pro rata share of tax paid by the Portfolio on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit. Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the extent it exceeds, the regular income tax and is computed at a maximum marginal rate of 28% for non-corporate taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's alternative minimum taxable income (AMTI) over an exemption amount. For purposes of the corporate AMT, the corporate 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 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. 74 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 31% of ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has failed to provide a correct taxpayer identification number, (2) who is subject to backup withholding for failure to report the receipt of interest or dividend income properly, or (3) who has failed to certify to the Portfolio that it is not subject to backup withholding or is an exempt recipient (such as a corporation). Sale or Redemption of Shares. The 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. If a shareholder (1) incurs a sales load in acquiring shares of a Portfolio, (2) disposes of such shares less than 91 days after they are acquired and (3) subsequently acquires shares of the Portfolio or another fund at a reduced sales load pursuant to a right acquired in connection with the acquisition of the shares disposed of, then the sales load on the shares disposed of (to the extent of the reduction in the sales load on the shares subsequently acquired) shall not be taken into account in determining gain or loss on such shares but shall be treated as incurred on the acquisition of the subsequently acquired shares. Foreign Shareholders. Taxation of a shareholder who, as to the United -------------------- States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ( foreign shareholder ), depends on whether the income from a Portfolio is effectively connected with a U.S. trade or business carried on by such shareholder. If the income from a Portfolio is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends paid to such foreign shareholder will be subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign shareholder in the International Equity Portfolio, S&P 75 STARS Portfolio or Focus List Portfolio may be subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) on the gross income resulting from the Portfolio's election to treat any foreign taxes paid by it as paid by its shareholders, but may not be allowed a deduction against such gross income or a credit against the U.S. withholding tax for the foreign shareholder's pro rata share of such foreign taxes which it is treated as having paid. Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Portfolio, capital gain dividends, and amounts retained by the Portfolio that are designated as undistributed capital gains. If the income from a Portfolio is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends, and any gains realized upon the sale of shares of the Portfolio will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. In the case of foreign noncorporate shareholders, a Portfolio may be required to withhold U.S. federal income tax at a rate of 31% on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Portfolio with proper notification of their foreign status. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Portfolio, including the applicability of foreign taxes. Effect of Future Legislation, State and Local Tax Considerations. The ---------------------------------------------------------------- foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this SAI. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect. Rules of state and local taxation of ordinary income dividends and capital gain dividends from regulated investment companies may differ from the rules for U.S. federal income taxation described above. Shareholders are urged to consult their tax advisers as to the consequences of these and other state and local tax rules affecting investment in the Portfolios. DIVIDENDS -- MONEY MARKET PORTFOLIO The Money Market Portfolio's net investment income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Portfolio's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Portfolio and the general expenses (e.g. legal, accounting and trustees' fees) of the Trust prorated to the Portfolio on the basis of its relative net assets. Any realized short-term capital gains may also be distributed as dividends to Portfolio investors. The Trust uses its best efforts to maintain the NAV of the Money Market Portfolio at $1.00. As a result of a significant expense or realized or unrealized loss incurred by the Portfolio, the Portfolio's NAV may fall below $1.00. 76 PORTFOLIO TRANSACTIONS Information in this section relating to the portfolio turnover of, and brokerage commissions paid by, the EMD Portfolio prior to July 29, 1999 represent the portfolio turnover of, and brokerage commissions paid by, the Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT. Money Market Portfolio. Subject to the general control of the Board, the Adviser is responsible for, makes decisions with respect to, and places orders for all purchases and sales of portfolio securities for the Money Market Portfolio. The Adviser purchases portfolio securities for the Portfolio either directly from the issuer or from dealers who specialize in money market instruments. Such purchases are usually without brokerage commissions. In making portfolio investments, the Adviser seeks to obtain the best net price and the most favorable execution of orders. To the extent that the execution and price offered by more than one dealer are comparable, the Adviser may, in its discretion, effect transactions in portfolio securities with dealers who provide the Trust with research advice or other services. The Adviser may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from the Money Market Portfolio prior to their maturity at their original costs plus interest (interest may sometimes be adjusted to reflect the actual maturity of the securities) if the Adviser believes that the Portfolio's anticipated need for liquidity makes such action desirable. Certain dealers (but not issuers) have charged and may in the future charge a higher price for commercial paper where they undertake to repurchase prior to maturity. The payment of a higher price in order to obtain such an undertaking reduces the yield which might otherwise be received by the Portfolio on the commercial paper. The Board has authorized the Adviser to pay a higher price for commercial paper where it secures such an undertaking if the Adviser believes that the prepayment privilege is desirable to assure the Portfolio's liquidity and such an undertaking cannot otherwise be obtained. Investment decisions for the Money Market Portfolio are made independently from those for another of the other Portfolios or other investment company series or accounts managed by the Adviser. Such other accounts may also invest in the same securities as the Portfolio. When purchases or sales of the same security are made at substantially the same time on behalf of such other accounts, transactions are averaged as to price, and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each account, including the Portfolio. In some instances, this investment procedure may adversely affect the price paid or received by the Portfolio or the size of the position obtainable for the Portfolio. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Portfolio with those to be sold or purchased for such other accounts in order to obtain best execution. The Money Market Portfolio will not execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase agreements with Bear Sterns or the Adviser or any of their affiliated persons (as defined in the 1940 Act), except as permitted by the SEC. In addition, with respect to such transactions, securities, deposits and agreements, the Portfolio will not give preference to service providers with which the Portfolio enters into agreements. The Money Market Portfolio may seek profits through short-term trading. The Portfolio's annual portfolio turnover will be relatively high, but brokerage commissions are normally not 77 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. The Adviser assumes general supervision over placing orders on behalf of each Equity Portfolio for the purchase or sale of investment securities. Allocation of brokerage transactions, including their frequency, is made in the Adviser's best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement the Adviser's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by the Adviser and the Adviser's fees are not reduced as a consequence of the receipt of such supplemental information. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Adviser determines in good faith that such commission is reasonable in terms of the transaction or the overall responsibility of the Adviser to a Portfolio and its other clients and that the total commissions paid by the Portfolio will be reasonable in relation to the benefits to the Portfolio over the long-term. Such supplemental information may be useful to the Adviser in serving each Equity Portfolio and the other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to each Equity Portfolio. Sales of Portfolio shares by a broker may be taken into consideration, and brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds advised or administered by the Adviser being engaged simultaneously in the purchase or sale of the same security. Certain of the Adviser's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to each Equity Portfolio for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, each Portfolio will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Foreign exchange transactions of each Equity Portfolio are made with banks or institutions in the interbank market at prices reflecting a mark-up or mark-down and/or commission. Allocation of Initial Public Offerings ("IPOs"). With respect to investment in large capitalization companies, the Equity Funds do not generally participate in the market for IPOs because the portfolio management team follows 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 78 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. Portfolio Turnover. The portfolio turnover rate is a measure of the average buying and selling activity in a Portfolio. It refers to the percentage of the Portfolio that is bought and sold each year. Portfolio turnover may vary from year to year as well as within a year. The following table shows the portfolio turnover rate for each Portfolio for the last three fiscal years ended March 31. PORTFOLIO TURNOVER
- ------------------------------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Income 158% 107% 245% - ------------------------------------------------------------------------------------------------ High Yield 71% 102% 140%* - ------------------------------------------------------------------------------------------------ EMD 92% 82% 129% - ------------------------------------------------------------------------------------------------ S&P STARS 55% 76% 173% - ------------------------------------------------------------------------------------------------ Insiders Select 76% 100% 116% Fund - ------------------------------------------------------------------------------------------------ Large Cap 56% 38% 62% - ------------------------------------------------------------------------------------------------ Small Cap 66% 84% 90% - ------------------------------------------------------------------------------------------------ Focus List 56% 84% 29%** - ------------------------------------------------------------------------------------------------ Balanced 86% 46% 13%** - ------------------------------------------------------------------------------------------------ International 96% 115% 3%** Equity - ------------------------------------------------------------------------------------------------
* From January 2, 1998 (commencement of investment operations) to March 31, 1998. ** From December 29, 1997 (commencement of investment operations) to March 31, 1998. In periods in which extraordinary market conditions prevail, the Adviser will not be deterred from changing investment strategy as rapidly as needed, in which case higher portfolio turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the SEC thereunder, the Board has determined that transactions for each Portfolio may be executed through Bear Stearns if, in the judgment of the Adviser, the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in the transaction, Bear Stearns charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. In addition, Bear Stearns may directly execute such 79 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, 2000, 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. BROKERAGE COMMISSIONS
- ----------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- % of total transactions % paid to through Bear Total paid Bear Stearns Stearns Total paid Total paid - ----------------------------------------------------------------------------------------------------------------------------- High Yield Total $ 0 0% 0% $ 3,600 $ 0 ----- (Paid to Bear Stearns) $ (0) ($900) $ (0) - ----------------------------------------------------------------------------------------------------------------------------- EMD Total $ 0 0% 0% $ 2,972 $ 0 ----- (Paid to Bear Stearns) $ (0) $ (0) $ (0) - ----------------------------------------------------------------------------------------------------------------------------- S&P STARS Total $1,710,365 41.61% 39.41% $ 780,970 $ 521,114 ----- (Paid to Bear Stearns) $ (711,620) $ (500,570) $(305,271) - ----------------------------------------------------------------------------------------------------------------------------- Insiders Select Total $ 127,168 20.54% 17.12% $ 161,821 $ 59,364 ----- (Paid to Bear Stearns) $ (26,124) $ (15,902) $ (12,445) - ----------------------------------------------------------------------------------------------------------------------------- Large Cap Total $ 42,449 2.35% 2.58% $ 23,164 $ 26,799 ----- (Paid to Bear Stearns) $ (996) $ (1,602) $ (522) - ----------------------------------------------------------------------------------------------------------------------------- Small Cap Total $ 88,939 5.13% 1.25% $ 120,832 $ 302,476 ----- (Paid to Bear Stearns) $ (4,560) $ (3,540) $ (1,728) - ----------------------------------------------------------------------------------------------------------------------------- Focus List Total $ 58,642 100.00% 100.00% $ 23,472 $ 8,274* ----- (Paid to Bear Stearns) $ (58,642) $ (23,472) $ (8,238) - ----------------------------------------------------------------------------------------------------------------------------- Balanced Total $ 20,190 42.48% 39.93% $ 12,605 $ 5,528* ----- (Paid to Bear Stearns) $ (8,576) $ (5,688) $ (2,598) - -----------------------------------------------------------------------------------------------------------------------------
80 BROKERAGE COMMISIONS
- ------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ % of total transactions % paid to through Bear Total paid Bear Stearns Stearns Total paid Total paid - --------------------------------------------------------------------------------------------------------------------- International Equity Total $196,972 0% 0% $ 67,305 $ 16,474* ----- (Paid to Bear Stearns) $ (0) $ (259) $ (0) - --------------------------------------------------------------------------------------------------------------------
* From December 29, 1997 (commencement of investment operations) to March 31, 1998. The following information shows the percentage of commissions for which a Portfolio received research services during the fiscal year ended March 31, 2000: S&P STARS Portfolio: 99.77%; Insiders Select Fund: 99.79%; Large Cap Portfolio: 100%; Small Cap Portfolio: 94.34%; Focus List Portfolio: 100%; Balanced Portfolio: 95.96%; International Equity Portfolio: 99.91%. PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Risk/Return Summary -- Performance." Performance information in this section relating to the EMD Portfolio prior to July 29, 1999 represents the performance information of the Portfolio's predecessor, the Emerging Markets Debt Portfolio, a series of BSIT. Money Market Portfolio. The "yield" and "effective yield" of the Money Market Portfolio are calculated separately for each class of shares and in accordance with the formulas prescribed by the SEC. The seven-day yield for each class of shares in the Portfolio is calculated by determining the net change in the value of a hypothetical preexisting account in the Portfolio having a balance of one share of the class involved at the beginning of the period, dividing the net change by the value of the account at the beginning of the period to obtain the base period return, and multiplying the base period return by 365/7. The net change in the value of an account in the Portfolio includes the value of additional shares purchased with dividends from the original share and dividends declared on the original share and any such additional shares, net of all fees charged to all shareholder accounts in proportion to the length of the base period and the Portfolio's average account size, but 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. 81 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: 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, 2000 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, 2000
- --------------------------------------------------------------------------------------------------------- Income High Yield EMD - --------------------------------------------------------------------------------------------------------- With Without With Without With Without waivers waivers waivers waivers waivers waivers - --------------------------------------------------------------------------------------------------------- Class A 6.24% 2.04% 11.62% 10.98% 6.29% 5.47% - ---------------------------------------------------------------------------------------------------------
82
- ----------------------------------------------------------------------------------------------------------- Income High Yield EMD - ----------------------------------------------------------------------------------------------------------- With Without With Without With Without waivers waivers waivers waivers waivers waivers - ----------------------------------------------------------------------------------------------------------- Class B 5.90% 1.48% 11.51% 10.84% 5.31% 4.60% - ----------------------------------------------------------------------------------------------------------- Class C 5.90% 1.48% 11.51% 10.84% 5.25% 4.68% - ----------------------------------------------------------------------------------------------------------- Class Y 6.90% 2.48% - - - - - -----------------------------------------------------------------------------------------------------------
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 the NAV at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the NAV (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the NAV at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class B and C shares. In such cases, the calculation would not reflect the deduction of the sales load with respect to Class A shares or any applicable CDSC with respect to Class B and C shares, which, if reflected, would reduce the performance quoted. CODE OF ETHICS 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 83 Code of Ethics, access persons which include, among others, trustees and officers of the Trust and employees of the Advisers, are prohibited from engaging in certain conduct, including: (1) the purchase or sale of any security for his or her account or for any account in which he or she has any direct or indirect beneficial interest, without prior approval by the Trust or the applicable Adviser, as the case may be, or without the applicability of certain exemptions; (2) the recommendation of a securities transaction without disclosing his or her interest in the security or issuer of the security; (3) the commission of fraud in connection with the purchase or sale of a security held by or to be acquired by each Portfolio; and (4) the purchase of any securities in an initial public offering or private placement transaction eligible for purchase or sale by each Portfolio without prior approval by the Trust or the applicable Adviser, as the case may be. Certain transactions are exempt from item (1) of the previous sentence, including: (1) in the case of BSAM's Code of Ethics, any securities transaction, or series of related transactions, involving 500 or fewer shares of (i) an issuer with an average monthly trading volume of 100 million shares or more, or (ii) an issuer that has a market capitalization of $1 billion or greater; and (2) transactions in exempt securities or the purchase or sale of securities purchased or sold in exempt transactions. 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 Portfolio. BSAM has the right to use the S&P, Standard & Poor's and STARS trademarks for a fee in connection with the management of mutual funds and access to STARS through S&P's publicly available subscription service. Bear Stearns and S&P entered into a License Agreement dated October 1, 1994 that, among other things, (i) grants Bear Stearns the non-exclusive right to use certain of S&P's proprietary trade names and trademarks for investment companies based, in whole or in part, on the STARS System, (ii) gives S&P the right to terminate the Agreement if Bear Stearns breaches its material terms, S&P ceases to publish STARS, legislative or regulatory changes negatively affect S&P's ability to license its trade names or trademarks, or certain litigation, (iii) provides that Bear Stearns will pay to S&P annual license fees based on a percentage of the net assets of any investment companies subject to the Agreement and (iv) provides for a partial reduction of the license fees to offset certain marketing expenses incurred by Bear Stearns in connection with the Portfolio. 84 STARS is the centerpiece of OUTLOOK, S&P's flagship investment newsletter that has a high net worth readership of 25,000 weekly subscribers. STARS reaches more than 74,000 brokers and investment professionals on their desktop computers through MarketScope, S&P's on-line, real-time equity ----------- evaluation service, which is accessed more than one million times daily. S&P has more than 130 years' experience in providing financial information and analysis, offers more than 60 products and employs more than 50 experienced equity analysts. These analysts consider fundamental factors that are expected to impact growth, including industry and macroeconomic conditions and a company's operations, balance sheet, ability to finance growth, competitive market advantages, earnings per share growth and strength of management. "Standard & Poor's(R)," "S&P(R)," and "STARS(R)" are trademarks of Standard & Poor's and have been licensed for use by Bear Stearns. The S&P STARS Portfolio is not sponsored, managed, advised, sold or promoted by S&P. Focus List Portfolio. The Adviser may be prohibited from buying an attractive stock in the Focus List for legal reasons and thus miss an investment opportunity. Current members of the Focus List Committee are Kathryn Booth and Elizabeth Mackay, CFA. Ms. Booth is the Director of Global Equity Research and a Senior Managing Director of Bear Stearns. She is a member of the Investment Committee and co-chairperson of the Stock Selection Committee. Ms. Booth also manages the Bear Stearns research department's Model Portfolio. Ms. Mackay is a Managing Director and the Chief Investment Strategist for Bear Stearns. Her focus is domestic financial markets. Ms. Mackay determines Bear Stearns' overall asset allocation and advises on market trends and specific investment themes. General. The Trust was organized as a business trust under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated 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 85 the creation of eleven Portfolios. All consideration received by the Trust for shares of a Portfolio and all assets in which such consideration is invested will belong to that Portfolio (subject only to the rights of creditors of the Trust) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, a Portfolio (and as to classes within the Portfolio) are treated separately from those of the other Portfolios (and classes). The Trust has the ability to create, from time to time, new Portfolios without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Trust, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a Portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, Rule 18f-2 exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of Rule 18f-2. The term "majority of the outstanding shares" of a Portfolio means the vote of the lesser of (i) 67% or more of the shares of the Portfolio present at a meeting, if the holders of more than 50% of the outstanding shares of the Portfolio are present or represented by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio. The Trust will send annual and semi-annual financial statements to all its shareholders. As of June 30, 2000, 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 - ----------------------------------------------------------------------------------------------------------- Money Market -- Bear Stearns Securities Corp 5.67% Class Y FBO 102-05752-11, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.86% FBO 04941252-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 16.98% FBO 04941299-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Income -- Class A Bear Stearns Securities Corp 9.99% FBO 051-29339-12, 1 Metrotech Center North Brooklyn NY 11201-3859 - -----------------------------------------------------------------------------------------------------------
86
- ----------------------------------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - ----------------------------------------------------------------------------------------------------------- Portfolio and class Name and address Percentage owned - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 8.47% FBO 222-12842-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Income -- Class B Bear Stearns Securities Corp 7.75% FBO 420-28188-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 9.86% FBO 130-45003-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.31% FBO 348-20543-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Dean Witter Reynolds Customer for 10.18% James A. Moran, P.O.Box 290, Church Street Station (beneficial owner) New York NY 10008-0250 - ----------------------------------------------------------------------------------------------------------- Income -- Class C Bear Stearns Securities Corp 8.46% FBO 498-00055-18, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.34% FBO 498-00056-17, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.85% FBO 220-57282-11, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Income -- Class Y Bear Stearns Securities Corp 11.42% FBO 049-40503-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 11.37% FBO 051-98474-12, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 9.83% FBO 046-03216-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - -----------------------------------------------------------------------------------------------------------
87
- ----------------------------------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - ----------------------------------------------------------------------------------------------------------- Portfolio and class Name and address Percentage owned - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 7.02% FBO 049-40716-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 17.75% FBO 051-37549-11, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.67% FBO 051-32810-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- High Yield -- Class A Mark Pinto 12.43% Trust Fox & Co, DTD 12/16/67 (beneficial owner) P.O.Box 976, New York NY 10268 - ----------------------------------------------------------------------------------------------------------- High Yield -- Class C Bear Stearns Securities Corp 5.64% FBO 028-62790-21, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- EMD -- Class A Balsa & Co, C/O Chase Manhattan Bank 13.86% Grand Central Station, P.O.Box 1768 (beneficial owner) New York NY 10163-1768 - ----------------------------------------------------------------------------------------------------------- Charles Schwab & Co Inc 11.18% FBO Spec A/C for Benefit of Customers Attn: Mutual Funds, 101 Montgomery Street San Francisco CA 94104 - ----------------------------------------------------------------------------------------------------------- EMD -- Class B Fiserv Securities Inc, FAO 60505356 6.44% Attn: Mutual Funds, One Commerce Square, 2005 Market Street Suite 1200, Philadelphia PA 19103 - ----------------------------------------------------------------------------------------------------------- EMD -- Class C Bear Stearns Securities Corp 14.10% FBO 211-18748-10, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 7.23% FBO 031-19213-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- S & P STARS -- Class Y Custodial Trust Company 77.35% Attn: Jonathan Brown ACCT/CTRL 101 Carnegie Center, Princeton NJ 08540 - -----------------------------------------------------------------------------------------------------------
88
- ----------------------------------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - ----------------------------------------------------------------------------------------------------------- Portfolio and class Name and address Percentage owned - ----------------------------------------------------------------------------------------------------------- Insiders Select -- Bear Stearns Securities Corp 9.44% Class Y FBO 722-90359-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.84% FBO 748-51683-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 11.80% FBO 025-06755-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 12.44% FBO 048-33878-17, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Large Cap -- Class A Bear Stearns Securities Corp 9.62% FBO 200-40445-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 9.62% FBO 200-40444-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Large Cap -- Class B Bear Stearns Securities Corp 5.87% FBO 051-35974-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 6.87% FBO 033-89223-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Large Cap -- Class Y Bear Stearns Securities Corp 7.54% FBO 049-40503-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 6.95% FBO 051-37142-12, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Strafe Co, FBO Levin TR FBO Danielle Young 9.39% A C 6863471800, P.O.Box 160, (beneficial owner) Westerville OH 43086-0160 - -----------------------------------------------------------------------------------------------------------
89
- ----------------------------------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - ----------------------------------------------------------------------------------------------------------- Portfolio and class Name and address Percentage owned - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 7.74% FBO 051-32810-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 22.54% FBO 049-41307-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Small Cap -- Class A Bear Stearns Securities Corp 5.82% FBO 049-40985-10, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Small Cap -- Class Y Bear Stearns Securities Corp 7.16% FBO 049-40880-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Custodial Trust Company 20.93% Attn: Jonathan Brown ACCT/CTRL 101 Carnegie Center, Princeton NJ 08540 - ----------------------------------------------------------------------------------------------------------- Robert Morris College 9.01% Endowment Account 724035728, Attn: Ronald Arnold CFO (beneficial owner) 401 South State Street, Chicago IL 60605 - ----------------------------------------------------------------------------------------------------------- Focus List -- Class A The Bear Stearns Co Inc, 21.39% Cash or Deferred Compensation Plan Custodial Trust Co., 115 S Jefferson Road Whippany NJ 07981 - ----------------------------------------------------------------------------------------------------------- Focus List -- Class B Bear Stearns Securities Corp 9.61% FBO 001-00279-10, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Ed Blakey Investments LLC 7.24% 1314 Bay Ridge Drive (beneficial owner) Benton LA 71006-3482 - ----------------------------------------------------------------------------------------------------------- Focus List -- Class C Bear Stearns Securities Corp 13.91% FBO 001-00279-10, 1 Metrotech Center North Brooklyn NY 11201-3859 - -----------------------------------------------------------------------------------------------------------
90
- ----------------------------------------------------------------------------------------------------------- FIVE PERCENT SHAREHOLDERS OF THE PORTFOLIOS - ----------------------------------------------------------------------------------------------------------- Portfolio and class Name and address Percentage owned - ----------------------------------------------------------------------------------------------------------- Balanced -- Class Bear Stearns Securities Corp 18.56% A FBO 001-00315-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 9.28% FBO 051-26132-17, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Balanced -- Class B Bear Stearns Securities Corp 32.53% FBO 001-00315-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Stifel Nicolaus Co Inc 11.58% A C 3124-3738, Jane Faulkner (beneficial owner) 501 North Broadway, St Louis MO 63102 - ----------------------------------------------------------------------------------------------------------- Balanced -- Class C Bear Stearns Securities Corp 48.12% FBO 001-00315-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- First Clearing Corporation 12.08% A C 4113- 3712, Joe A. Dewberry (beneficial owner) 4265 County Road 268, Five Points AL 36855-2801 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.50% FBO 984-62194-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Balanced -- Class Y Bear Stearns Securities Corp 9.32% FBO 051-37445-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 17.30% FBO 049-40526-16, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.83% FBO 049-40474-18, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 8.56% FBO 038-13162-15, 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 26.27% FBO 049-40122-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 7.56% FBO 040-58124-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 6.96% FBO 051-38428-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp 6.10% -- Class A FBO 037-13145-19, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- The Bear Stearns Co Inc 23.25% Cash or Deferred Compensation Plan Custodial Trust Co., 115 S Jefferson Road Whippany NJ 07981 - ----------------------------------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp 5.45% -- Class B FBO 001-00317-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- International Equity Bear Stearns Securities Corp 10.27% -- Class C FBO 001-00317-14, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 5.44% FBO 028-62790-21, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 14.91% FBO 031-19222-15, 1 Metrotech Center North Brooklyn NY 11201-3859 - ----------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp 16.91% FBO 062-30317-13, 1 Metrotech Center North Brooklyn NY 11201-3859 - -----------------------------------------------------------------------------------------------------------
92 CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodians -- General. CTC, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the custodian for each Portfolio other than the EMD Portfolio. Under a custody agreement, CTC holds each Portfolio's securities and keeps all necessary accounts and records. For its services, each Portfolio pays CTC an annual fee of the greater of 0.015% of the value of the domestic assets held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges that are payable monthly. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street, Boston, Massachusetts 02109, is the custodian of the EMD Portfolio's securities and cash and also maintains the Portfolio's accounting records. Brown Brothers has appointed sub-custodians from time to time to hold certain securities purchased by the Portfolio in foreign countries and to hold cash and currencies for the Portfolio. 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 and Brown Brothers pursuant to foreign custody manager agreements dated November 12, 1998 and November 25, 1998, respectively. As Foreign Custody Managers, CTC and Brown Brothers must (a) determine that Trust assets held by a foreign sub- custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market; (b) determine that the Trust's foreign custody arrangements are governed by written contracts in compliance with Rule 17f-5 (or, in the case of a compulsory depository, by such a contract and/or established practices or procedures); and (c) monitor the appropriateness of these arrangements and any material change in the relevant contract, practices or procedures. In determining appropriateness, CTC and Brown Brothers will not evaluate a particular country's investment risks, such as (a) the use of compulsory depositories, (b) such country's financial infrastructure, (c) such country's prevailing custody and settlement practices, (d) nationalization, expropriation or other governmental actions, (e) regulation of the banking or securities industry, (f) currency controls, restrictions, devaluations or fluctuations, and (g) market conditions that affect the orderly execution of securities transactions or affect the value of securities. CTC and Brown Brothers will provide to the Trust quarterly written reports regarding the Trust's foreign custody arrangements. 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, Brown Brothers nor PFPC participates in determining the investment policies of any Portfolio or which securities are to be purchased or sold by any Portfolio. Counsel. Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022, is counsel for the Trust. 93 Independent Auditors. Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281-1434, independent auditors, are the independent auditors of the Trust. FINANCIAL STATEMENTS The Trust's annual report to shareholders for the fiscal year ended March 31, 2000 are separate documents supplied with this SAI, and the financial statements, accompanying notes and report of independent auditors appearing therein are incorporated by reference into this SAI. 94 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 IBCA, Duff 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 A-2 the terms of the obligation. BB indicates the lowest degree of speculation, and C the highest degree of speculation. While such debt likely will have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CI. The rating CI is reserved for income bonds on which no interest -- is being paid. D. Debt rated D is in payment default. The D rating category is used - when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. S&P's letter ratings may be modified by the addition of a plus (+) or minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. S&P Commercial Paper Ratings A-1. The designation A-1 indicates that the degree of safety --- regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus sign (+) designation. A-2. Capacity for timely payment on issues with an A-2 designation is --- strong. However, the relative degree of safety is not as high as for issues designated A-1. Moody's Bond Ratings Aaa. Bonds rated Aaa are judged to be of the best quality. They --- carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements 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 A-3 very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B. Bonds that are rated B generally lack characteristics of the - desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa. Bonds which are rated Caa are of poor standing. Such issues may --- be in default or there may be present elements of danger with respect to principal or interest. Ca. Bonds which are rated Ca represent obligations which are -- speculative in a high degree. Such issues are often in default or have other marked shortcomings. C. Bonds which are rated C are the lowest rated class of bonds and - issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. Moody's Commercial Paper Ratings P-1. The rating Prime-1 (P-1) is the highest commercial paper rating --- assigned by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of short-term promissory obligations, and ordinarily will be evidenced by leading market positions in well established industries, high rates of return on funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well established access to a range of financial markets and assured sources of alternate liquidity. P-2. Issuers (or relating supporting institutions) rated Prime-2 (P- --- 2) have a strong capacity for repayment of short-term promissory obligations. This ordinarily will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Fitch IBCA International Credit Ratings Fitch IBCA's international credit ratings are applied to the spectrum of corporate, structured, and public finance. They cover sovereign (including supranational and subnational), financial, bank, insurance, and other corporate entities and the securities they issue, as well as municipal and other public finance entities, and securities backed by receivables or other financial assets, and counterparties. When applied to an entity, these long- and short- term ratings assess its general creditworthiness on a senior basis. When applied to specific issues and programs, these ratings take into account the relative preferential position of the holder of the security and reflect the terms, conditions, and covenants attaching to that security. International credit ratings assess the capacity to meet foreign currency or local currency commitments. Both "foreign currency" and "local currency" ratings are internationally comparable assessments. The local currency rating measures the probability of payment within the relevant A-4 sovereign state's currency and jurisdiction and therefore, unlike the foreign currency rating, does not take account of the possibility of foreign exchange controls limiting transfer into foreign currency. Fitch IBCA International Long-Term Credit Ratings Investment Grade ---------------- AAA Highest credit quality. `AAA' ratings denote the lowest --- expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA Very high credit quality. `AA' ratings denote a very low -- expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A High credit quality. `A' ratings denote a low expectation of - credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB Good credit quality. `BBB' ratings indicate that there is --- currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. Speculative Grade ----------------- BB Speculative, `BB' ratings indicate that there is a possibility of -- credit risk developing particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B Highly speculative, `B' ratings indicate that significant credit - risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, CC, C High default risk. Default is a real possibility. ---------- Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A `CC' rating indicates that default of some king appears probable. `C' ratings signal imminent default. DDD, DD, and D Default. The ratings of obligations in this category -------------- are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. `DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. `DD' indicates potential recoveries in the range of 50%-90%, and `D' the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated `DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated `DD' and `D' are generally undergoing a formal reorganization or liquidation process; those rated `DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated `D' have a poor prospect for repaying all obligations. A-5 Fitch IBCA International Short-Term Credit Ratings A short term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. F1 Highest credit quality. Indicates the strongest capacity for -- timely payment of financial commitments; they may have an added "+" to denote any exceptionally strong credit feature. F2 Good credit quality. A satisfactory capacity for timely payment -- of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. F3 Fair credit quality. The capacity for timely payment of -- financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. B Speculative. Minimal capacity for timely payment of financial - commitments, plus vulnerability to near-term adverse changes in financial and economic obligations. C High default risk. Default is a real possibility. Capacity for - meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment. D Default. Denotes actual or imminent payment default. - Fitch IBCA may append a "+" or "-" to a rating to denote relative status within major rating categories. Such suffixes are not added to the `AAA' long-term rating category, to categories below `CCC', or to short-term ratings other than `F1'. `NR' indicates that Fitch IBCA does not rate the issuer or issue in question. `Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced. RatingAlert: Ratings are placed on RatingAlert to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. RatingAlert is typically resolved over a relatively short period. Duff Bond Ratings AAA. Bonds rated AAA are considered highest credit quality. The risk --- factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA. Bonds rated AA are considered high credit quality. Protection -- factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A. Bonds rated A have protection factors which are average but - adequate. However, risk factors are more variable and greater in periods of economic stress. BBB. Bonds rated BBB are considered to have below average protection --- factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. A-6 BB, B, CCC, DD, and DP. Debt that possesses one of these ratings is ---------------------- considered to be below investment grade. Although below investment grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B" possesses the risk that obligations will not be met when due. Debt rated "CCC" is well below investment grade and may be in default or have considerable uncertainty as to timely payment of principal, interest or preferred dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents preferred stock with dividend arrearages. Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to indicate the relative position of a credit within the rating category. Duff Commercial Paper Ratings Duff-1. The rating Duff-1 is the highest commercial paper rating ------ assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Duff-2. Paper rated Duff-2 is regarded as having good certainty of ------ timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. Thomson BankWatch Bond Ratings Thomson BankWatch assesses the likelihood of an untimely repayment of principal or interest over the term to maturity of long-term debt and preferred stock which are issued by U.S. commercial banks, thrifts and non-bank banks; non-U.S. banks; and broker-dealers. The following summarizes the two highest rating categories used by Thomson BankWatch for long-term debt ratings: AAA. This designation represents the highest category assigned by --- Thomson BankWatch to long-term debt and indicates that the ability to repay principal and interest on a timely basis is very high. AA. This designation indicates a superior ability to repay principal -- and interest on a timely basis with limited incremental risk versus issues rated in the highest category. 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. A-7 CC. "CC" is applied to issues that are subordinate to other -- obligations rated "CCC" and are afforded less protection in the event of bankruptcy or reorganization. D. In default. - PLUS (+) or MINUS (-). The ratings may include a plus or minus sign --------------------- designation which indicates where within the respective category the issue is placed. Thomson BankWatch Short-Term Ratings Thomson BankWatch short-term ratings assess the likelihood of an untimely payment of principal or interest of debt having a maturity of one year or less. The following summarizes the two highest ratings used by Thomson BankWatch: TBW-1. This designation represents Thomson BankWatch's highest rating ----- category and indicates a very high degree of likelihood that principal and interest will be paid on a timely basis. TBW-2. This designation indicates that while the degree of safety ----- regarding timely payment of principal and interest is strong, the relative degree of safety is not as high as for issues rated TBW-1. A-8 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. (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"). (d)(2) 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. (e)(1) Distribution Agreement dated April 11, 1995 between Registrant and Bear, Stearns & Co. Inc. ("Bear Stearns")./(1)/ (e)(2) Schedule I to the Distribution Agreement, as revised February 10, 1999. (f) None. (g)(1) Custody Agreement dated December 22, 1997 between Registrant, on behalf of each Portfolio other than the Emerging Markets Debt Portfolio (the "EMD Portfolio"), and Custodial Trust Company ("CTC") (Exhibit A revised as of July 13, 2000, Exhibit B revised as of May 4, 2000). (g)(2) Custody Agreement dated January 8, 1993 between Registrant and Brown Brothers Harriman & Co. ("Brown Brothers"), with respect to the EMD Portfolio, as amended May 15, 1997. (g)(3) Foreign Custody Manager Agreement with CTC dated November 12, 1998. (g)(4) Foreign Custody Manager Delegation Agreement with Brown Brothers dated November 25, 1998. (h)(1) Form of Dealer Agreement. (h)(2) Form of Financial Institution Agency Agreement. _____________________ /(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. C-1 (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 February 7, 2000. (h)(5) Administrative Services Agreement, as amended February 22, 1995, between Registrant and PFPC Inc./(1)/ (h)(6) Exhibit A to the PFPC Administrative Services Agreement, as revised July 29, 1999. (i)(1) Opinion and consent of Kramer Levin Naftalis & Frankel LLP. (i)(2) Opinion of Goodwin, Procter and Hoar LLP, Massachusetts counsel to Registrant. (j) 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. (m)(2) Form of 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./(2)/ (n) Rule 18f-3 Plan, as revised February 10, 1999./(2)/ (p)(1) Code of Ethics of Registrant dated November 12, 1998. (p)(2) Code of Ethics of BSAM dated November 12, 1998, as revised June 25, 1999. (p)(3) Code of Ethics of Marvin & Palmer, as revised April 6, 2000. Certificate of Corporate Secretary./(1)/ Powers of Attorney of Peter M. Bren, Jr., Michael Minikes and M.B. Oglesby, Jr./(2)/ Powers of Attorney of Doni L. Fordyce, John S. Levy, Robert E. Richardson and Robert Steinberg. Item 24. Persons Controlled by or Under Common Control with the Trust ------------------------------------------------------------ Not Applicable ____________________ /(2)/ 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 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). 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 245 Park Avenue, New York, New York 10167, except as set forth below. Name Positions and Offices with Bear Stearns - ---- --------------------------------------- Executive Officers - ------------------ Alan C. Greenberg Chairman of the Board; Chairman of the Executive Committee James E. Cayne Chief Executive Officer; President Bruce E. Geismar Chief Operations Officer Kenneth L. Edlow Secretary Michael Minikes* Treasurer _________________________ * Mr. Minikes is also Chairman of the Board of Trustees of Registrant. C-3 Mark E. Lehman Executive Vice President; General Counsel; Chief Legal Officer Alan D. Schwartz Executive Vice President Warren J. Spector Executive Vice President Samuel L. Molinaro Jr. Chief Financial Officer; Senior Vice President -- Finance E. John Rosenwald Jr. Vice Chairman of the Board Michael L. Tarnopol Vice Chairman of the Board Michael J. Abetamarco ** Controller Peter D. Cherasia Chief Information Officer; Director eCommerce Ronald Hersch Director eCommerce Jeffrey M. Lipman Assistant Secretary Marc H. Feuer Assistant Secretary Robert J. Schwartz Assistant Treasurer Directors - --------- Denis A. Bovin Daniel L. Keating Michael Minikes Alan D. Schwartz James E. Cayne John L. Knight Samuel L. Molinaro Jr. Warren J. Spector Peter D. Cherasia Mark E. Lehman Donald R. Mullen Jr. Robert M. Steinberg Ralph R. Cioffi David A. Liebowitz Fares D. Noujaim Donald W. Tang Barry J. Cohen Bruce M. Lisman Craig M. Overlander Michael L. Tarnopol Wendy L. de Monchaux Roland N. Livney Stephen E. Raphael Michael J. Urfirer Bruce E. Geismar Jeffrey Mayer E. John Rosenwald Jr. Eli Wachtel Alan C. Greenberg Gary M. McLoughlin Richard B. Sachs Uzi Zucker
Director Emeritus - ----------------- John H. Slade Item 28. Location of Accounts and Records -------------------------------- 1. Bear Stearns Funds Management Inc. 575 Lexington Avenue New York, New York 10022 (records relating to operations of Registrant) 2. The Bear Stearns Funds 575 Lexington Avenue New York, New York 10022 (records relating to Registrant) 3. Bear Stearns Asset Management Inc. 575 Lexington Avenue New York, New York 10022 (advisory records) 4. Custodial Trust Company 101 Carnegie Center Princeton, New Jersey 08540 (records of Registrant and BSAM) ________________________ ** Mr. Abatemarco's principal business address is 1 Metrotech Center North, Brooklyn, New York 11201-3859. C-4 5. PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, Delaware 19809 (certain accounting, financial and 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) Item 29. Management Services ------------------- Not Applicable Item 30. Undertakings - ------- ------------ None. C-5 SIGNATURES Pursuant to the requirements of the Securities Act and the Investment Company Act, Registrant certifies that it meets all of the requirements for effectiveness of this registration statement under Rule 485(b) under the Securities Act and 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 20th day of July, 2000. THE BEAR STEARNS FUNDS (Registrant) By: /s/ Doni L. Fordyce ------------------- Doni L. Fordyce President Pursuant to the requirements of the Securities Act, this post- effective amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Doni L. Fordyce - --------------------------- President (Principal Executive Officer) and July 20, 2000 Doni L. Fordyce Trustee /s/ Frank J. Maresca - --------------------------- Vice President and Treasurer July 20, 2000 Frank J. Maresca (Principal Financial and Accounting Officer) /s/ _______________________* Peter M. Bren Trustee July 20, 2000 /s/ _______________________* John S. Levy Trustee July 20, 2000 /s/ _______________________* M.B. Oglesby, Jr. Trustee July 20, 2000 /s/ _______________________* Michael Minikes Trustee July 20, 2000 /s/ _______________________* Robert E. Richardson Trustee July 20, 2000 /s/ _______________________* Robert Steinberg Trustee July 20, 2000 * By: /s/ Frank J. Maresca --------------------- Frank J. Maresca, Attorney-in-Fact, July 20, 2000
C-6 THE BEAR STEARNS FUNDS INDEX TO EXHIBITS EX-99.a Amendment to Agreement and Declaration of Trust dated May 4, 2000. EX-99.d(1) Amended and Restated Investment Advisory Agreement dated April 17, 2000 between Registrant and Bear Stearns Asset Management Inc. ("BSAM"). EX-99.d(2) Amended and Restated Sub-Investment Advisory Agreement dated April 17, 2000 between BSAM and Marvin & Palmer Associates, Inc., with respect to the International Equity Portfolio. EX-99.e Schedule I to the Distribution Agreement, as revised February 10, 1999. EX-99.g(1) Custody Agreement dated December 22, 1997 between Registrant, on behalf of each Portfolio other than the Emerging Markets Debt Portfolio (the "EMD Portfolio"), and Custodial Trust Company ("CTC") (Exhibit A revised as of July 13, 2000, Exhibit B revised as of May 4, 2000). EX-99.g(2) Custody Agreement dated January 8, 1993 between Registrant and Brown Brothers Harriman & Co. ("Brown Brothers"), with respect to the EMD Portfolio, as amended May 15, 1997. EX-99.g(3) Foreign Custody Manager Agreement with CTC dated November 12, 1998. EX-99.g(4) Foreign Custody Manager Delegation Agreement with Brown Brothers dated November 25, 1998. EX-99.h(1) Form of Dealer Agreement. EX-99.h(2) Form of Financial Institution Agency Agreement. EX-99.h(3) Schedule I to the BSAM Administration Agreement, as revised February 7, 2000. EX-99.h(4) Exhibit A to the PFPC Administrative Services Agreement, as revised July 29, 1999. EX-99.i(1) Opinion and consent of Kramer Levin Naftalis & Frankel LLP. EX-99.i(2) Opinion of Goodwin, Procter and Hoar LLP, Massachusetts counsel to Registrant. EX-99.j Consent of Deloitte & Touche LLP. EX-99.m Forms of 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. EX-99.p(1) Code of Ethics of Registrant dated November 12, 1998. EX-99.p(2) Code of Ethics of BSAM dated November 12, 1998, as revised June 25, 1999. EX-99.p(3) Code of Ethics of Marvin & Palmer, as revised April 6, 2000. EX-99 Powers of Attorney of Doni L. Fordyce, John S. Levy, Robert E. Richardson and Robert Steinberg. C-7 EX-99.A 2 0002.txt AMENDMENT TO AGREEMENT AND DECLARATION OF TRUST EXHIBIT A THE BEAR STEARNS FUNDS ARTICLES OF AMENDMENT WHEREAS, Article IX, Section 8 of the Agreement and Declaration of Trust dated September 29, 1994, as amended (the "Declaration of Trust"), of The Bear Stearns Funds (the "Trust") provides that the Declaration of Trust may be amended by an instrument in writing signed by a majority of the then Trustees when authorized so to do by a vote of Shareholders holding a majority of the Shares outstanding and entitled to vote. NOW THEREFORE, the undersigned, being a majority of the Trustees of the Trust, hereby certify to the Secretary of The Commonwealth of Massachusetts and to the City Clerk of The City of Boston that, pursuant to a vote of Shareholders holding a majority of the Shares outstanding and entitled to vote on such matters, the Declaration of Trust is hereby amended as follows: FIRST: The Declaration of Trust is hereby amended by striking out the second sentence of Article V, Section 1 and inserting in lieu thereof the following: "Each holder of Shares entitled to vote on a matter submitted to a vote of Shareholders shall be entitled to one vote for each dollar of net asset value standing in such holder's name on the books of the Trust with respect to such Shares (except that in the election of Trustees said vote may be cast for as many persons as there are Trustees to be elected)." SECOND: The Declaration of Trust is hereby amended by striking out Article IX, Section 8 and inserting in lieu thereof the following: " Section 8. Amendments. The provisions of this Declaration of Trust --------- ---------- may be amended at any time by an instrument in writing signed by a majority of the then Trustees (or by an officer of the Trust pursuant to the vote of a majority of such Trustees). Any such amendment to this Declaration of Trust need not be approved by Shareholders unless such approval is required by applicable law. If Shareholder approval of an amendment to this Declaration of Trust is required by applicable law, such amendment may be adopted at any time by an instrument in writing signed by a majority of the then Trustees (or by an officer of the Trust pursuant to a vote of a majority of such Trustees) when authorized to do so by the vote of Shareholders in accordance with applicable law and Article V hereof. Subject to the foregoing, any such amendment shall be effective as of any prior or future time as provided in the instrument containing the terms of such amendment or, if there is no provision therein with respect to effectiveness, upon the execution of such instrument and of a certificate (which may be a part of such instrument) executed by a Trustee or officer of the Trust to the effect that such amendment has been duly adopted." THIRD: The Declaration of Trust is hereby amended by striking out Article V, Section 1, subsection (iv) and inserting in lieu thereof the following: "(iv) with respect to an amendment to this Declaration of Trust as provided in Article IX, Section 8," FOURTH: The Declaration of Trust is hereby amended by striking out the sixth and seventh sentences of Article V, Section 1 and inserting in lieu thereof the following: "Proxies may be given by or on behalf of a Shareholder orally or in writing or pursuant to any computerized, telephonic, or mechanical data gathering process. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed or otherwise given by or on behalf of any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed or otherwise given by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger." FIFTH: The Declaration of Trust is hereby amended by adding new Section 9 to Article IX as follows: " Section 9. Reorganization of Trust or Series Created After April 17, -------- -------------------------------------------------------- 2000. At any time, by vote of a majority of the Trustees then in office, ---- the Trust, or any one or more series of Shares created after April 17, 2000, may, either as the successor, survivor, or non-survivor, (1) consolidate or merge with one or more other trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) organized under the laws of The Commonwealth of Massachusetts or any other state of the United States, to form a consolidated or merged trust, partnership, limited liability company, association or corporation (or series of any of the foregoing) under the laws of which any one of the constituent entities is organized, or (2) transfer a substantial portion of its assets to one or more other trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) organized under the laws of The Commonwealth of Massachusetts or any other state of the United States, or have one or more such trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) transfer a substantial portion of its assets to it, any such consolidation, merger or transfer to be upon such terms and conditions as are specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the Trust, or one or more of such series of Shares as the case may be, in connection therewith." 2 SIXTH: The Declaration of Trust is hereby amended by adding new Section 10 to Article IX as follows: " Section 10. Certain Other Reorganizations. At any time, by vote of a ---------- ----------------------------- majority of the Trustees then in office, the series of Shares designated as the Large Cap Value Portfolio and the Small Cap Value Portfolio, may, either as the successor, survivor, or non-survivor, (1) consolidate or merge with one or more other trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) organized under the laws of The Commonwealth of Massachusetts or any other state of the United States, to form a consolidated or merged trust, partnership, limited liability company, association or corporation (or series of any of the foregoing) under the laws of which any one of the constituent entities is organized, or (2) transfer a substantial portion of its assets to one or more other trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) organized under the laws of The Commonwealth of Massachusetts or any other state of the United States, or have one or more such trusts, partnerships, limited liability companies, associations or corporations (or series of any of the foregoing) transfer a substantial portion of its assets to it, any such consolidation, merger or transfer to be upon such terms and conditions as are specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by one or more of such series of Shares in connection therewith." WITNESS our hands this 4th day of May, 2000. By: /s/ Peter M. Bren ----------------------------------- Peter M. Bren, Trustee By: /s/ Doni L. Fordyce ----------------------------------- Doni L. Fordyce, Trustee By: /s/ John S. Levy ----------------------------------- John S. Levy, Trustee By: /s/ Michael Minikes ----------------------------------- Michael Minikes, Trustee 3 By: /s/ M.B. Oglesby, Jr. ----------------------------------- M.B. Oglesby, Jr., Trustee By: /s/ Robert E. Richardson ----------------------------------- Robert E. Richardson, Trustee By: /s/ Robert M. Steinberg ----------------------------------- Robert M. Steinberg, Trustee 4 EX-99.D(1) 3 0003.txt AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT EXHIBIT D(1) AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT THE BEAR STEARNS FUNDS 575 Lexington Avenue New York, New York 10022 April 17, 2000 Bear Stearns Asset Management Inc. 575 Lexington Avenue New York, New York 10022 Dear Sirs: The above-named investment company (the "Fund"), with respect to the series named on Schedule 1 hereto, as such Schedule may be revised from time to time (each, a "Series"), herewith confirms its agreement with you as follows: The Fund desires to employ its capital by investing and reinvesting the same in investments of the type and in accordance with the limitations specified in its charter documents and in its offering documents (Part A and Part B) as from time to time in effect, copies of which have been or will be submitted to you, and in such manner and to such extent as from time to time may be approved by the Fund's Board. The Fund desires to employ you to act as its investment adviser. You may render services through your own employees or the employees of one or more affiliated companies that are qualified to act as an investment adviser to the Fund under applicable laws and are under your common control as long as all such persons are functioning as part of an organized group of persons, and such organized group of persons, with respect to the services used by the Fund, is managed at all times by your authorized officers. It is also understood that you may from time to time, subject to the approval by the Fund's Board and shareholders of the Series, as necessary, employ or associate yourself with such person or persons as you may believe to be particularly fitted to assist you in the performance of this Agreement. You will be as fully responsible to the Fund for the acts and omissions of such persons as you are for your own acts and omissions. The compensation of such person or persons shall be paid by you and no obligation may be incurred on the Fund's behalf in any such respect. Subject to the supervision and approval of the Fund's Board, you will provide investment management of each Series' portfolio in accordance with such Series' investment objectives and policies as stated in the Fund's offering documents (Part A and Part B) as from time to time in effect. In connection, therewith, you will obtain and provide investment research and will supervise each Series' investments and conduct a continuous program of investment, evaluation and, if appropriate, sale and reinvestment of such Series assets. You will furnish to the Fund such statistical information, with respect to the investments which a Series may hold or contemplate purchasing, as the Fund may reasonably request. The Fund wishes to be informed of important developments materially affecting each Series' portfolio and shall expect you, on your own initiative, to furnish to the Fund from time to time such information as you may believe appropriate for this purpose. You shall exercise your best judgment in rendering the services to be provided to the Fund hereunder, and the Fund agrees as an inducement to your undertaking the same that neither you nor any Sub-Investment Adviser shall be liable hereunder for any error of judgment or mistake of law or for any loss suffered by one or more Series, provided that nothing herein shall be deemed to protect or purport to protect you or any Sub-Investment Adviser against any liability to the Fund or a Series or to its security holders to which you would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of your duties hereunder or by reason of your reckless disregard of your obligations or duties hereunder (hereinafter "Disabling Conduct") or to which any Sub-Investment Adviser would otherwise be subject by reason of Disabling Conduct. In consideration of services rendered pursuant to this Agreement, the Fund will pay you on the first business day of each month a fee at the rate set forth on Schedule 1 hereto or will pay you in accordance with the methodology described on additional Schedules hereto. Net asset value shall be computed on such days and at such time or times as described in the Fund's then-current Part A and Part B. The fee for the period from the date of execution of this Agreement to the end of the month during which this Agreement has been executed shall be pro-rated according to the proportion which such period bears to the full monthly period, and upon any termination of this Agreement before the end of any month, the fee for such part of a month shall be pro-rated according to the proportion which such period bears to the full monthly period and shall be payable upon the date of termination of this Agreement. For the purpose of determining fees payable to you, the value of each Series' net assets shall be computed in the manner specified in the Fund's charter documents for the computation of the value of each Series' net assets. You will bear all expenses in connection with the performance of your services under this Agreement and will pay all fees of any Sub-Investment Adviser in connection with its duties in respect of a Series. All other expenses to be incurred in the operation of the Fund (other than those to be borne by a Sub-Investment Adviser, if any) will be borne by the Fund, except to the extent specifically assumed by you. The expenses to be borne by the Fund include, without limitation, the following: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees of Board members, Securities and Exchange Commission fees, state Blue Sky qualification fees, advisory, administration and fund accounting fees, charges of custodians, transfer and dividend disbursing agents fees, certain insurance premiums, insurance coverage against credit defaults and similar losses on securities held in a participating Series' money market fund investment portfolio, industry association fees, outside auditing and legal expenses, costs of independent pricing services, costs of maintaining a Series' existence, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of preparing and printing prospectuses and statements of additional information for regulatory purposes and for distribution to existing shareholders, costs of shareholders' reports and meetings, and any extraordinary expenses. 2 The Fund understands that you now act, and that from time to time hereafter you may act, as investment adviser to one or more other investment companies and fiduciary or other managed accounts, and the Fund has no objection to your so acting, provided that when the purchase or sale of securities of the same issuer is suitable for the investment objectives of two or more companies or accounts managed by you which have available funds for investment, the available securities will be allocated in a manner believed by you to be equitable to each company or account. It is recognized that in some cases this procedure may adversely affect the price paid or received by one or more Series or the size of the position obtainable for or disposed of by one or more Series. In addition, it is understood that the persons employed by you to assist in the performance of your duties hereunder will not devote their full time to such service and nothing contained herein shall be deemed to limit or restrict your right or the right of any of your affiliates to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. Any person, even though also your officer, director, partner, employee or agent, who may be or become an officer, Board member, employee or agent of the Fund, shall be deemed, when rendering services to the Fund or acting on any business of the Fund, to be rendering such services to or acting solely for the Fund and not as your officer, director, partner, employee, or agent or one under your control or direction even though paid by you. You shall place all orders for the purchase and sale of portfolio securities for a Series with brokers or dealers selected by you, which may include brokers or dealers affiliated with you to the extent permitted by the Investment Company Act of 1940, as amended (the "1940 Act") and the Fund's policies and procedures applicable to the Series. You shall use your best efforts to seek to execute portfolio transactions at prices which, under the circumstances, result in total costs or proceeds being the most favorable to a Series. In assessing the best overall terms available for any transaction, you shall consider all factors you deem relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, research services provided to you, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. In no event shall you be under any duty to obtain the lowest commission or the best net price for any Series on any particular transaction, nor shall you be under any duty to execute any order in a fashion either preferential to any Series relative to other accounts managed by you or otherwise materially adverse to such other accounts. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to you and/or the other accounts over which you exercise investment discretion. You are authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for a Series which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if you determine in good faith that the total commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or your overall responsibilities with respect to accounts over which you exercise investment discretion. You shall report to the Board of Trustees of the Fund regarding any overall commissions paid by a Series and their reasonableness in relation to their benefits to the Series. Any transactions for a Series that are effected through an affiliated broker-dealer on a national securities 3 exchange of which such broker-dealer is a member will be effected in accordance with Section 11(a) of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. Each Series hereby authorizes any such broker or dealer to retain commissions for effecting such transactions and to pay out of such retained commissions any compensation due to others in connection with effectuating those transactions. In executing portfolio transactions for a Series, you may, to the extent permitted by applicable laws and regulations, but shall not be obligated to, aggregate the securities to be sold or purchased with those of other portfolios or its other clients if, in your reasonable judgment, such aggregation (i) will result in an overall economic benefit to the Series, taking into consideration the advantageous selling or purchase price, brokerage commission and other expenses, and trading requirements, and (ii) is not inconsistent with the policies set forth in the Fund's registration statement and the Series' Prospectus and Statement of Additional Information. In such event, you will allocate the securities so purchased or sold, and the expenses incurred in the transaction, in an equitable manner, consistent with your fiduciary obligations to the Series and such other clients. The Fund will indemnify you and any Sub-Investment Adviser, your officers, directors, employees and agents (each, an "indemnitee") against, and hold each indemnitee harmless from, any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) not resulting from Disabling Conduct by the indemnitee. Indemnification shall be made only following: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the indemnitee was not liable by reason of Disabling Conduct or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of Disabling Conduct by (a) the vote of a majority of a quorum of Board members who are neither "interested persons" of the Fund nor parties to the proceeding ("disinterested non-party Board members") or (b) an independent legal counsel in a written opinion. Each indemnitee shall be entitled to advances from the Fund for payment of the reasonable expenses incurred by it in connection with the matter as to which it is seeking indemnification in the manner and to the fullest extent permissible under applicable law. Each indemnitee shall provide to the Fund a written affirmation of its good faith belief that the standard of conduct necessary for indemnification by the Fund has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the indemnitee shall provide security in form and amount acceptable to the Fund for its undertaking; (b) the Fund is insured against losses arising by reason of the advance; or (c) a majority of a quorum of disinterested non-party Board members, or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the Fund at the time the advance is proposed to be made, that there is reason to believe that the indemnitee will ultimately be found to be entitled to indemnification. No provision of this Agreement shall be construed to protect any Board member or officer of the Fund, or any indemnitee, from liability in violation of Sections 17(h) and (i) of the 1940 Act. As to each Series, this Agreement shall become effective upon its execution, shall remain in force for a period of two (2) years from that date and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically approved at least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined in the 1940 Act) of such Series' outstanding voting securities, provided that in either event its continuance also is approved by a majority of the Fund's 4 Board members who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. As to each Series, this Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of holders of a majority of such Series' shares or, upon not less than 90 days' notice, by you. This Agreement also will terminate automatically, as to the relevant Series, in the event of its assignment (as defined in the 1940 Act). The Fund recognizes that from time to time your directors, officers and employees may serve as trustees, directors, partners, officers and employees of other business trusts, corporations, partnerships or other entities (including other investment companies), and that such other entities may include the name "Bear Stearns" as part of their name, and that your corporation or its affiliates may enter into investment advisory or other agreements with such other entities. If you cease to act as the Fund's investment adviser, the Fund agrees that, at your request, the Fund will take all necessary action to change the name of the Fund to a name not including "Bear Stearns" in any form or combination of words. This Agreement has been executed on behalf of the Fund by the undersigned officer of the Fund in his capacity as an officer of the Fund. The obligations of this Agreement shall only be binding upon the assets and property of the relevant Series and shall not be binding upon any Board member, officer or shareholder of the Fund individually. If the foregoing is in accordance with your understanding, will you kindly so indicate by signing and returning to us the enclosed copy hereof. Very truly yours, THE BEAR STEARNS FUNDS /s/ Frank J Maresca By:_______________________ Frank J Maresca Vice president and Treasurer Accepted: BEAR STEARNS ASSET MANAGEMENT INC. /s/ Doni Fordyce By:_______________________ Doni Fordyce Senior Managing Director Chief Operating Officer 5 SCHEDULE 1 ----------
Annual Fee as a Percentage Name of Series of Average Daily Net Assets - -------------- --------------------------- Prime Money Market Portfolio 0.20% Balanced Portfolio 0.65% High Yield Total Return Portfolio 0.60% International Equity Portfolio 1.00% S&P STARS Portfolio 0.75% Focus List Portfolio 0.65% Large Cap Value Portfolio 0.75% Small Cap Value Portfolio 0.75% Income Portfolio 0.45% Emerging Markets Debt Portfolio Asset level up to $50 million, 1.00%; asset level more than $50 million up to $100 million, 0.85%; asset level more than $100 million, 0.55% The Insiders Select Fund See Schedule 2
SCHEDULE 2 ---------- Insiders Select Fund The Fund will pay you, at the end of each month, a monthly advisory fee calculated at an annual rate of 1.0% of the Series' average daily net assets during such month (the "Basic Fee"). The Basic Fee will be adjusted each month (the "Monthly Performance Adjustment") depending on the extent to which the investment performance of the Class of shares expected to bear the highest total Series operating expenses (as such Class from time to time may be designated by the Fund's Board, the "Designated Class"), reflecting the deduction of expenses, exceeds or is exceeded by the percentage change in the investment record of the Standard & Poor's MidCap 400 Index (the "MidCap 400") for the immediately preceding twelve calendar months on a rolling basis. The rate of the Monthly Performance Adjustment may increase or decrease the fee payable to you by up to .50% per annum of the Series' average daily net assets. The performance of the Designated Class during a performance period will be calculated by first determining the change in the Class' net asset value per share during the period, assuming the reinvestment of distributions during that period, and then expressing this amount as a percentage of the net asset value per share at the beginning of the period. The performance of the MidCap 400 during a performance period is calculated as the sum of the change in the level of the index during the period, plus the value of any dividends or distributions made by the companies whose securities comprise the index accumulated to the end of the period. The total advisory fee, payable by the Fund to you at the end of each calendar month, will be equal to the Basic Fee for the month adjusted upward or downward for the month by the Monthly Performance Adjustment for the month. The monthly advisory fee will be calculated as follows: (1) one-twelfth of the 1% annual basic fee rate will be applied to the Series' average daily net assets over the most recent calendar month, giving a dollar amount which will be the Basic Fee for that month; (2) one-twelfth of the applicable performance adjustment fee rate from the table below will be applied to the Series' average daily net assets over the most recent month, giving a dollar amount which will be the Monthly Performance Adjustment; and (3) the Monthly Performance Adjustment will then be added to or subtracted from the Basic Fee and the result will be the amount payable by the Fund to you as the total advisory fee for that month. The full range of permitted fees on an annualized basis is as follows:
Percentage Point Difference Between Designated Class' Performance (Net of Expenses Including Basic Fee on Performance Advisory Fees) and Percentage Change in the Average Daily Adjustment MidCap 400 Investment Record Net Assets (%) Rate (%) Total Fee (%) ---------------------------- -------------- -------- ------------- +3.00 percentage points or more............................... 1.00% 0.50% 1.50% +2.75 percentage points or more but less less than + 3.00 percentage points......................... 1.00% 0.40% 1.40% +2.50 percentage points or more but less than + 2.75 percentage points.............................. 1.00% 0.30% 1.30% +2.25 percentage points or more but less than + 2.50 percentage points.............................. 1.00% 0.20% 1.20% +2.00 percentage points or more but less than + 2.25 percentage points.............................. 1.00% 0.10% 1.10% Less than + 2.00 percentage points but more than -2.00 percentage points............................... 1.00% 0.00% 1.00% - -2.00 percentage points or less but more than -2.25 percentage points............................... 1.00% -0.10% 0.90% - -2.25 percentage points or less but more than -2.50 percentage points............................... 1.00% -0.20% 0.80% - -2.50 percentage points or less but more than -2.75 percentage points................................ 1.00% -0.30% 0.70% - -2.75 percentage points or less but more than -3.00 percentage points............................... 1.00% -0.40% 0.60% - -3.00 percentage points or less............................... 1.00% -0.50% 0.50%
Performance will be measured over a rolling 12-month period based on the fiscal year. 2 EX-99.D(2) 4 0004.txt AMENDED AND RESTATED SUB-INVESTMENT ADVISORY AGREEMENT EXHIBIT D(2) SUB-INVESTMENT ADVISORY AGREEMENT BEAR STEARNS ASSET MANAGEMENT INC. 575 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 April 17, 2000 Marvin & Palmer Associates, Inc. 1201 N. Market Street-Suite 2300 Wilmington, Delaware 19801-1165 Dear Sirs: As you are aware, each Series of The Bear Stearns Funds (the "Fund") desires to employ its capital by investing and reinvesting the same in investments of the type and in accordance with the limitations specified in its charter documents and in its Prospectus and Statement of Additional Information as from time to time in effect, copies of which have been or will be submitted to you, and in which manner and to such extent as from time to time may be approved by the Fund's Board of Trustees (the "Board"). The Fund intends to employ us (the "Adviser") to act as its investment adviser pursuant to a written agreement (the "Investment Advisory Agreement"), a copy of which has been provided to you. The Adviser desires to employ you to act as the sub-investment adviser to the International Equity Portfolio (the "Series"). In this connection, it is understood that from time to time you will employ or associate with yourself such person or persons as you may believe to be particularly fitted to assist you in the performance of this Agreement. Such person or persons shall be officers or employees who are employed by you or the Fund. The compensation of such person or persons shall be paid by you and no obligation shall be incurred on the Fund's behalf in any such respect. Subject to the supervision and approval of the Adviser, you will provide investment management of the Series' portfolio in accordance with the Series' investment objectives and policies as stated in its Prospectus and Statement of Additional Information as from time to time in effect. In connection therewith, you will supervise the Series' investments and conduct a continuous program of investment, evaluation and, if appropriate, sales and reinvestment of the Series' assets. You will furnish to the Adviser or the Fund such statistical information, with respect to the investments which the Series may hold or contemplate purchasing, as the Adviser or the Fund may reasonably request. The Fund and the Adviser wish to be informed of important developments materially affecting the Series' portfolio and shall expect you, on your own initiative, to furnish to the Fund or the Adviser from time to time such information as you may believe appropriate for this purpose. You shall exercise your best judgment in rendering the services to be provided hereunder, and, to the extent provided in the Investment Advisory Agreement, the Fund has agreed as an inducement to your undertaking the same that you shall not be liable hereunder for any error of judgment or mistake of law or for any loss suffered by the Fund, provided that nothing herein shall be deemed to protect or purport to protect you against any liability to the Adviser, the Fund or the Fund's security holders to which you would otherwise be subject by reasons of willful misfeasance, bad faith or gross negligence in the performance of your duties hereunder, or by reason of your reckless disregard of your obligations and duties hereunder. In consideration of services rendered pursuant to this Agreement, the Adviser will pay you, in arrears, by the twentieth day of each month, a fee calculated as set forth on Schedule 1 hereto. Net asset value shall be computed on such days and at such time or times as described in the Series' then-current Prospectus and Statement of Additional Information. The fee for the period from the date of execution of this Agreement to the end of the month during which this Agreement has been executed shall be pro-rated according to the proportion which such period bears to the full monthly period, and upon any termination of this Agreement before the end of any month, the fee for such part of a month shall be pro-rated according to the proportion which such period bears to the full monthly period and shall be payable within 10 business days of the date of termination of this Agreement. For the purpose of determining fees payable to you, the value of the Series' net assets shall be computed in the manner specified in the Fund's charter documents for the computation of the value of the Series' net assets. You will bear all of your expenses in connection with the performance of your services under this Agreement. Except to the extent specifically assumed by you, all expenses to be incurred in the operation of the Series (other than those borne by the Adviser) will be borne by the Series, including, without limitation, the following: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees and expenses of Board members, Securities and Exchange Commission and state Blue Sky qualification fees, advisory, administration, distribution and fund accounting fees, charges of custodians, transfer and dividend disbursing agents' fees, fees paid pursuant to a Rule 12b-1 Plan, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of independent pricing services, costs of maintaining the Series' existence, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs or shareholders' reports and meetings, and any extraordinary expenses. The Adviser understands that you now act, and that from time to time hereafter you may act, as investment adviser to one or more other investment companies 2 and fiduciary or other managed accounts, and the Adviser has no objection to your so acting and continuing to so act pursuant to your current agreements, provided that, during the term of this Agreement, (i) if you charge a management fee to any other investment company with an investment objective and policies comparable to that of the Series that is less than the fees as set forth in Schedule 1, you shall notify us and adjust the fees for managing the Series to reflect such lower fee, and (ii) you shall not enter any advisory relationship with any other investment company sponsored or managed by someone other than the Adviser if that investment company has an investment objective and policies comparable to that of the Series and a lower overall fee structure. In addition, it is understood that the persons employed by you to assist in the performance of your duties hereunder will not devote their full time to such services and nothing contained herein shall be deemed to limit or restrict your right or the right of any of your affiliates to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. Any person, even though also your officer, director, partner, employee or agent, who may be or become an officer, Board member, employee or agent of the Fund, shall be deemed, when rendering services to the Fund or acting on any business of the Fund, to be rendering such services to or acting solely for the Fund and not as your officer, director, partner, employee, or agent or one under your control or direction even though paid by you. You shall place all orders for the purchase and sale of portfolio securities for the Series with brokers or dealers selected by you, which may include brokers or dealers affiliated with you or the Adviser to the extent permitted by the Investment Company Act of 1940, as amended (the "1940 Act") and the Fund's policies and procedures applicable to the Series. You shall use your best efforts to seek to execute portfolio transactions at prices which, under the circumstances, result in total costs or proceeds being the most favorable to the Series. In assessing the best overall terms available for any transaction, you shall consider all factors you deem relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, research services provided to you, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. In no event shall you be under any duty to obtain the lowest commission or the best net price for any Series on any particular transaction, nor shall you be under any duty to execute any order in a fashion either preferential to the Series relative to other accounts managed by you or otherwise materially adverse to such other accounts. In arranging for the execution of a particular transaction, you may select brokers or dealers who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to you and/or the other accounts over which you exercise investment discretion. You are authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Series which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if you determine in good faith that the total commission is reasonable in relation to the value 3 of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or your overall responsibilities with respect to accounts over which you exercise investment discretion. You shall report to the Board of Trustees of the Fund regarding overall commissions paid by the Series and their reasonableness in relation to their benefits to the Series. Any transactions for the Series that are effected through a broker- dealer that is affiliated with the Adviser, on a national securities exchange of which such broker-dealer is a member will be effected in accordance with Section 11(a) of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The Series hereby authorizes any such broker or dealer to retain commissions for effecting such transactions and to pay out of such retained commissions any compensation due to others in connection with effectuating those transactions. In executing portfolio transactions for the Series, you may, to the extent permitted by applicable laws and regulations, but shall not be obligated to, aggregate the securities to be sold or purchased with those of other portfolios or your other clients if, in your reasonable judgment, such aggregation (i) will result in an overall economic benefit to the Series, taking into consideration the advantageous selling or purchase price, brokerage commission and other expenses, and trading requirements, and (ii) is not inconsistent with the policies set forth in the Fund's registration statement and the Series' Prospectus and Statement of Additional Information. In such event, you hereby agree to allocate the securities so purchased or sold, and the expenses incurred in the transaction, in an equitable manner, consistent with your fiduciary obligations to the Series and such other clients. The Adviser recognizes that in some cases this procedure may adversely affect the price paid or received by the Series or the size of the position obtainable for or disposed of by the Series. This Agreement shall become effective upon its execution, shall remain in force for a period of two (2) years from that date and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically approved at least annually by (i) the Fund's Board or (ii) the vote of a majority (as defined in the 1940 Act) of the Fund's outstanding voting securities, provided that in either event its continuance also is approved by a majority of the Fund's Board members who are not "interested persons" (as defined in said Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. This Agreement is terminable without penalty (i) by the Adviser upon 60 days' notice to you, (ii) by the Fund's Board or by vote of the holders of a majority of the Series' shares upon 60 days' notice to you, or (iii) by you upon not less than 90 days' notice to the Fund and the Adviser. This Agreement also will terminate automatically in the event of its assignment (as defined in said Act). In addition, notwithstanding anything herein to the contrary, if the Investment Advisory Agreement terminates for any reason, this Agreement shall terminate effective upon the date the Investment Advisory Agreement terminates. All assets of the Series' shall be maintained for safekeeping with the Fund's custodian (and sub-custodian network) and you shall not have custody of the assets of the Series. Each party hereto also represents and warrants that it is duly authorized to enter this Agreement and has caused this Agreement to be executed by a duly authorized representative. 4 If the foregoing is in accordance with your understanding, will you kindly so indicate by signing and returning to us the enclosed copy hereof. Very truly yours, BEAR STEARNS ASSET MANAGEMENT INC. By: /s/ Doni Fordyce ---------------------------- Title: Senior Managing Director Accepted: MARVIN & PALMER ASSOCIATES, INC. By: /s/ David F. Marvin ------------------------ Title: Chairman 5 SCHEDULE 1 ---------- In consideration of the services rendered pursuant to this Agreement, the Adviser will pay to Marvin & Palmer Associates, Inc. a monthly payment calculated on an annual basis as set forth below: ================================================================================ Portfolio's Average Annual Fee as a Percentage Daily Net Assets at of Total Average Daily Relevant Month-End Net Assets ------------------ ---------- - -------------------------------------------------------------------------------- Up to $25 million 0.00% More than $25 million up to $50 million 0.20% More than $50 million up to $65 million 0.45% More than $65 million 0.60% ================================================================================ EX-99.E 5 0005.txt SCHEDULE I TO DISTRIBUTION EXHIBIT E SCHEDULE I TO DISTRIBUTION AGREEMENT DATED FEBRUARY 22, 1995 (AS REVISED APRIL 11. 1995) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC. Name of Series Last Approved Must be Approved By - -------------- ------------- ------------------- S&P Stars Portfolio February 7, 2000 March 31, 2001 Large Cap Value Portfolio February 7, 2000 March 31, 2001 Small Cap Value Portfolio February 7, 2000 March 31, 2001 Total Return Bond Portfolio February 7, 2000 March 31, 2001 The Insiders Select Portfolio February 7, 2000 March 31, 2001 Prime Money Market Portfolio February 7, 2000 March 31, 2001 Focus List Portfolio February 7, 2000 March 31, 2001 High Yield Total Return Portfolio February 7, 2000 March 31, 2001 International Portfolio February 7, 2000 March 31, 2001 Balanced Portfolio February 7, 2000 March 31, 2001 Emerging Markets Debt Portfolio February 7, 2000 March 31, 2001 THE BEAR STEARNS FUNDS By: /s/ Frank J. Maresca ---------------------- Accepted: BEAR, STEARNS & CO. INC. By: Doni Fordyce --------------------- As revised: February 10, 1999 EX-99.G(1) 6 0006.txt CUSTODY AGREEMENT FOR ALL PORTFOLIOS EXCEPT EMD EXHIBIT G(1) CUSTODY AGREEMENT AGREEMENT, dated as of December 22, 1997 by and between THE BEAR STEARNS FUNDS (the "Trust"), a business trust organized and existing under the laws of the Commonwealth of Massachusetts, acting with respect to and on behalf of each of the series of the Trust that are identified on Exhibit A hereto (each, a "Portfolio"), and CUSTODIAL TRUST COMPANY, a bank organized and existing under the laws of the State of New Jersey (the "Custodian"). WHEREAS, the Trust desires that the securities, funds and other assets of the Portfolios be held and administered by Custodian pursuant to this Agreement; WHEREAS, each Portfolio is an investment portfolio represented by a series of Shares included among the shares of beneficial interest issued by the Trust, an open-end management investment company registered under the 1940 Act; WHEREAS, Custodian represents that it is a bank having the qualifications prescribed in the 1940 Act to act as custodian for management investment companies registered under the 1940 Act; NOW, THEREFORE, in consideration of the mutual agreements herein made, the Trust and Custodian hereby agree as follows: ARTICLE I DEFINITIONS ----------- Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall mean: 1.1 "Authorized Person" means any person authorized by resolution of the ----------------- Board of Trustees to give Oral Instructions and Written Instructions on behalf of the Trust and identified, by -1- name or by office, in Exhibit B hereto or any person designated to do so by an investment adviser of any Portfolio who is named by the Trust in Exhibit C hereto. 1.2 "Board of Trustees" means the Board of Trustees of the Trust or, when ----------------- permitted under the 1940 Act, the Executive Committee thereof, if any. 1.3 "Book-Entry System" means a book-entry system maintained by a Federal ----------------- Reserve Bank for securities of the United States government or of agencies or instrumentalities thereof (including government-sponsored enterprises). 1.4 "Business Day" means any day on which banks in the State of New Jersey ------------ and New York are open for business. 1.5 "Custody Account" means, with respect to a Portfolio, the account in --------------- the name of such Portfolio, which is provided for in Section 3.2 below. 1.6 "Domestic Securities Depository" means The Depository Trust Company and ------------------------------ any other clearing agency registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, which acts as a securities depository. 1.7 "Eligible Domestic Bank" means a bank as defined in the 1940 Act. ---------------------- 1.8 "Eligible Foreign Custodian" means any banking institution, trust -------------------------- company or other entity (including any Foreign Securities Depository) organized under the laws of a country other than the United States which is eligible under the 1940 Act to act as a custodian for securities and other assets of a Portfolio held outside the United States. 1.9 "Foreign Custody Manager" has the same meaning as in the 1940 Act. ----------------------- -2- 1.10 "Foreign Securities Depository" means a foreign securities depository ----------------------------- or clearing agency as defined in the 1940 Act. 1.11 "1940 Act" means the Investment Company Act of 1940, as amended, and -------- the rules and regulations thereunder. 1.12 "Oral Instructions" means instructions orally transmitted to and ----------------- accepted by Custodian which are (a) reasonably believed by Custodian to have - been given by an Authorized Person, (b) recorded and kept among the records of - Custodian made in the ordinary course of business, and (c) completed in - accordance with Custodian's requirements from time to time as to content of instructions and their manner and timeliness of delivery by the Trust. 1.13 "Proper Instructions" means Oral Instructions or Written Instructions. ------------------- Proper Instructions may be continuing Written Instructions when deemed appropriate by the Trust and Custodian. 1.14 "Securities Depository" means any Domestic Securities Depository or --------------------- Foreign Securities Depository. 1.15 "Shares" means, with respect to a Portfolio, those shares in a series ------ or class of beneficial interests of the Trust that represent interests in such Portfolio. 1.16 "Written Instructions" means written communications received by -------------------- Custodian that are (a) reasonably believed by Custodian to have been signed or - sent by an Authorized Person, (b) sent or transmitted by letter, facsimile, - central processing unit connection, on-line terminal or magnetic tape, and (c) - completed in accordance with Custodian's requirements from time to time as to content of instructions and their manner and timeliness of delivery by the Trust. -3- ARTICLE II APPOINTMENT OF CUSTODIAN ------------------------ 2.1 Appointment. The Trust hereby appoints Custodian as custodian of all ----------- such securities, funds and other assets of each Portfolio as may be acceptable to Custodian and from time to time delivered to it by the Trust or others for the account of such Portfolio. 2.2 Acceptance. Custodian hereby accepts appointment as such custodian and ---------- agrees to perform the duties thereof as hereinafter set forth. ARTICLE III CUSTODY OF SECURITIES, FUNDS AND OTHER ASSETS --------------------------------------------- 3.1 Segregation. All securities and non-cash property of a Portfolio in the ----------- possession of Custodian (other than securities maintained by Custodian with a sub-custodian appointed pursuant to this Agreement or in a Securities Depository or Book-Entry System) shall be physically segregated from other such securities and non-cash property in the possession of Custodian. All cash, securities and other non-cash property of a Portfolio shall be identified as belonging to such Portfolio. 3.2 Custody Account. (a) Custodian shall open and maintain in its trust --------------- department a custody account in the name of each Portfolio, subject only to draft or order of Custodian, in which Custodian shall enter and carry all securities, funds and other assets of such Portfolio which are delivered to Custodian and accepted by it. (b) If, with respect to any Portfolio, Custodian at any time fails to receive any of the documents referred to in Section 3.10(a) below, then, until such time as it receives such document, it shall not be obligated to receive any securities into the Custody Account of such Portfolio and shall be entitled to return to such Portfolio any securities that it is holding in such Custody Account. 3.3 Securities in Physical Form. Custodian may, but shall not be obligated --------------------------- to, hold securities that may be held only in physical form. -4- 3.4 Disclosure to Issuers of Securities. Custodian is authorized to ----------------------------------- disclose the Trust's and any Portfolio's names and addresses, and the securities positions in such Portfolio's Custody Account, to the issuers of such securities when requested by them to do so. 3.5 Employment of Domestic Sub-Custodians. At any time and from time to ------------------------------------- time, Custodian in its discretion may appoint and employ, and may also cease to employ, any Eligible Domestic Bank as sub-custodian to hold securities and other assets of a Portfolio that are maintained in the United States and to carry out such other provisions of this Agreement as it may determine, provided, however, that the employment of any such sub-custodian has been approved by the Trust. The employment of any such sub-custodian shall be at Custodian's expense and shall not relieve Custodian of any of its obligations or liabilities under this Agreement. 3.6 Employment of Foreign Sub-Custodians. (a) At any time and from time to ------------------------------------ time, Custodian in its discretion may appoint and employ in accordance with the 1940 Act, and may also cease to employ, (i) any overseas branch of any Eligible - Domestic Bank, or (ii) any Eligible Foreign Custodian selected by the Foreign -- Custody Manager, in each case as a foreign sub-custodian for securities and other assets of a Portfolio that are maintained outside the United States, provided, however, that the employment of any such overseas branch has been approved by the Trust and, provided further that, in the case of any such Eligible Foreign Custodian, the Foreign Custody Manager has approved, in writing, the agreement (and/or, in the case of a Foreign Securities Depository, the rules and/or established practices and procedures thereof) pursuant to which Custodian employs such Eligible Foreign Custodian. (b) Set forth on Exhibit D hereto, with respect to each Portfolio, are the foreign sub-custodians (including Foreign Securities Depositories) that Custodian may employ pursuant to Section 3.6(a) above. Exhibit D shall be revised from time to time as foreign sub-custodians are added or deleted. (c) If the Trust proposes to have a Portfolio make an investment which is to be held in a country in which Custodian does not have appropriate arrangements in place with a foreign sub- -5- custodian selected by the Foreign Custody Manager, then the Trust shall inform Custodian sufficiently in advance of such investment to allow Custodian to make such arrangements. (d) Notwithstanding anything to the contrary in Section 7.1 below, Custodian shall have no greater liability to any Portfolio or the Trust for the actions or omissions of any foreign sub-custodian appointed pursuant to this Agreement than any such foreign sub-custodian has to Custodian, and Custodian shall not be required to discharge any such liability which may be imposed on it unless and until such foreign sub-custodian has effectively indemnified Custodian against it or has otherwise discharged its liability to Custodian in full. (e) Upon the request of the Foreign Custody Manager, Custodian shall furnish to the Foreign Custody Manager information concerning all foreign sub- custodians employed pursuant to this Agreement which shall be similar in kind and scope to any such information that may have been furnished to the Foreign Custody Manager in connection with the initial approval by the Foreign Custody Manager of the agreements pursuant to which Custodian employs such foreign sub- custodians or as otherwise required by the 1940 Act. 3.7 Employment of Other Agents. Custodian may employ other suitable agents, -------------------------- which may include affiliates of Custodian such as Bear, Stearns & Co. Inc. or Bear, Stearns Securities Corp., both of which are securities broker-dealers. The appointment of any agent pursuant to this Section 3.7 shall not relieve Custodian of any of its obligations or liabilities under this Agreement. 3.8 Bank Accounts. In its discretion and from time to time Custodian may ------------- open and maintain one or more demand deposit accounts with any Eligible Domestic Bank (any such accounts to be in the name of Custodian and subject only to its draft or order), provided, however, that the opening and maintenance of any such account shall be at Custodian's expense and shall not relieve Custodian of any of its obligations or liabilities under this Agreement. 3.9 Delivery of Assets to Custodian. Provided they are acceptable to ------------------------------- Custodian, the Trust shall deliver to Custodian the securities, funds and other assets of each Portfolio, including (a) payments of income, payments of - principal and capital distributions received by such Portfolio with -6- respect to securities, funds or other assets owned by such Portfolio at any time during the term of this Agreement, and (b) funds received by such Portfolio for - the issuance, at any time during such term, of Shares of such Portfolio. Custodian shall not be under any duty or obligation to require the Trust to deliver to it any securities or other assets owned by a Portfolio and shall have no responsibility or liability for or on account of securities or other assets not so delivered. 3.10 Domestic Securities Depositories and Book-Entry Systems. Custodian and ------------------------------------------------------- any sub-custodian appointed pursuant to Section 3.5 above may deposit and/or maintain securities of any Portfolio in a Domestic Securities Depository or in a Book-Entry System, subject to the following provisions: (a) Prior to a deposit of securities of a Portfolio in any Domestic Securities Depository or Book-Entry System, the Trust shall deliver to Custodian a resolution of the Board of Trustees, certified by an officer of the Trust, authorizing and instructing Custodian (and any sub-custodian appointed pursuant to Section 3.5 above) on an on-going basis to deposit in such Domestic Securities Depository or Book-Entry System all securities eligible for deposit therein and to make use of such Domestic Securities Depository or Book-Entry System to the extent possible and practical in connection with the performance of its obligations hereunder (or under the applicable sub-custody agreement in the case of such sub-custodian), including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of collateral consisting of securities. (b) Securities of a Portfolio kept in a Book-Entry System or Domestic Securities Depository shall be kept in an account ("Depository Account") of Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) in such Book-Entry System or Domestic Securities Depository which includes only assets held by Custodian (or such sub-custodian) as a fiduciary, custodian or otherwise for customers. -7- (c) The records of Custodian with respect to securities of a Portfolio that are maintained in a Book-Entry System or Domestic Securities Depository shall at all times identify such securities as belonging to such Portfolio. (d) If securities purchased by a Portfolio are to be held in a Book-Entry System or Domestic Securities Depository, Custodian (or any sub-custodian appointed pursuant to Section 3.5 above) shall pay for such securities upon (i) - receipt of advice from the Book-Entry System or Domestic Securities Depository that such securities have been transferred to the Depository Account, and (ii) -- the making of an entry on the records of Custodian (or of such sub-custodian) to reflect such payment and transfer for the account of such Portfolio. If securities sold by a Portfolio are held in a Book-Entry System or Domestic Securities Depository, Custodian (or such sub-custodian) shall transfer such securities upon (A) receipt of advice from the Book-Entry System or Domestic - Securities Depository that payment for such securities has been transferred to the Depository Account, and (B) the making of an entry on the records of - Custodian (or of such sub-custodian) to reflect such transfer and payment for the account of such Portfolio. (e) Custodian shall provide the Trust with copies of any report obtained by Custodian (or by any sub-custodian appointed pursuant to Section 3.5 above) from a Book-Entry System or Domestic Securities Depository in which securities of a Portfolio are kept on the internal accounting controls and procedures for safeguarding securities deposited in such Book-Entry System or Domestic Securities Depository. (f) At its election, the Trust shall be subrogated to the rights of Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) with respect to any claim against a Book-Entry System or Domestic Securities Depository or any other person for any loss or damage to a Portfolio arising from the use of such Book-Entry System or Domestic Securities Depository, if and to the extent that such Portfolio has not been made whole for any such loss or damage. 3.11 Relationship With Securities Depositories. No Book-Entry System, ----------------------------------------- Securities Depository, or other securities depository or clearing agency (whether foreign or domestic) which -8- it is or may become standard market practice to use for the comparison and settlement of trades in securities shall be an agent or sub-contractor of Custodian for purposes of Section 3.7 above or otherwise. 3.12 Payments from Custody Account. Upon receipt of Proper Instructions ----------------------------- with respect to a Portfolio but subject to its right to foreclose upon and liquidate collateral pledged to it pursuant to Section 8.3 below, Custodian shall make payments from the Custody Account of such Portfolio, but only in the following cases, provided, first, that such payments are in connection with the ----- clearance and/or custody of securities or other assets, second, that there are ------ sufficient funds in such Custody Account, whether belonging to such Portfolio or advanced to it by Custodian in its sole and absolute discretion as set forth in Section 3.18 below, for Custodian to make such payments, and, third, that after ----- the making of such payments, such Portfolio would not be in violation of any margin or other requirements agreed upon pursuant to Section 3.18 below: (a) For the purchase of securities for such Portfolio but only (i) in the - case of securities (other than options on securities, futures contracts and options on futures contracts), against the delivery to Custodian (or any sub- custodian appointed pursuant to this Agreement) of such securities registered as provided in Section 3.20 below or in proper form for transfer or, if the purchase of such securities is effected through a Book-Entry System or Domestic Securities Depository, in accordance with the conditions set forth in Section 3.10 above, and (ii) in the case of options, futures contracts and options on -- futures contracts, against delivery to Custodian (or such sub-custodian) of evidence of title thereto in favor of such Portfolio, the Custodian, any such sub-custodian, or any nominee referred to in Section 3.20 below; (b) In connection with the conversion, exchange or surrender, as set forth in Section 3.13(f) below, of securities owned by such Portfolio; (c) For transfer in accordance with the provisions of any agreement among the Trust, Custodian and a securities broker-dealer, relating to compliance with rules of The Options -9- Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions of such Portfolio; (d) For transfer in accordance with the provisions of any agreement among the Trust, Custodian and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding margin or other deposits in connection with transactions of such Portfolio; (e) For the funding of any time deposit (whether certificated or not) or other interest-bearing account with any banking institution (including Custodian), provided that Custodian shall receive and retain such certificate, advice, receipt or other evidence of deposit (if any) as such banking institution may deliver with respect to any such deposit or account; (f) For the purchase from a banking or other financial institution of loan participations, but only if Custodian has in its possession a copy of the agreement between the Trust and such banking or other financial institution with respect to the purchase of such loan participations and provided that Custodian shall receive and retain such participation certificate or other evidence of participation (if any) as such banking or other financial institution may deliver with respect to any such loan participation; (g) For the purchase and/or sale of foreign currencies or of options to purchase and/or sell foreign currencies, for spot or future delivery, for the account of such Portfolio pursuant to contracts between the Trust and any banking or other financial institution (including Custodian, any sub-custodian appointed pursuant to this Agreement and any affiliate of Custodian); (h) For transfer to a securities broker-dealer as margin for a short sale of securities for such Portfolio, or as payment in lieu of dividends paid on securities sold short for such Portfolio; -10- (i) For the payment as provided in Article IV below of any dividends, capital gain distributions or other distributions declared on the Shares of such Portfolio; (j) For the payment as provided in Article IV below of the redemption price of the Shares of such Portfolio; (k) For the payment of any expense or liability incurred by such Portfolio, including but not limited to the following payments for the account of such Portfolio: interest, taxes, and administration, investment advisory, accounting, auditing, transfer agent, custodian, trustee and legal fees, and other operating expenses of such Portfolio; in all cases, whether or not such expenses are to be in whole or in part capitalized or treated as deferred expenses; and (l) For any other proper purpose, but only upon receipt of Proper Instructions, specifying the amount and purpose of such payment, certifying such purpose to be a proper purpose of such Portfolio, and naming the person or persons to whom such payment is to be made. 3.13 Deliveries from Custody Account. Upon receipt of Proper Instructions ------------------------------- with respect to a Portfolio but subject to its right to foreclose upon and liquidate collateral pledged to it pursuant to Section 8.3 below, Custodian shall release and deliver securities and other assets from the Custody Account of such Portfolio, but only in the following cases, provided, first, that such ----- deliveries are in connection with the clearance and/or custody of securities or other assets, second, there are sufficient amounts and types of securities or ------ other assets in such Custody Account for Custodian to make such deliveries, and, third, that after the making of such deliveries, such Portfolio would not be in - ----- violation of any margin or other requirements agreed upon pursuant to Section 3.18 below: (a) Upon the sale of securities for the account of such Portfolio but, subject to Section 3.14 below, only against receipt of payment therefor or, if such sale is effected through a Book-Entry System or Domestic Securities Depository, in accordance with the provisions of Section 3.10 above; -11- (b) To an offeror's depository agent in connection with tender or other similar offers for securities of such Portfolio; provided that, in any such case, the funds or other consideration for such securities is to be delivered to Custodian; (c) To the issuer thereof or its agent when such securities are called, redeemed or otherwise become payable, provided that in any such case the funds or other consideration for such securities is to be delivered to Custodian; (d) To the issuer thereof or its agent for exchange for a different number of certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to Custodian; (e) To the securities broker through whom securities are being sold for such Portfolio, for examination in accordance with the "street delivery" custom; (f) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement, including surrender or receipt of underlying securities in connection with the issuance or cancellation of depository receipts; provided that, in any such case, the new securities and funds, if any, are to be delivered to Custodian; (g) In the case of warrants, rights or similar securities, to the issuer of such warrants, rights or similar securities, or its agent, upon the exercise thereof, provided that, in any such case, the new securities and funds, if any, are to be delivered to Custodian; (h) To the borrower thereof, or its agent, in connection with any loans of securities for such Portfolio pursuant to any securities loan agreement entered into by the Trust, but only against receipt by Custodian of such collateral as is required under such securities loan agreement; -12- (i) To any lender, or its agent, as collateral for any borrowings from such lender by such Portfolio that require a pledge of assets of such Portfolio, but only against receipt by Custodian of the amounts borrowed; (j) Pursuant to any authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of such Portfolio or the Trust; (k) For delivery in accordance with the provisions of any agreement among the Trust, Custodian and a securities broker- dealer, relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions of such Portfolio; (l) For delivery in accordance with the provisions of any agreement among the Trust, Custodian, and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding margin or other deposits in connection with transactions of such Portfolio; (m) For delivery to a securities broker-dealer as margin for a short sale of securities for such Portfolio; (n) To the issuer of American Depositary Receipts or International Depositary Receipts (hereinafter, collectively, "ADRs") for such securities, or its agent, against a written receipt therefor adequately describing such securities, provided that such securities are delivered together with instructions to issue ADRs in the name of Custodian or its nominee and to deliver such ADRs to Custodian; -13- (o) In the case of ADRs, to the issuer thereof, or its agent, against a written receipt therefor adequately describing such ADRs, provided that such ADRs are delivered together with instructions to deliver the securities underlying such ADRs to Custodian or an agent of Custodian; or (p) For any other proper purpose, but only upon receipt of Proper Instructions, specifying the securities or other assets to be delivered, setting forth the purpose for which such delivery is to be made, certifying such purpose to be a proper purpose of such Portfolio, and naming the person or persons to whom delivery of such securities or other assets is to be made. 3.14 Delivery Prior to Final Payment. When instructed by the Trust to ------------------------------- deliver securities of a Portfolio against payment, Custodian shall be entitled, but only if in accordance with generally accepted market practice, to deliver such securities prior to actual receipt of final payment therefor and, exclusively in the case of securities in physical form, prior to receipt of payment therefor. In any such case, such Portfolio shall bear the risk that final payment for such securities may not be made or that such securities may be returned or otherwise held or disposed of by or through the person to whom they were delivered, and Custodian shall have no liability for any of the foregoing. 3.15 Credit Prior to Final Payment. In its sole discretion and from time to ----------------------------- time, Custodian may credit the Custody Account of a Portfolio, prior to actual receipt of final payment thereof, with (a) proceeds from the sale of securities - of such Portfolio which it has been instructed to deliver against payment, (b) - proceeds from the redemption of securities or other assets in such Custody Account, and (c) income from securities, funds or other assets in such Custody - Account. Any such credit shall be conditional upon actual receipt by Custodian of final payment and may be reversed if final payment is not actually received in full. Custodian may, in its sole discretion and from time to time, permit a Portfolio to use funds so credited to its Custody Account in anticipation of actual receipt of final payment. Any funds so used shall constitute an advance subject to Section 3.18 below. -14- 3.16 Definition of Final Payment. For purposes of this Agreement, "final --------------------------- payment" means payment in funds which are (or have become) immediately available, under applicable law are irreversible, and are not subject to any security interest, levy, lien or other encumbrance. 3.17 Payments and Deliveries Outside the United States. Notwithstanding ------------------------------------------------- anything to the contrary that may be required by Section 3.12 or Section 3.13 above, or elsewhere in this Agreement, in the case of securities and other assets maintained outside the United States and in the case of payments made outside the United States, Custodian and any sub-custodian appointed pursuant to this Agreement may receive and deliver such securities or other assets, and may make such payments, in accordance with the laws, regulations, customs, procedures and practices applicable in the relevant local market outside the United States. 3.18 Clearing Credit. Provided that such an extension of credit is not --------------- prohibited under laws and regulations applicable to Custodian and/or the Trust, Custodian may, in its sole discretion and from time to time, advance funds to the Trust to facilitate the settlement of a Portfolio's transactions in the Custody Account of such Portfolio. Any such advance (a) shall be repayable - immediately upon demand made by Custodian, (b) shall be fully secured as - provided in Section 8.3 below, and (c) shall bear interest at such rate, and be - subject to such other terms and conditions, as Custodian and the Trust may agree. 3.19 Actions Not Requiring Proper Instructions. Unless otherwise instructed ----------------------------------------- by the Trust, Custodian shall with respect to all securities and other assets held for a Portfolio: (a) Subject to Section 7.4 below, receive into the Custody Account of such Portfolio any funds or other property, including payments of principal, interest and dividends, due and payable on or on account of such securities and other assets; (b) Deliver securities of such Portfolio to the issuers of such securities or their agents for the transfer thereof into the name of such Portfolio, Custodian or any of the nominees referred to in Section 3.20 below; -15- (c) Endorse for collection, in the name of such Portfolio, checks, drafts and other negotiable instruments; (d) Surrender interim receipts or securities in temporary form for securities in definitive form; (e) Execute, as custodian, any necessary declarations or certificates of ownership under the federal income tax laws of the United States, or the laws or regulations of any other taxing authority, in connection with the transfer of such securities or other assets or the receipt of income or other payments with respect thereto; (f) Receive and hold for such Portfolio all rights and similar securities issued with respect to securities or other assets of such Portfolio; (g) As may be required in the execution of Proper Instructions, transfer funds from the Custody Account of such Portfolio to any demand deposit account maintained by Custodian pursuant to Section 3.8 above; and (h) In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase and transfer of, and other dealings in, such securities and other assets. 3.20 Registration and Transfer of Securities. All securities held for a --------------------------------------- Portfolio that are issuable only in bearer form shall be held by Custodian in that form, provided that any such securities shall be held in a Securities Depository or Book-Entry System if eligible therefor. All other securities and all other assets held for a Portfolio may be registered in the name of (a) - Custodian as agent, (b) any sub-custodian appointed pursuant to this Agreement, - (c) any Securities Depository, or (d) any nominee or agent of any of them. The - - Trust shall furnish to Custodian appropriate instruments to enable Custodian to hold or deliver in proper form for -16- transfer, or to register as in this Section 3.20 provided, any securities or other assets delivered to Custodian which are registered in the name of a Portfolio. 3.21 Records. (a) Custodian shall maintain complete and accurate records ------- - with respect to securities, funds and other assets held for a Portfolio, including (i) journals or other records of original entry containing an itemized - daily record in detail of all receipts and deliveries of securities and all receipts and disbursements of funds; (ii) ledgers (or other records) reflecting -- (A) securities in transfer, if any, (B) securities in physical possession, (C) - - - monies and securities borrowed and monies and securities loaned (together with a record of the collateral therefor and substitutions of such collateral), (D) - dividends and interest received, and (E) dividends receivable and interest - accrued; and (iii) cancelled checks and bank records related thereto. Custodian --- shall keep such other books and records with respect to securities, funds and other assets of a Portfolio which are held hereunder as the Trust may reasonably request. (b) All such books and records maintained by Custodian for a Portfolio shall (i) be maintained in a form acceptable to the Trust and in compliance with - rules and regulations of the Securities and Exchange Commission, (ii) be the -- property of such Portfolio and at all times during the regular business hours of Custodian be made available upon request for inspection by duly authorized officers, employees or agents of the Trust and employees or agents of the Securities and Exchange Commission, and (iii) if required to be maintained under --- the 1940 Act, be preserved for the periods prescribed therein. 3.22 Account Reports by Custodian. Custodian shall furnish the Trust with a ---------------------------- daily activity statement, including a summary of all transfers to or from the Custody Account of each Portfolio (in the case of securities and other assets maintained in the United States, on the day following such transfers). At least monthly and from time to time, Custodian shall furnish the Trust with a detailed statement of the securities, funds and other assets held for each Portfolio under this Agreement. -17- 3.23 Other Reports by Custodian. Custodian shall provide the Trust with -------------------------- such reports as the Trust may reasonably request from time to time on the internal accounting controls and procedures for safeguarding securities which are employed by Custodian or any sub-custodian appointed pursuant to this Agreement. 3.24 Proxies and Other Materials. (a) Unless otherwise instructed by the --------------------------- Trust, Custodian shall promptly deliver to the Trust all notices of meetings, proxy materials (other than proxies) and other announcements, which it receives regarding securities held by it in the Custody Account of a Portfolio. Whenever Custodian or any of its agents receives a proxy with respect to securities in the Custody Account of a Portfolio, Custodian shall promptly request instructions from the Trust on how such securities are to be voted, and shall give such proxy, or cause it to be given, in accordance with such instructions. If the Trust timely informs Custodian that the Trust wishes to vote any such securities in person, Custodian shall promptly seek to have a legal proxy covering such securities issued to the Trust. Unless otherwise instructed by the Trust, neither Custodian nor any of its agents shall exercise any voting rights with respect to securities held hereunder. (b) Unless otherwise instructed by the Trust, Custodian shall promptly transmit to the Trust all other written information received by Custodian from issuers of securities held in the Custody Account of any Portfolio. With respect to tender or exchange offers for such securities or with respect to other corporate transactions involving such securities, Custodian shall promptly transmit to the Trust all written information received by Custodian from the issuers of such securities or from any party (or its agents) making any such tender or exchange offer or participating in such other corporate transaction. If the Trust, with respect to such tender or exchange offer or other corporate transaction, desires to take any action that may be taken by it pursuant to the terms of such offer or other transaction, the Trust shall notify Custodian (i) - in the case of securities maintained outside the United States, such number of Business Days prior to the date on which Custodian is to take such action as will allow Custodian to take such action in -18- the relevant local market for such securities in a timely fashion, and (ii) in -- the case of all other securities, at least five Business Days prior to the date on which Custodian is to take such action. 3.25 Co-operation. Custodian shall cooperate with and supply necessary ------------ information to the entity or entities appointed by the Trust to keep the books of account of a Portfolio and/or to compute the value of the assets of a Portfolio. ARTICLE IV REDEMPTION OF PORTFOLIO SHARES; ------------------------------- DIVIDENDS AND OTHER DISTRIBUTIONS --------------------------------- 4.1 Transfer of Funds. From such funds as may be available for the purpose ----------------- in the Custody Account of a Portfolio, and upon receipt of Proper Instructions specifying that the funds are required to redeem Shares of such Portfolio or to pay dividends or other distributions to holders of Shares of such Portfolio, Custodian shall transfer each amount specified in such Proper Instructions to such account of such Portfolio or of an agent thereof (other than Custodian), at such bank, as the Trust may designate therein with respect to such amount. 4.2 Sole Duty of Custodian. Custodian's sole obligation with respect to the ---------------------- redemption of Shares of a Portfolio and the payment of dividends and other distributions thereon shall be its obligation set forth in Section 4.1 above, and Custodian shall not be required to make any payments to the various holders from time to time of Shares of a Portfolio nor shall Custodian be responsible for the payment or distribution by the Trust, or any agent designated in Proper Instructions given pursuant to Section 4.1 above, of any amount paid by Custodian to the account of the Trust or such agent in accordance with such Proper Instructions. ARTICLE V SEGREGATED ACCOUNTS ------------------- Upon receipt of Proper Instructions to do so, Custodian shall establish and maintain a segregated account or accounts for and on behalf of any Portfolio, into which account or accounts -19- may be transferred funds and/or securities, including securities maintained in a Securities Depository: (a) in accordance with the provisions of any agreement among the Trust, Custodian and a securities broker-dealer (or any futures commission merchant), relating to compliance with the rules of The Options Clearing Corporation or of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions of such Portfolio, (b) for purposes of segregating funds or securities in connection with securities options purchased or written by such Portfolio or in connection with financial futures contracts (or options thereon) purchased or sold by such Portfolio, (c) which constitute collateral for loans of securities made by such Portfolio, (d) for purposes of compliance by such Portfolio with requirements under the 1940 Act for the maintenance of segregated accounts by registered management investment companies in connection with reverse repurchase agreements, when- issued, delayed delivery and firm commitment transactions, and short sales of securities, and (e) for other proper purposes, but only upon receipt of Proper Instructions, specifying the purpose or purposes of such segregated account and certifying such purposes to be proper purposes of such Portfolio. ARTICLE VI CONCERNING THE CUSTODIAN ------------------------ 7.1 Standard of Care. Custodian shall be held to the exercise of ---------------- reasonable care in carrying out its obligations under this Agreement, and shall be without liability to any Portfolio or the Trust for any loss, damage, cost, expense (including attorneys' fees and disbursements), liability or claim which does not arise from willful misfeasance, bad faith or negligence on the -20- part of Custodian. Custodian shall be entitled to rely on and may act upon advice of counsel in all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. In no event shall Custodian be liable for special, incidental or consequential damages, even if Custodian has been advised of the possibility of such damages, or be liable in any manner whatsoever for any action taken or omitted upon instructions from the Trust or any agent of the Trust. 7.2 Actual Collection Required. Custodian shall not be liable for, or -------------------------- considered to be the custodian of, any funds belonging to a Portfolio or any money represented by a check, draft or other instrument for the payment of money, until Custodian or its agents actually receive such funds or collect on such instrument. 7.3 No Responsibility for Title, etc. So long as and to the extent that it -------------------------------- is in the exercise of reasonable care, Custodian shall not be responsible for the title, validity or genuineness of any assets or evidence of title thereto received or delivered by it or its agents. 7.4 Limitation on Duty to Collect. Custodian shall promptly notify the ----------------------------- Trust whenever any money or property due and payable from or on account of any securities or other assets held hereunder for a Portfolio is not timely received by it. Custodian shall not, however, be required to enforce collection, by legal means or otherwise, of any such money or other property not paid when due, but shall receive the proceeds of such collections as may be effected by it or its agents in the ordinary course of Custodian's custody and safekeeping business or of the custody and safekeeping business of such agents. 7.5 Express Duties Only. Custodian shall have no duties or obligations ------------------- whatsoever except such duties and obligations as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against Custodian. Custodian shall have no discretion whatsoever with respect to the management, disposition or investment of the Custody Account of any Portfolio and is not a fiduciary to any Portfolio or the Trust. In particular, Custodian shall not be under any obligation at any time to monitor or to take any other -21- action with respect to compliance by any Portfolio or the Trust with the 1940 Act, the provisions of the Trust's trust instruments or by-laws, or any Portfolio's investment objectives, policies and limitations as in effect from time to time. ARTICLE VIII INDEMNIFICATION --------------- 8.1 Indemnification. Each Portfolio shall indemnify and hold harmless --------------- Custodian, any sub-custodian appointed pursuant to this Agreement and any nominee of any of them, from and against any loss, damages, cost, expense (including attorneys' fees and disbursements), liability (including, without limitation, liability arising under the Securities Act of 1933, the Securities Exchange Act of 1934, the 1940 Act, and any federal, state or foreign securities and/or banking laws) or claim arising directly or indirectly (a) from the fact - that securities or other assets in the Custody Account of such Portfolio are registered in the name of any such nominee, or (b) from any action or inaction, - with respect to such Portfolio, by Custodian or such sub-custodian or nominee (i) at the request or direction of or in reliance on the advice of the Trust or - any of its agents, or (ii) upon Proper Instructions, or (c) generally, from the -- - performance of its obligations under this Agreement with respect to such Portfolio, provided that Custodian, any such sub-custodian or any nominee of any of them shall not be indemnified and held harmless from and against any such loss, damage, cost, expense, liability or claim arising from willful misfeasance, bad faith or negligence on the part of Custodian or any such sub- custodian or nominee. 8.2 Indemnity to be Provided. If the Trust requests Custodian to take any ------------------------ action with respect to securities or other assets of a Portfolio, which may, in the opinion of Custodian, result in Custodian or its nominee becoming liable for the payment of money or incurring liability of some other form, Custodian shall not be required to take such action until such Portfolio shall have provided indemnity therefor to Custodian in an amount and form satisfactory to Custodian. 8.3 Security. As security for the payment of any present or future -------- obligation or liability of any kind which a Portfolio may have to Custodian with respect to or in connection with the Custody Account of such Portfolio or this Agreement, or which such Portfolio may otherwise -22- have to Custodian, the Trust hereby pledges to Custodian all securities, funds and other assets of every kind which are in such Custody Account or otherwise held for such Portfolio pursuant to this Agreement, and hereby grants to Custodian a lien, right of set-off and continuing security interest in such securities, funds and other assets. ARTICLE IX FORCE MAJEURE ------------- Custodian shall not be liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; strikes; epidemics; riots; power failures; computer failure and any such circumstances beyond its reasonable control as may cause interruption, loss or malfunction of utility, transportation, computer (hardware or software) or telephone communication service; accidents; labor disputes; acts of civil or military authority; actions by any governmental authority, de jure -- ---- or de facto; or inability to obtain labor, material, equipment or -- ----- transportation. ARTICLE X REPRESENTATIONS AND WARRANTIES ------------------------------ 10.1 Representations With Respect to Portfolios. The Trust represents and ------------------------------------------ warrants that (a) it has all necessary power and authority to perform the obligations hereunder of each Portfolio, (b) the execution and delivery by it of this Agreement, and the performance by it of the obligations hereunder of each Portfolio, have been duly authorized by all necessary action and will not violate any law, regulation, charter, by-law, or other instrument, restriction or provision applicable to it or such Portfolio or by which it or such Portfolio, or their respective assets, may be bound, and (c) this Agreement constitutes a legal, valid and binding obligation of each Portfolio, enforceable against it in accordance with its terms. 10.2 Representations of Custodian. Custodian represents and warrants that ---------------------------- (a) it has all necessary power and authority to perform its obligations hereunder, (b) the execution and -23- delivery by it of this Agreement, and the performance by it of its obligations hereunder, have been duly authorized by all necessary action and will not violate any law, regulation, charter, by-law, or other instrument, restriction or provision applicable to it or by which it or its assets may be bound, and (c) this Agreement constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with its terms. ARTICLE XI COMPENSATION OF CUSTODIAN ------------------------- Each Portfolio shall pay Custodian such fees and charges as are set forth in Exhibit E hereto, as such Exhibit E may from time to time be revised by Custodian upon 14 days' prior written notice to the Trust. Any annual fee or other charges payable by a Portfolio shall be paid monthly by automatic deduction from funds available therefor in the Custody Account of such Portfolio, or, if there are no such funds, upon presentation of an invoice therefor. Out-of-pocket expenses incurred by Custodian in the performance of its services hereunder for any Portfolio and all other proper charges and disbursements of the Custody Account of such Portfolio shall be charged to such Custody Account by Custodian and paid in the same manner as the annual fee and other charges referred to in this Article XI. ARTICLE XII TAXES ----- 12.1 Taxes Payable by Portfolios. Any and all taxes, including any interest --------------------------- and penalties with respect thereto, which may be levied or assessed under present or future laws or in respect of the Custody Account of any Portfolio or any income thereof shall be charged to such Custody Account by Custodian and paid in the same manner as the annual fee and other charges referred to in Article XI above. 12.2 Tax Reclaims. Upon the written request of the Trust, Custodian shall ------------ exercise, on behalf of any Portfolio, any tax reclaim rights of such Portfolio which arise in connection with foreign securities in the Custody Account of such Portfolio. -24- ARTICLE XIII AUTHORIZED PERSONS; NOTICES --------------------------- 13.1 Authorized Persons. Custodian may rely upon and act in accordance with ------------------ any notice, confirmation, instruction or other communication which is reasonably believed by Custodian to have been given or signed on behalf of the Trust by one of the Authorized Persons designated by the Trust in Exhibit B hereto, as it may from time to time be revised. The Trust may revise Exhibit B hereto at any time by notice in writing to Custodian given in accordance with Section 13.4 below, but no revision of Exhibit B hereto shall be effective until Custodian actually receives such notice. 13.2 Investment Advisers. Custodian may also rely upon and act in ------------------- accordance with any Written or Oral Instructions given with respect to a Portfolio which are reasonably believed by Custodian to have been given or signed by one of the persons designated from time to time by any of the investment advisers of such Portfolio who are specified in Exhibit C hereto (if any) as it may from time to time be revised. The Trust may revise Exhibit C hereto at any time by notice in writing to Custodian given in accordance with Section 13.4 below, and each investment adviser specified in Exhibit C hereto (if any) may at any time by like notice designate an Authorized Person or remove an Authorized Person previously designated by it, but no revision of Exhibit C hereto (if any) and no designation or removal by such investment adviser shall be effective until Custodian actually receives such notice. 13.3 Oral Instructions. Custodian may rely upon and act in accordance with ----------------- Oral Instructions. All Oral Instructions shall be confirmed to Custodian in Written Instructions. However, if Written Instructions confirming Oral Instructions are not received by Custodian prior to a transaction, it shall in no way affect the validity of the transaction authorized by such Oral Instructions or the authorization given by an Authorized Person to effect such transaction. Custodian shall incur no liability to any Portfolio or the Trust in acting upon Oral Instructions. To the extent such Oral Instructions vary from any confirming Written Instructions, Custodian -25- shall advise the Trust of such variance but unless confirming Written Instructions are timely received, such Oral Instructions shall govern. 13.4 Addresses for Notices. Unless otherwise specified herein, all demands, --------------------- notices, instructions, and other communications to be given hereunder shall be sent, delivered or given to the recipient at the address, or the relevant telephone number, set forth after its name hereinbelow: If to the Trust: THE BEAR STEARNS FUNDS for [INSERT NAME OF PORTFOLIO] 575 Lexington Avenue New York, NY 10022 Attention: Ellen T. Arthur --------------- Telephone: (212) 272-2346 Facsimile: (212) 272-6856 If to Custodian: CUSTODIAL TRUST COMPANY 101 Carnegie Center Princeton, New Jersey 08540-6231 Attention: Vice President - Trust Operations --------------------------------- Telephone: (609) 951-2320 Facsimile: (609) 951-2327 or at such other address as either party hereto shall have provided to the other by notice given in accordance with this Section 13.4. Writing shall include transmissions by or through teletype, facsimile, central processing unit connection, on-line terminal and magnetic tape. 13.5 Remote Clearance. Written Instructions for the receipt, delivery or ---------------- transfer of securities may include, and Custodian shall accept, Remote Clearance Instructions (as defined hereinbelow) and Bulk Input Instructions (as defined hereinbelow), provided that such Instructions are given in accordance with the procedures prescribed by Custodian from time to time as to content of instructions and their manner and timeliness of delivery by Customer. -26- Custodian shall be entitled to conclusively assume that all Remote Clearance Instructions and Bulk Input Instructions have been given by an Authorized Person, and Custodian is hereby irrevocably authorized to act in accordance therewith. For purposes of this Agreement, "Remote Clearance Instructions" means instructions that are input directly via a remote terminal which is located on the premises of the Trust, or of an investment adviser named in Exhibit C hereto, and linked to Custodian; and "Bulk Input Instructions" means instructions that are input by bulk input computer tape delivered to Custodian by messenger or transmitted to it via such transmission mechanism as the Trust and Custodian shall from time to time agree upon. ARTICLE XIV TERMINATION ----------- Either party hereto may terminate this Agreement with respect to one or more of the Portfolios by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of the giving of such notice. Upon the date set forth in such notice this Agreement shall terminate with respect to each Portfolio specified in such notice, and Custodian shall, upon receipt of a notice of acceptance by the successor custodian, on that date (a) deliver directly to the - successor custodian or its agents all securities (other than securities held in a Book-Entry System or Securities Depository) and other assets then owned by such Portfolio and held by Custodian as custodian, and (b) transfer any - securities held in a Book-Entry System or Securities Depository to an account of or for the benefit of such Portfolio, provided that such Portfolio shall have paid to Custodian all fees, expenses and other amounts to the payment or reimbursement of which it shall then be entitled. ARTICLE XV LIMITATION OF LIABILITIES ------------------------- To the extent that the trustees of the Trust are regarded as entering into this Agreement, they do so only as trustees of the Trust and not individually. The obligations under this Agreement of the Trust or any Portfolio shall not be binding upon any trustee, officer or employee of the Trust individually, or upon any holder of Shares individually, but shall be binding only upon the assets and property of such Portfolio. Such trustees, officers, employees -27- and holders, when acting in such capacities, shall not be personally liable under this Agreement, and Custodian shall look solely to the assets and property of each Portfolio for the performance of this Agreement with respect to such Portfolio and the payment of any claim against such Portfolio under this Agreement. ARTICLE XVI MISCELLANEOUS ------------- 16.1 Business Days. Nothing contained in this Agreement shall require ------------- Custodian to perform any function or duty on a day other than a Business Day. 16.2 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New York, without regard to the conflict of law principles thereof. 16.3 References to Custodian. The Trust shall not circulate any printed ----------------------- matter which contains any reference to Custodian without the prior written approval of Custodian, excepting printed matter contained in the prospectus or statement of additional information for a Portfolio and such other printed matter as merely identifies Custodian as custodian for a Portfolio. The Trust shall submit printed matter requiring approval to Custodian in draft form, allowing sufficient time for review by Custodian and its counsel prior to any deadline for printing. 16.4 No Waiver. No failure by either party hereto to exercise, and no delay --------- by such party in exercising, any right hereunder shall operate as a waiver thereof. The exercise by either party hereto of any right hereunder shall not preclude the exercise of any other right, and the remedies provided herein are cumulative and not exclusive of any remedies provided at law or in equity. 16.5 Amendments. This Agreement cannot be changed orally and, except as ---------- otherwise provided herein with respect to the Exhibits attached hereto, no amendment to this Agreement shall be effective unless evidenced by an instrument in writing executed by the parties hereto. -28- 16.6 Counterparts. This Agreement may be executed in one or more ------------ counterparts, and by the parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute but one and the same instrument. 16.7 Severability. If any provision of this Agreement shall be invalid, ------------ illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. 16.8 Successors and Assigns. This Agreement shall be binding upon and shall ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by -------- ------- either party hereto without the written consent of the other party. Any purported assignment in violation of this Section 16.8 shall be void. 16.9 Jurisdiction. Any suit, action or proceeding with respect to this ------------ Agreement may be brought in the Supreme Court of the State of New York, County of New York, or in the United States District Court for the Southern District of New York, and the parties hereto hereby submit to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding, and hereby waive for such purpose any other preferential jurisdiction by reason of their present or future domicile or otherwise. 16.10 Headings. The headings of sections in this Agreement are for -------- convenience of reference only and shall not affect the meaning or construction of any provision of this Agreement. -29- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its representative thereunto duly authorized, all as of the day and year first above written. THE BEAR STEARNS FUNDS By: /s/ Robert S. Reitzes --------------------- Name: Robert S. Reitzes Title: President CUSTODIAL TRUST COMPANY By: /s/ Ronald D. Watson -------------------- Name: Ronald D. Watson Title: President -30- EXHIBIT A PORTFOLIOS ---------- (as of July 13, 2000) - Balanced Portfolio - High Yield Total Return Portfolio - International Equity Portfolio - Small Cap Value Portfolio - Large Cap Value Portfolio - Total Return Bond Portfolio - S&P Stars Portfolio - The Insiders Select Portfolio - Focus List Portfolio - Prime Money Market Portfolio -31- EXHIBIT B AUTHORIZED PERSONS ------------------ Set forth below are the names and specimen signatures of the persons authorized by the Trust to administer the Custody Accounts of the Portfolios. All Portfolios - -------------- Frank J. Maresca and Vincent L. Pereira Large Cap Value Portfolio, Small Cap Value Portfolio and S&P STARS Portfolio - ---------------------------------------------------------------------------- Jamie Bogen, Jodi B. Levine and James G. McCluskey Focus List Portfolio - -------------------- Jamie Bogen, Mark A. Kurland and Jodi B. Levine The Insiders Select Fund - ------------------------ Jamie Bogen, Jodi B. Levine and James G. McCluskey Balanced Portfolio - ------------------ Jamie Bogen, Lawrence Fields and Jodi B. Levine International Equity Portfolio - ------------------------------ Edward G. Keane, Jamie A. Bogen and Jodi B. Levine Income Portfolio and High Yield Total Return Portfolio - ------------------------------------------------------ John Geissinger, Peter Mahoney and Wendy Wang Prime Money Market Portfolio - ---------------------------- Jeff Bagaglio, John Geissinger and Wendy Wang Authorized Signatories Signature - ---------------------- --------- Edward G. Keane /s/ Edward G. Keane ------------------- Jeff Bagaglio /s/ Jeff Bagaglio ----------------- Jamie Bogen /s/ Jamie Bogen --------------- Lawrence Fields /s/ Lawrence Fields ------------------- John Geissinger /s/ John Geissinger ------------------- Mark B. Kurland /s/ Mark B. Kurland ------------------- Jodi B. Levine /s/ Jodi B. Levine ------------------ Peter Mahoney /s/ Peter Mahoney ----------------- Frank J. Maresca /s/ Frank J. Maresca ------------------- James G. McCluskey /s/ James G. McCluskey ---------------------- Vincent L. Pereira /s/ Vincent L. Pereira ---------------------- Wendy Wang /s/ Wendy Wang -------------- Revised as of May 4, 2000 -32- EXHIBIT C INVESTMENT ADVISERS ------------------- ALL PORTFOLIOS Bear Stearns Asset Management Inc. -33- EXHIBIT D APPROVED FOREIGN SUB-CUSTODIANS AND SECURITIES DEPOSITORIES ----------------------------------------------------------- Country Subcustodian Bank Securities Depositories - ------- ------------------ ----------------------- Australia Citicorp Nominees Ltd. Austraclear CHESS RITS Canada Citibank Canada CDS Denmark Citibank through Den Danske Bank The Danish Securities Centre Finland Citibank through Merita Bank Finish Central Securities Depository Ltd. France Citibank, S.A. SICOVAM S.A. Germany Citibank Aktiengesellshaft Deutsche Boerse Clearing AG Hong Kong Citibank, N.A. Hong Kong Securities Clearing Company Limited Central Money Markets Unit Ireland Citibank, N.A Central Bank of Ireland CREST Italy Citibank, N.A. Monte Titoli Spa Bank of Italy Japan Citibank, N.A. The Bank of Japan Japan Securities Depository Center -34- Netherlands Citibank, N.A. Nederlands Interprofessioneel Effectencentrum NIEC B.V. Nominee Amsterdam Stock Exchange N.V. Nederlands Centraal Instituut Voor Giraal Effectenverkeer B.V. Norway Citibank through Christiania Bank Verdipapirsentralen og Kreditkasse (Norwegian Central Securities Depository) Portugal Citibank Portugal INTERBOLSA (Central de Valores Mobiliarios) Singapore Citibank, N.A. Central Depository (Pte) Ltd. Spain Citibank, N.A. Bank of Spain Servicio de Compensacion y Liquidacion de Valores Sweden Citibank through Skandinaviska Vardepapperscentralen VPC AB Enskilda Banken Switzerland Citibank, N.A. Schweizerishe Effekten - Giro AG Thailand Citibank, N.A. Thailand Securities Depository Co., Ltd. United Kingdom Citibank, N.A. CREST Central Gilts Office (Bank of England) Central Money Market Office (Bank of England) First Chicago Clearing Centre Custodial Trust Company Depository Participant Relationships - -------------------------------------------------------------- Euroclear Belgium Cedel Luxembourg -35- EXHIBIT E CUSTODY FEES AND TRANSACTION CHARGES ------------------------------------ Domestic Fees. Each Portfolio shall pay Custodian the following fees for ------------- assets maintained by such Portfolio in the United States ("Domestic Assets") and charges for transactions by such Portfolio in the United States, all such fees and charges to be payable monthly: (1) an annual fee of the greater of 0.015% (one and one-half basis points) per annum of the value of the Domestic Assets in the Custody Account of such Portfolio or $5,000, any such percentage fee to be based upon the total market value of such Domestic Assets as determined on the last Business Day of the month for which such fee is charged; (2) a transaction charge of $18 for each receive or deliver of book-entry securities into or from the Custody Account of such Portfolio (but not for any such receive or deliver of book-entry securities in a repurchase transaction representing a cash sweep investment for such Portfolio's account); (3) a transaction charge of $50 for each receive or deliver into or from such Portfolio's Custody Account of securities in physical form; (4) a transaction charge for each repurchase transaction in the Custody Account of such Portfolio which represents a cash sweep investment for such Portfolio's account, computed on the basis of a 360-day year and for the actual number of days such repurchase transaction is outstanding at a rate of 0.10% (ten basis points) per annum on the amount of the purchase price paid by such Portfolio in such repurchase transaction; (5) a charge of $10 for each "free" transfer of funds from the Custody Account of such Portfolio; -36- (6) an administrative fee for each purchase in the Custody Account of such Portfolio of shares or other interests in a money market or other fund, which purchase represents a cash sweep investment for such Portfolio's account, computed for each day that there is a positive balance in such fund to equal 1/365th of 0.10% (ten basis points) on the amount of such positive balance for such day; and (7) a service charge for each holding of securities or other assets of such Portfolio that are sold by way of private placement or in such other manner as to require services by Custodian which in its reasonable judgment are materially in excess of those ordinarily required for the holding of publicly traded securities in the United States. International Fees. Each Portfolio shall pay Custodian fees for assets ------------------ maintained by such Portfolio outside the United States ("Foreign Assets") and charges for transactions by such Portfolio outside the United States (including, without limitation, charges for funds transfers and tax reclaims) in accordance with such schedule of fees and charges for each country in which Foreign Assets of such Portfolio are held as Custodian shall from time to time provide to the Trust. Any asset-based fee shall be based upon the total market value of the applicable Foreign Assets as determined on the last Business Day of the month for which such fee is charged. -37- EX-99.G(2) 7 0007.txt CUSTODY AGREEMENT WITH BROWN BROTHERS (EMD ONLY) EXHIBIT G(2) AGREEMENT BETWEEN BROWN BROTHERS HARRIMAN & CO. AND BEAR STEARNS INVESTMENT TRUST Table of Contents -----------------
Page ---- 1. Employment of Custodian....................................................... 1 2. Powers and Duties of the Custodian with respect to Property of the Fund held by the Custodian......................................................... 1 A. Safekeeping............................................................. 2 B. Manner of Holding Securities............................................ 2 C. Registered Name......................................................... 2 D. Purchases............................................................... 2 E. Exchanges............................................................... 3 F. Sales of Securities..................................................... 3 G. Depositary Receipts..................................................... 4 H. Exercise of Rights; Tender Offers....................................... 5 I. Stock Dividends, Rights, Etc............................................ 5 J. Options................................................................. 5 K. Borrowings.............................................................. 6 L. Demand Deposit Bank Accounts............................................ 6 M. Interest Bearing Call or Time Deposits.................................. 6 N. Foreign Exchange Transactions and Futures Contracts..................... 7 O. Stock Loans............................................................. 8 P. Collections............................................................. 8 Q. Dividends. Distributions and Redemptions................................ 9 R. Proxies, Notices, Etc................................................... 9 S. Nondiscretionary Details................................................ 10 T. Bills................................................................... 10 U. Deposit of Fund Assets in Securities Systems............................ 10 V. Other Transfers......................................................... 12 W. Investment Limitations.................................................. 13 X. Restricted Securities................................................... 13 Y. Proper Instructions..................................................... 14 Z. Segregated Account...................................................... 15 3. Powers and Duties of the Custodian with Respect to the Appointment of Subcustodians................................................................. 15 4. Assistance by the Custodian as to Certain Matters............................. 19 5. Powers and Duties of the Custodian with Respect to Records.................... 19 A. Records................................................................. 19 B. Accounts................................................................ 20 C. Access to Records....................................................... 20 6. Standard of Care and Related Matters.......................................... 20 A. Liability of the Custodian with Respect to Proper Instructions: Evidence of Authority; Etc.............................................. 20 B. Liability of the Custodian with Respect to Use of Securities System..... 21
i C. Standard of Care; Liability; Indemnification............................ 22 D. Reimbursement of Advances............................................... 23 E. Security for Obligations to Custodian................................... 23 F. Appointment of Agents................................................... 23 G. Powers of Attorney...................................................... 24 7. Compensation of the Custodian................................................. 24 8. Termination; Successor Custodian.............................................. 24 9. Amendment..................................................................... 25 10. Governing Law................................................................. 25 11. Notices....................................................................... 25 12. Binding Effect................................................................ 26 13. Counterparts.................................................................. 26
ii CUSTODIAN AGREEMENT AGREEMENT made this 8th day of January, 1993, between BEAR STEARNS INVESTMENT TRUST (the "Trust") and Brown Brothers Harriman & Co. (the "Custodian"); WHEREAS, the Emerging Markets Debt Fund (the "Fund") is organized as a separate, non-diversified portfolio of the Trust, an open-end management company and the Trust wishes to retain the Custodian as custodian of the Fund's assets; WITNESSETH: That in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. Employment of Custodian: The Trust hereby employs and appoints the ----------------------- Custodian as a custodian of the Fund for the term and subject to the provisions of this Agreement. The Custodian shall not be under any duty or obligation to require the Fund to deliver to it any securities or funds owned by the Fund and shall have no responsibility or liability for or on account of securities or funds not so delivered. The Fund will deposit with the Custodian copies of the Declaration of Trust and By-Laws of the Trust and all amendments thereto, and copies of such votes and other proceedings of the Trust as may be necessary for or convenient to the Custodian in the performance of its duties. 2. Powers and Duties of the Custodian with respect to Property of the Fund ----------------------------------------------------------------------- held by the Custodian: Except for securities and funds held by any Subcustodians - --------------------- (as defined in Section 3 hereof) or held by the Custodian through a non-U.S. securities depository appointed pursuant to the provisions of Section 3 hereof, the Custodian shall have and perform the following powers and duties: -1- A. Safekeeping - To keep safely the securities and other assets of ----------- the Fund that have been delivered to the Custodian and, on behalf of the Fund, from time to time to receive delivery of securities and other assets for safekeeping. B. Manner of Holding Securities - To hold securities of the Fund (1) ---------------------------- by physical possession of the share certificates or other instruments representing such securities in registered or bearer form, or (2) in book-entry form by a Securities System (as said term is defined in Section 2U). C. Registered Name - To hold registered securities of the Fund, with --------------- or without any indication of fiduciary capacity, provided that securities are held in an account of the Custodian containing only assets of the Fund or only assets held as fiduciary or custodian for customers. D. Purchases - Upon receipt of Proper Instructions, as defined in --------- Section Y, insofar as funds are available for the purpose, to pay for and receive securities purchased for the account of the Fund, payment being made only upon receipt of the securities (1) by the Custodian, or (2) by a clearing corporation of a national securities exchange of which the Custodian is a member, or (3) by a Securities System. However. (i) in the case of repurchase agreements entered into by the Fund, the Custodian (as well as an Agent) may release funds to a Securities System or to a Subcustodian prior to the receipt of advice from the Securities System or Subcustodian that the securities underlying such repurchase agreement have been transferred by book entry into the Account (as defined in Section 2U) of the Custodian (or such Agent) maintained with such Securities System or Subcustodian, so long as such payment instructions to the Securities System or Subcustodian include a requirement that delivery is only against payment for securities (ii) in the case of foreign exchange contracts, options, time deposits, call -2- account deposits, currency deposits, and other deposits, contracts or options pursuant to Sections 2J, 2L, 2M and 2N, the Custodian may make payment therefor without receiving an instrument evidencing said deposit, contract or option so long as such payment instructions detail specific securities to be acquired, and (iii) in the case of securities in which payment for the security and receipt of the instrument evidencing the security are under generally accepted trade practice or the terms of the instrument representing the security expected to take place in different locations or through separate parties, such as commercial paper which is indexed to foreign currency exchange rates, derivatives and similar securities, the Custodian may make payment for such securities prior to delivery thereof in accordance with such generally accepted trade practice or the terms of the instrument representing such security. E. Exchanges - Upon receipt of Proper Instructions, to exchange --------- securities held by it for the account of the Fund for other securities in connection with any reorganization, recapitalization, split-up of shares, change of par value, conversion or other event, relating to the securities or the issuer of such securities, and to deposit any such securities in accordance with the terms of any reorganization or protective plan. Without Proper Instructions, the Custodian may surrender securities in temporary form for definitive securities, may surrender securities for transfer into a name or nominee name as permitted in Section 2C, and may surrender securities for a different number of certificates or instruments representing the same number of shares or same principal amount of indebtedness, provided the securities to be issued are to be delivered to the Custodian. F. Sales of Securities - Upon receipt of Proper Instructions, to ------------------- make delivery of securities which have been sold for the account of the Fund, but only against payment therefor (1) in cash, by a certified check, bank cashier's check, bank credit, or bank wire transfer, or (2) -3- by credit to the account of the Custodian with a clearing corporation of a national securities exchange of which the Custodian is a member, or (3) by credit to the account of the Custodian or an Agent of the Custodian with a Securities System: provided, however, that (i) in the case of delivery of -------- ------- physical certificates or instruments representing securities, the Custodian may make delivery to the broker buying the securities, against receipt therefor, for examination in accordance with "street delivery" custom, provided that the payment therefor is to be made to the Custodian (which payment may be made by a broker's check) or that such securities are to be returned to the Custodian, and (ii) in the case of securities referred to in clause (iii) of the last sentence of Section 2D, the Custodian may make settlement, including with respect to the form of payment, in accordance with generally accepted trade practice relating to such securities or the terms of the instrument representing said security. G. Depositary Receipts - Upon receipt of Proper Instructions, to ------------------- instruct a Subcustodian or an Agent to surrender securities to the depositary used by an issuer of American Depositary Receipts or International Depositary Receipts (hereinafter collectively referred to as "ADRs") for such securities against a written receipt therefor adequately describing such securities and written evidence satisfactory to the Subcustodian or Agent that the depositary has acknowledged receipt of instructions to issue with respect to such securities ADRs in the name of the Custodian, or a nominee of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at such other place as the Custodian may from time to time designate. Upon receipt of Proper Instructions, to surrender ADRs to the issuer thereof against a written receipt therefor adequately describing the ADRs surrendered and written evidence satisfactory to the Custodian that the issuer of the ADRs has acknowledged receipt of -4- instructions to cause its depositary to deliver the securities underlying such ADRs to a Subcustodian or an Agent. H. Exercise of Rights; Tender Offers - Upon timely receipt of Proper --------------------------------- Instructions, to deliver to the issuer or trustee thereof, or to the agent of either, warrants, puts, calls, rights or similar securities for the purpose of being exercised or sold, provided that the new securities and cash, if any, acquired by such action are to be delivered to the Custodian, and, upon receipt of Proper Instructions, to deposit securities upon invitations for tenders of securities, provided that the consideration is to be paid or delivered or the tendered securities are to be returned to the Custodian. I. Stock Dividends, Rights, Etc. - To receive and collect all stock ---------------------------- dividends, rights and other items of like nature; and to deal with the same pursuant to Proper Instructions relative thereto. J. Options - Upon receipt of Proper Instructions, to receive and ------- retain confirmations or other documents evidencing the purchase or writing of an option on a security or securities index by the Fund; to deposit and maintain in a segregated account, either physically or by book-entry in a Securities System, securities subject to a covered call option written by the Fund; and to release and/or transfer such securities or other assets only in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer relating to such securities or other assets a notice or other communication evidencing the expiration, termination or exercise of such covered option furnished by The Options Clearing Corporation, the securities or options exchange on which such covered option is traded or such other organization as may be responsible for handling such options transactions. -5- K. Borrowings - Upon receipt of Proper Instructions, to deliver ---------- securities of the Fund to lenders or their agents as collateral for borrowings effected by the Fund, provided that such borrowed money is payable to or upon the Custodian's order as Custodian for the Fund. L. Demand Deposit Bank Accounts - To open and operate an account or ---------------------------- accounts in the name of the Fund on the Custodian's books subject only to draft or order by the Custodian. All funds received by the Custodian from or for the account of the Fund shall be deposited in said account(s). The responsibilities of the Custodian to the Fund for deposits accepted on the Custodian's books shall be that of a U. S. bank for a similar deposit. If and when authorized by Proper Instructions, the Custodian may open and operate an additional account(s) in such other banks or trust companies as may be designated by the Fund in such instructions (any such bank or trust company so designated by the Fund being referred to hereafter as a "Banking Institution"), provided that such account(s) (hereinafter collectively referred to as "demand deposit bank accounts") shall be in the name of the Custodian for account of the Fund and subject only to the Custodian's draft or order. Such demand deposit accounts may be opened with Banking Institutions in the United States and in other countries and may be denominated in either U. S. Dollars or other currencies as the Fund may determine. All such deposits shall be deemed to be portfolio securities of the Fund and accordingly the responsibility of the Custodian therefore shall be the same as and no greater than the Custodian's responsibility in respect of other portfolio securities of the Fund. M. Interest Bearing Call or Time Deposits - To place interest -------------------------------------- bearing fixed term and call deposits with such banks and in such amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits may be placed with the Custodian or with Subcustodians or other Banking Institutions as the Fund may determine. Deposits may be denominated in U.S. -6- Dollars or other currencies and need not be evidenced by the issuance or delivery of a certificate to the Custodian, provided that the Custodian shall include in its records with respect to the assets of the Fund appropriate notation as to the amount and currency of each such deposit, the accepting Banking Institution and other appropriate details, and shall retain such forms of advice or receipt evidencing the deposit, if any, as may be forwarded to the Custodian by the Banking Institution. Such deposits, other than those placed with the Custodian, shall be deemed portfolio securities of the Find and the responsibilities of the Custodian therefor shall be the same as those for demand deposit bank accounts placed with other banks, as described in Section L of this Agreement. The responsibility of the Custodian for such deposits accepted on the Custodian's books shall be that of a U. S. bank for a similar deposit. N. Foreign Exchange Transactions and Futures Contracts - Pursuant to --------------------------------------------------- Proper Instructions, to enter into foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf and for the account of the Fund. Such transactions may be undertaken by the Custodian with such Banking Institutions, including the Custodian and Subcustodian(s) as principals, as approved and authorized by the Fund. Foreign exchange contracts and options other than those executed with the Custodian, shall be deemed to be portfolio securities of the Fund and the responsibilities of the Custodian therefor shall be the same as those for demand deposit bank accounts placed with other banks as described in Section 2-L of this agreement. Upon receipt of Proper Instructions, to receive and retain confirmations evidencing the purchase or sale of a futures contract or an option on a futures contract by the Fund; to deposit and maintain in a segregated account, for the benefit of any futures commission merchant or to pay to such futures commission merchant, assets designated by the Fund as initial, maintenance or variation "margin" deposits intended to secure the Fund's performance of its obligations under any futures contracts purchased or sold or any options on futures contracts -7- written by the Fund, in accordance with the provisions of any agreement or agreements among any of the Fund, the Custodian and such futures commission merchant, designated to comply with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations, regarding such margin deposits; and to release and/or transfer assets in such margin accounts only in accordance with any such agreements or rules. O. Stock Loans - Upon receipt of Proper Instructions, to deliver ----------- securities of the Fund, in connection with loans of securities by the Fund, to the borrower thereof prior to receipt of the collateral, if any, for such borrowing, provided that for stock loans secured by cash collateral the Custodian's instructions to the Securities System require that the Securities System may deliver the securities to the borrower thereof only upon receipt of the collateral for such borrowing. P. Collections - To collect, receive and deposit in said account or ----------- accounts all income, payments of principal and other payments with respect to the securities held hereunder, and in connection therewith to deliver the certificates or other instruments representing the securities to the issuer thereof or its agent when securities are called, redeemed, retired or otherwise become payable; provided, that the payment is to be made in such firm and ------- -------- manner, and at such time, which may be after delivery by the Custodian of the instrument representing the security, as is in accordance with the terms of the instrument representing the security, or such Proper Instructions as the Custodian may receive, or governmental regulations, the rules of Securities Systems or other U.S. securities depositories and clearing agencies or, with respect to securities referred to in clause (iii) of the last sentence of Section 2D, in accordance with generally accepted trade practice; (ii) to execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with -8- respect to securities of the Fund or in connection with transfer of securities, and (iii) pursuant to Proper Instructions to take such other actions with respect to collection or receipt of funds or transfer of securities which involve an investment decision. The Custodian shall promptly notify the Fund in writing by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing if any amount payable with respect to portfolio securities or other assets of the Fund is not received by the Custodian when due. Q. Dividends. Distributions and Redemptions - Upon receipt of Proper ---------------------------------------- Instructions from the Fund, or upon receipt of instructions from the Fund's shareholder servicing agent or agent with comparable duties (the "Shareholder Servicing Agent") (given by such person or persons and in such manner on behalf of the Shareholder Servicing Agent as the Fund shall have authorized), the Custodian shall release funds or securities to the Shareholder Servicing Agent or otherwise apply funds or securities, insofar as available, for the payment of dividends or other distributions to Fund shareholders. Upon receipt of Proper Instructions from the Fund, or upon receipt of instructions from the Shareholder Servicing Agent (given by such person or persons and in such manner on behalf of the Shareholder Servicing Agent as the Fund shall have authorized), the Custodian shall release funds or securities, insofar as available, to the Shareholder Servicing Agent or as such Agent shall otherwise instruct for payment to Fund shareholders who have delivered to such Agent a request for repurchase or redemption of their shares of capital stock of the Fund. R. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund --------------------- all forms of proxies and all notices of meetings and any other notices or announcements affecting or relating to securities owned by the Fund that are received by the Custodian, and upon receipt of Proper Instructions, to execute and deliver or cause its nominee to execute and deliver such proxies or -9- other authorizations as may be required. Neither the Custodian nor its nominee shall vote upon any of such securities or execute any proxy to vote thereon or give any consent or take any other action with respect thereto (except as otherwise herein provided) unless ordered to do so by Proper Instructions. S. Nondiscretionary Details - Without the necessity of express ------------------------ authorization from the Fund, (1) to attend to all nondiscretionary details in connection with the sale, exchange, substitution, purchase, transfer or other dealings with securities, funds or other property of the Portfolio held by the Custodian except as otherwise directed from time to time by the Trustees of the Trust, and (2) to make payments to itself or others for minor expenses of handling securities or other similar items relating to the Custodian's duties under this Agreement, provided that all such payments shall be accounted for to the Fund. T. Bills - Upon receipt of Proper Instructions, to pay or cause to ----- be paid, insofar as funds are available for the purpose, bills, statements and other obligations of the Fund (including but not limited to interest charges, taxes, management fees, compensation to Fund officers and employees, and other operating expenses of the Fund). U. Deposit of Fund Assets in Securities Systems - The Custodian may -------------------------------------------- deposit and/or maintain securities owned by the Fund in (i) The Depository Trust Company, (ii) any book-entry system as provided is Subpart O of Treasury Circular No. 300, 31 CFR 306. Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies substantially in the form of Subpart O, or (iii) any other domestic clearing agency registered with the Securities and Exchange Commission ("SEC") under Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act") which acts as a securities depository and whose use the Fund has previously approved in writing (each of the foregoing being referred to in this Agreement as a -10- "Securities System"). Utilization of a Securities System shall be in accordance with applicable Federal Reserve Hoard and SEC rules and regulations, if any, and subject to the following provisions: 1) The Custodian may deposit and/or maintain Fund securities, either directly or through one or more Agents appointed by the Custodian (provided that any such agent shall be qualified to act as a custodian of the Fund pursuant to the Investment Company Act of 1940, as amended (the "Investment Company Act") and the rules and regulations thereunder), in a Securities System provided that such securities are represented in an account ("Account") of the Custodian or such Agent in the Securities System which shall not include any assets of the Custodian or Agent other than assets held as a fiduciary, custodian, or otherwise for customers; 2) The records of the Custodian with respect to securities of the Fund which are maintained in a Securities System shall identify by book- entry those securities belonging to the Fund: 3) The Custodian shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account -11- of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian or an Agent as referred to above, and be provided to the Fund at its request. The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund on the next business day; 4) The Custodian shall provide the Fund with any report obtained by the Custodian or any Agent as referred to above in the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; and the Custodian and such Agents shall send to the Fund such reports on their own systems of internal accounting control as the Fund may reasonably request from time to time. 5) At the written request of the Fund, the Custodian will terminate the use of any such Securities System on behalf of the Fund as promptly as practicable. V. Other Transfers - Upon receipt of Proper Instructions, to deliver --------------- securities, funds and other property of the Fund to a Subcustodian or another custodian of the Fund; and, upon receipt of Proper Instructions, to make such other disposition of securities, funds or other property of the Fund in a manner other than or for purposes other than as enumerated elsewhere in this Agreement, provided that the instructions relating to such disposition shall state the amount of securities to be delivered and the name of the person or persons to whom delivery is to be made. -12- W. Investment Limitations - In performing its duties generally, and ---------------------- more particularly in connection with the purchase, sale and exchange of securities made by or for the Fund, the Custodian may assume unless and until notified in writing to the contrary that Proper Instructions received by it are not in conflict with or in any way contrary to any provisions of the Trust's Declaration of Trust or By-Laws or votes or proceedings of the shareholders or Trustees of the Trust. The Custodian shall in no event to liable to the Fund or the Trust and shall be indemnified by the Fund for any violation which occurs in the course of carrying out instructions given by the Fund of any investment limitations to which the Fund is subject or other limitations with respect to the Fund's powers to make expenditures, encumber securities, borrow or take similar actions affecting the Fund. X. Restricted Securities - Notwithstanding any other provision of --------------------- this Agreement, the Custodian shall not be liable for failure to take any action in respect of a "restricted security" (as hereafter defined) if the Custodian has not received Proper instructions to take such action (including but not limited to the failure to exercise in a timely manner any right in respect of any restricted security) unless the Custodian's responsibility to take such action is set forth in a writing, agreed upon by the Custodian and the Fund or the investment adviser of the Fund, which specifies particular actions the Custodian is to take without Proper Instructions in respect of specified rights and obligations pertaining to a particular restricted security. Further, the Custodian shall not be responsible for transmitting to the Fund information concerning a restricted security, such as with respect to exercise periods and expiration dates for rights relating to the restricted security, except such information which the Custodian actually receives or which is published in a source which is publicly distributed and generally recognized as a major source of information with respect to corporate actions of securities similar to the particular restricted security. As used herein, the term "restricted securities" shall mean securities which are subject -13- to restrictions on transfer, whether by reason of contractual restrictions or federal, state or foreign securities or similar laws, or securities which have special rights or contractual features which do not apply to publicly-traded shares of, or comparable interests representing, such security. Y. Proper Instructions - Proper Instructions shall mean a tested ------------------- telex from the Fund or a written request, direction, instruction or certification signed or initialed on behalf of the Fund by one or more person or persons as the Hoard of Trustees of the Trust shall have from time to time authorized, provided, however, that no such instructions directing the delivery -------- ------- of securities or the payment of funds to an authorized signatory of the Fund shall be signed by such person. Those persons authorized to give Proper Instructions may be identified by the Board of Trustees by name, title or position and will include at least one officer empowered by the Board to name other individuals who are authorized to give Proper Instructions on behalf of the Fund. Telephonic or other oral instructions or instructions given by facsimile transmission may be given by any one of the above persons and will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. Oral instructions will be confirmed by tested telex or in writing in the manner set forth above but the lack of such confirmation shall in no way affect any action taken by the Custodian in reliance upon such oral instructions. The Fund authorizes the Custodian to tape record any and all telephonic or other oral instructions given to the Custodian by or on behalf of the Fund (including any of the Fund's or the Trust's officers. Trustees, employees or agents) and will deliver to the Custodian a similar authorization from any investment manager or adviser or person or entity with similar responsibilities which is authorized to give Proper Instructions on behalf of the Fund to the Custodian. Proper Instructions may relate to specific transactions or to types or classes of transactions, and may be in the form of standing instructions. -14- Proper Instructions may include communications effected directly between electro-mechanical or electronic devices or systems, in addition to tested telex, provided that the Fund s-s the Custodian agree to the use of such device or system. Z. Segregated Account - The Custodian shall upon receipt of Proper ------------------ Instructions establish and maintain on its books a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities of the Fund, including securities maintained by the Custodian pursuant to Section 2U hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the National Association of Securities Dealers, Inc. (or any futures commission merchant registered under the Commodity Exchange Act) relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission ("CFTC") or any registered contract market), or any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the SEC relating to the maintenance of segregated accounts by registered investment companies, and (iv) as mutually agreed from time to time between the Fund and the Custodian. 3. Powers and Duties of the Custodian with Respect to the Appointment of --------------------------------------------------------------------- Subcustodians: The Custodian may, at any time and from time to time, appoint any - ------------- bank, trust company or other entity meeting the requirements of a custodian or an "eligible foreign -15- custodian" under the Investment Company Act and the rules and regulations thereunder or by order of the SEC exempted therefrom to act as Subcustodian for the Fund, to hold securities, funds and other property of the Fund which are maintained outside the United States. Any such bank, trust company or other entity appointed pursuant to the provisions of this Section 3 (as herein defined to as a "Subcustodian"). The Fund shall approve in writing (1) the appointment of each Subcustodian and the subcustodian agreement to be entered into between such Subcustodian and the Custodian, and (2) if the Subcustodian is organized under the laws of a country other than the United States, the country or countries in which the Subcustodian is authorized to hold securities, cash and other property of the Fund. The Fund hereby further authorizes and instructs the Custodian and any Subcustodian to utilize such securities depositories and clearing agencies located outside the United States which are approved in writing by the Fund to hold securities, cash and other property of the Fund. Upon such approval by the Fund, the Custodian is authorized on behalf of the Fund to notify each Subcustodian of its appointment as such. The Custodian may, at any time in its discretion, remove any Subcustodian that has been appointed as such but will promptly notify the Fund of any such action. Those Subcustodians, and the countries where and the securities depositories and clearing agencies through which they or the Custodian may hold securities, cash and other property of the Fund which the Fund has approved to date are set forth on Appendix A hereto. Such Appendix shall be amended from time to time as Subcustodians, and/or countries and/or securities depositories and clearing agencies are changed, added or deleted. The Fund shall be responsible for informing the Custodian sufficiently in advance of a proposed investment which is to be held in a country not listed on Appendix A, in order that there shall be sufficient time for the Fund to give the approval required by the preceding paragraph and for the Custodian to put the appropriate arrangements in place with such Subcustodian, including negotiation of a -16- subcustodian agreement and submission of such subcustodian agreement to the Fund for approval. If the Fund shall have invested in a security to be held in a country before the foregoing procedures have been completed, such security shall be held by such agent as the Custodian may appoint. In any event, the Custodian shall be liable to the Fund for the actions of such agent if and only to the extent the Custodian shall have recovered from such agent for any damages caused the Fund by such agent. At the request of the Fund, Custodian agrees to remove any securities held on behalf of the Fund by such agent, if practical, to an approved Subcustodian. Under such circumstances the Custodian will collect income and respond to corporate actions on a best efforts basis. Upon request of the Fund, the Custodian shall deliver to the Fund a certificate stating: (i) the identity of each foreign Subcustodian then acting on behalf of the Custodian: (ii) the countries in which and the securities depositories and clearing agents through which each such foreign Subcustodian is then holding cash, securities and other assets of the Fund; and (iii) such other information as may be requested by the Fund to ensure compliance with Rule 17(f)-5 under the Investment Company Act. With respect to securities and funds held by a Subcustodian, either directly or indirectly (including by a securities depository or clearing agency), notwithstanding any provision of this Agreement to the contrary, payment for securities purchased and delivery of securities sold may be made prior to receipt of the securities or payment, respectively, and securities or payment may be received in a form, in accordance with governmental regulations, rules of securities depositories and clearing agencies, or generally accepted trade practice in the applicable local market. -17- With respect to the securities and funds held by a Subcustodian, either directly or indirectly, (including by a securities depository or a clearing agency) including demand and interest bearing deposits, currencies or other deposits and foreign exchange contracts as referred to in Sections 2L, 2M or 2N, the Custodian shall be liable to the Fund if and only to the extent that such Subcustodian is liable to the Custodian and the Custodian recovers under the applicable subcustodian agreement. The Custodian shall nevertheless be liable to the Fund for its own negligence in transmitting any instructions received by it from the Fund and for its own negligence in connection with the delivery of any securities or funds held by it to any such Subcustodian. In the event that any Subcustodian appointed pursuant to the provisions of this Section 3 fails to perform any of its obligations under the terms and conditions of the applicable subcustodian agreement, the Custodian shall use its best efforts to cause such Subcustodian to perform such obligations. In the event that the Custodian is unable to cause such Subcustodian to perform fully its obligations thereunder, the Custodian shall forthwith upon the Fund's request terminate such Subcustodian in accordance with the termination provisions under the applicable subcustodian agreement and, if necessary or desirable, appoint another subcustodian in accordance with the provisions of this Section 3. At the election of the Fund, it shall have the right to enforce, to the extent permitted by the subcustodian agreement and applicable law, the Custodian's rights against any such Subcustodian for loss or damage caused the Fund by such Subcustodian. The Custodian will not amend any subcustodian agreement or agree to change or permit any changes thereunder except upon the prior written approval of the Fund. -18- The Custodian may, at any time in its discretion upon notification to the Fund, terminate any Subcustodian of the Fund in accordance with the termination provisions under the applicable Subcustodian Agreement, and at the written request of the Fund, the Custodian will terminate any Subcustodian in accordance with the termination provisions under the applicable Subcustodian Agreement. If necessary or desirable, the Custodian may appoint another subcustodian to replace a Subcustodian terminated pursuant to the foregoing provisions of this Section 3, such appointment to be made upon approval of the successor subcustodian by the Fund's Board of Directors or Trustees in accordance with the provisions of this Section 3. In the event the Custodian receives a claim from a Subcustodian under the indemnification provisions of any subcustodian agreement, the Custodian shall promptly give written notice to the Fund of such claim. No more than thirty days after written notice to the Fund of the Custodian's intention to make such payment, the Fund will reimburse the Custodian the amount of such payment except in respect of any negligence or misconduct of the Custodian. 4. Assistance by the Custodian as to Certain Matters: The Custodian may ------------------------------------------------- assist generally in the preparation of reports to Fund shareholders and others, audits of accounts, and other ministerial matters of like nature. 5. Powers and Duties of the Custodian with Respect to Records: The ---------------------------------------------------------- Custodian shall have and perform the following duties with respect to recordkeeping: A. Records - To create, maintain and retain such records ------- relating to its activities and obligations under this Agreement as are required under the Investment Company Act and the rules and regulations thereunder (including Section 31 thereof and Rules 31a-1 and 31a-2 -19- thereunder) and under applicable Federal and State tax laws. All such records will be the property of the Fund and in the event of termination of this Agreement shall be delivered to the successor custodian. B. Accounts - To keep books of account and render statements, -------- including interim monthly and complete quarterly financial statements, or copies thereof, from time to time as reasonably requested by Proper Instructions. C. Access to Records - The books and records maintained by the ----------------- Custodian pursuant to Sections 5A and 5B shall at all times during the Custodian's regular business hours be open to inspection and audit by officers of, attorneys for and auditors employed by the Fund and by employees and agents of the SEC, provided that all such individuals shall observe all security requirements of the Custodian applicable to its own employees having access to similar records within the Custodian and such regulations as may be reasonably imposed by the Custodian. 6. Standard of Care and Related Matters: ------------------------------------ A. Liability of the Custodian with Respect to Proper Instructions: -------------------------------------------------------------- Evidence of Authority; Etc. - The Custodian shall not be liable for any action - -------------------------- taken or omitted in reliance upon Proper Instructions believed by it to be genuine of upon any other written notice, request, direction, instruction, certificate or other instrument believed by it to be genuine and signed by the proper party or parties. The Secretary or Assistant Secretary of the Trust shall certify to the Custodian the names, signatures and scope of authority of all persons authorized to give Proper Instructions or any other such notice, request, direction, instruction, certificate or instrument on behalf of the Fund, -20- the names and signatures of the officers of the Trust, the name and address of the Shareholder Servicing Agent, and any resolutions, votes. instructions or directions of the Trust's Board of Trustees or shareholders. Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and may be considered in full force and effect until receipt of a similar certificate to the contrary. So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement. The Custodian shall be entitled, at the reasonable expense of the Fund, to receive and act upon advice of (i) counsel regularly retained by the Custodian in respect of custodian matters, (ii) counsel for the Fund, or (iii) such other counsel as the Fund and the Custodian may agree upon, with respect to all matters, and the Custodian shall be without liability for any action reasonably taken or omitted pursuant to such advice. B. Liability of the Custodian with Respect to Use of Securities ------------------------------------------------------------ System - With respect to the portfolio securities, cash and other property of - ------ the Fund held by a Securities System, the Custodian shall be liable to the Fund only for any loss or damage to the Fund resulting from use of the Securities System if caused by any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from any failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage to the Fund if and to the extent that the Fund has not been made whole for any such loss or damage. -21- C. Standard of Care; Liability; Indemnification - Except as may -------------------------------------------- otherwise be set forth in this Agreement, the Custodian shall be held only to the exercise of reasonable care and diligence in carrying out the provisions of this Agreement, provided that the Custodian shall not thereby be required to take any action which is in contravention of any applicable law. The Fund agrees to indemnify and hold harmless the Custodian and its nominees from all claims and liabilities (including counsel fees) incurred or assessed against it or its nominees in connection with the performance of this Agreement, except such as may arise from its or its nominee's breach of the relevant standard of conduct set forth in this Agreement. Without limiting the foregoing indemnification obligation of the Fund, the Fund agrees to indemnify the Custodian and any nominee in whose name portfolio securities or other property of the Fund is registered against any liability the Custodian or such nominee may incur by reason of taxes assessed to the Custodian or such nominee or other costs, liability or expense incurred by the Custodian or such nominee resulting directly or indirectly from the fact that portfolio securities or other property of the Fund is registered in the name of the Custodian or such nominee. It is also understood that the Custodian shall not be liable for any loss involving any securities, currencies, deposits or other property of the Fund, whether maintained by it, a Subcustodian, a securities depository, an agent of the Custodian or a Subcustodian, a Securities System, or a Banking Institution, or for any loss arising from a foreign currency transaction or contract, where the loss results from a Sovereign Risk or where the entity maintaining such securities, currencies, deposits or other property of the Fund, whether the Custodian, a Subcustodian, a securities depository, an agent of the Custodian or a Subcustodian, a Securities System or a Banking Institution, has exercised reasonable care maintaining such property or in connection with the transaction involving such property. A "Sovereign Risk" shall mean nationalization, expropriation, devaluation, revaluation, confiscation, seizure, cancellation, -22- destruction or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, taxes, levies or other charges affecting the Fund's property; or acts of war, terrorism, insurrection or revolution; or any other act or event beyond the Custodian's control. D. Reimbursement of Advances - The Custodian shall be entitled to ------------------------- receive reimbursement from the Fund on demand, in the manner provided in section 7, for its cash disbursements, expenses and charges (including the fees and expenses of any Subcustodian or any Agent) in connection with this Agreement, but excluding salaries and usual overhead expenses. E. Security for Obligations to Custodian - If the Fund shall require ------------------------------------- the Custodian to advance cash or securities for any purpose for the benefit of the Fund, including in connection with foreign exchange contracts or options (collectively, an "Advance"), or if the Custodian or any nominee thereof shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement (collectively a "Liability"), except such as may arise from its or such nominee's breach of the relevant standard of conduct set forth in this Agreement, then in such event any property at any time held for the account of the Fund by the Custodian or a Subcustodian shall be security for such Advance or Liability and if the Fund shall fail to repay or indemnify the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund's property, including securities, to the extent necessary to obtain reimbursement or indemnification. F. Appointment of Agents - The Custodian may at any time or times in --------------------- its discretion appoint (and may at any time remove) any other bank or trust company as its agent (an -23- "Agent") to carry out such of the provisions of this Agreement as the Custodian may from time to time direct, provided, however, that the appointment of such Agent (other than an Agent appointed pursuant to the third paragraph of Section 3) shall not relieve the Custodian of any of its responsibilities under this Agreement. G. Powers of Attorney - Upon request, the Fund shall deliver to the ------------------ Custodian such proxies, powers of attorney or other instruments as may be reasonable and necessary or desirable in connection with the performance by the Custodian or any Subcustodian of their respective obligations under this Agreement or any applicable subcustodian agreement. 7. Compensation of the Custodian: The Fund shall pay the Custodian a ----------------------------- custody fee based on such fee schedule as may from time to time be agreed upon in writing by the Custodian and the Fund. Such fee, together with all amounts for which the Custodian is to be reimbursed in accordance with Section 6D, shall be billed to the Fund and be paid in cash by a direct cash payment to the Custodian. 8. Termination; Successor Custodian: This Agreement shall continue in full -------------------------------- force and effect until terminated by either party by an instrument in writing delivered or mailed, postage prepaid, to the other party, such termination to take effect not sooner than seventy five (75) days after the date of such delivery or mailing. In the event of termination the Custodian shall be entitled to receive prior to delivery of the securities, funds and other property held by it all accrued fees and unreimbursed expenses the payment of which is contemplated by Sections 6D and 7, upon receipt by the Fund of a statement setting forth such fees and expenses. In the event of the appointment of a successor custodian, it is agreed that the funds and securities owned by the Fund and held by the Custodian or any Subcustodian shall be delivered -24- to the successor custodian, and the Custodian agrees to cooperate with the Fund in execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement. 9. Amendment: This Agreement constitutes the entire understanding and --------- agreement of the parties hereto with respect to the subject matter hereof. No provision of this Agreement may be amended or terminated except by a statement in writing signed by the party against which enforcement of the amendment or termination is sought. In connection with the operation of this Agreement, the Custodian and the Fund may agree in writing from time to time on such provisions interpretative of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. No interpretative or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. The section headings in this Agreement are for the convenience of the parties and in no way alter, amend, limit or restrict the contractual obligations of the parties set forth in this Agreement. 10. Governing Law: This instrument is executed and delivered in The ------------- Commonwealth of Massachusetts and shall be governed by and construed according to the laws of said Commonwealth. 11. Notices: Notices and other writings delivered or mailed postage prepaid to the Fund addressed to the Fund at 245 Park Avenue. New York, New York 10167 or to such other address as the Fund may have designated to the Custodian in writing, or to the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to such -25- other address as the Custodian may have designated to the Fund in writing, shall be deemed to have been properly delivered or given hereunder to the respective addressee. 12. Binding Effect: This Agreement shall be binding on and shall inure to -------------- the benefit of the Fund and the Custodian and their respective successors and assigns, provided that neither party hereto may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party. 13. Counterparts: This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original. This Agreement shall become effective when one or more counterparts have been signed and delivered by each of the parties. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf on the day and year first above written. BEAR STEARNS INVESTMENT TRUST BROWN BROTHERS HARRIMAN & CO. By: /s/ Frank J. Maresca per pro: /s/ Kenneth Csaplar ----------------------------- --------------------------- -26- BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK BEAR STEARNS INVESTMENT TRUST - EMERGING MARKETS DEBT FUND APPENDIX A
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITARY - ------- ------------ ------------------ ARGENTINA CITIBANK N.A., BUENOS AIRES AGMT 07/16/81* CDV BRAZIL THE FIRST NATIONAL BANK OF BOSTON AGMT 01/05/88 BOVESPA CLC CHILE CITIBANK N.A., SANTIAGO AGMT 7/16/81 NONE COLOMBIA CITITRUST COLOMBIA S.A. SOCIEDAD FIDUCIARIA NONE CITIBANK N.A. AGMT 07/16/81* CITIBANK SUBSIDIARY AMENDMENT 08/07/92 CITIBANK N.A./CITITRUST COLOMBIA AGMT 12/02/91 MEXICO CITIBANK N.A., MEXICO CITY AGMT 7/16/81* INDEVAL PERU CITIBANK N.A., LIMA AGMT 07/16/81* CAVAL TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. EUROCLEAR CEDEL URUGUAY CITIBANK N.A., MONTEVIDEO AGMT 07/16/81* NONE VENEZUELA CITIBANK N.A., CARACAS AGMT 07/16/81* NONE
* CITIBANK N.A. AGREEMENT AMENDMENT DATED 08/31/90 I HEREBY CERTIFY THAT AT ITS MEETING ON JANUARY 8, 1993 THE BOARD APPROVED THE COUNTRIES, SUBCUSTODIANS, AGREEMENTS, AND CENTRAL DEPOSITORIES LISTED ON THIS APPENDIX. /s/ Frank J. Maresca 1/8/93 - ------------------------------ ------------------ (SIGNATURE) (DATE) Vice President and Treasurer - ------------------------------------- (TITLE) -27- AMENDMENT TO THE CUSTODIAN AGREEMENT ------------------------------------ AMENDMENT entered into as of this 15th day of May, 1997 to the Custodian Agreement among BEAR STEARNS INVESTMENT TRUST (the "Trust") and BROWN BROTHERS HARRIMAN & CO. (the "Custodian") dated as of the 8th day of January, 1993 (the "Agreement"). In consideration of the mutual covenants herein contained, the Trust and the Custodian agree that the Agreement is hereby amended as follows: 1. Section 2.L. Demand Deposit Bank Accounts - is replaced in its ----------------------------------------- entirety with the following: L. Demand Deposit Bank Accounts - To open and operate an account or ----------------------------- accounts in the name of the Trust, subject only to draft or order by the Trust, and to hold in such account or accounts deposits accepted on the Custodian's books denominated in U.S. and foreign currency, received for the account of the Trust, other than deposits with Banking Institutions held in accordance with the last paragraph of this Section 2.L. The obligation of the Custodian for deposits accepted on the Custodian's books and denominated in U.S. currency shall be that of a U.S. bank for a similar deposit. The obligation of the Custodian for deposits denominated in any foreign currency shall have the benefit of and be subject to the provisions of the last paragraph of Section 6.C of the Agreement as amended hereof, and accordingly in the event and to the extent the Custodian shall be unable to make payment due to a Sovereign Risk or other factor described in the first sentence of said paragraph from any bank, trust company or similar institution with which the Custodian has in turn deposited funds denominated in a foreign currency by reason of the Custodian's foreign currency deposit obligation to the Trust, the Custodian's obligation to pay the Trust in respect of such foreign currency obligation shall similarly be deferred or relieved until and to the extent the Custodian is able to obtain payment in respect of the Custodian's foreign deposit from such bank, trust company or similar institution and accordingly shall not be payable on demand in U.S. currency. If and when authorized by Proper Instructions, the Custodian may open and operate an additional account(s) in such other banks, trust companies or similar institutions as may be designated by the Trust in such instructions (any such bank, trust company or similar institution so designated by the Trust being referred to hereafter as a "Banking Institution"), and may hold in such account or accounts deposits of the Trust denominated in U.S. or foreign currency, provided that such account(s) (hereinafter collectively referred to as "demand deposit bank accounts") shall be in the name of the Custodian or a nominee of the Custodian for the account of the Trust or for the account of the Custodian's customers generally and shall be subject only to the Custodian's draft or order; provided that any such demand deposit bank account shall contain only assets held by the Custodian as a fiduciary or custodian for the Trust and/or other customers and that the records of the Custodian shall indicate at all times the Trust and/or other customers for which such funds are held in such account and the respective interests therein. Such demand deposit accounts may be opened with Banking Institutions in the United States and in other countries and may be denominated in either U.S. Dollars or other currencies as the Trust may determine. The records for each such account will be maintained by the Custodian but the -28- deposits in any such account shall not constitute a deposit liability of the Custodian. All such deposits, including with Subcustodians, shall be deemed to be portfolio securities of the Trust and accordingly the responsibility of the Custodian therefor shall be the same as and no greater than the Custodian's responsibility in respect of other portfolio securities of the Trust. The authorization by the Trust to appoint a Subcustodian as such shall also constitute a proper instruction to open a demand deposit bank account subject to the provisions of this paragraph with such Subcustodian. 2. Section 2M. Interest Bearing Call or Time Deposits - is replaced in its -------------------------------------------------- entirety with the following: M. Interest Bearing Call or Time Deposits - To place interest bearing -------------------------------------- fixed term and call deposits with such banks and in such amounts as the Trust may authorize pursuant to Proper Instructions. Such deposits may be placed with the Custodian or with Subcustodians or other Banking Institutions as the Trust may determine, in the name of the Custodian or a nominee of the Custodian for the account of the Trust or the account of the Custodian's customers generally and subject only to the Custodian's draft or order; provided that any such deposit shall be held in an account containing only assets held by the Custodian as a fiduciary or custodian for the Trust and/or other customers and that the records of the Custodian shall indicate at all times the Trust and/or other customers for which such fiends are held in such account and the respective interests therein. Deposits may be denominated in U. S. Dollars or other currencies and need not be evidenced by the issuance or delivery of a certificate to the Custodian, provided that the Custodian shall include in its records with respect to the assets of the Trust appropriate notation as to the amount and currency of each such deposit, the accepting Banking Institution and other appropriate details, and shall retain such forms of advice or receipt evidencing the deposit, if any, as may be forwarded to the Custodian by the Banking Institution. Funds, other than those accepted on the Custodian's books as a deposit, but including those placed with Subcustodians, shall be deemed portfolio securities of the Trust and the responsibilities of the Custodian therefor shall be the same as those for demand deposit bank accounts placed with other banks, as described in the section 2.M. of this Agreement as amended. The responsibility of the Custodian for funds accepted on the Custodian's books as a deposit shall be that of a U. S. bank for a similar deposit. 3. Section 6C. - Standard of Care: Liability: Indemnification - is hereby ---------------------------------------------------------- amended by inserting the following at the end of said section: The Trust bears all risks of holding or transacting in any currency. Without limiting the generality of the foregoing, the Trust bears all risks that rules or procedures imposed by Securities Depositories, exchange controls, asset freezes or other laws or regulations shall prohibit or impose burdens on or costs relating to the transfer of, by or for the account of the Trust's cash or currency held outside the United States or denominated in a currency other than U.S. dollars or on the conversion of any currency so held. The Custodian shall in no event be obligated to substitute another currency (including U.S. dollars) for a currency whose transferability, convertibility or availability has been affected by any such law, regulation, rule or -29- procedure. Neither the Custodian nor any Subcustodian or other agent of the Custodian shall be liable to the Trust for any loss or delay which results from the foregoing events. Except as amended above, all the provisions of the Agreement as heretofore in effect shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first set forth above. BEAR STEARNS INVESTMENT TRUST /s/ Frank J. Maresca - --------------------------------- Name: Frank J. Maresca Title: Vice President & Treasurer BROWN BROTHERS HARRIMAN & CO /s/ Kristen F. Giarruso - --------------------------------- Name Kristen F. Giarrusso Title: Senior Manager -30- EX-99.G(3) 8 0008.txt FOREIGN CUSTODY MANAGER AGREEMENT EXHIBIT G(3) FOREIGN CUSTODY MANAGER AGREEMENT AGREEMENT dated as of November 12, 1998, between The Bear Steams Funds (the "Trust"), a business trust formed and existing under the laws of the Commonwealth of Massachusetts, acting on behalf of each of the series of the Trust identified on Exhibit A hereto (each, a "Fund") and Custodial Trust Company ("CTC"), a bank organized and existing under the laws of the State of New Jersey. WHEREAS, CTC serves as custodian for the assets of each Fund pursuant to the custody agreement with the Trust which is set forth opposite the name of such Fund on Exhibit A hereto; WHEREAS, the Trust desires that the Funds maintain their Foreign Assets (as hereinafter defined) in one or more foreign countries; WHEREAS, the Trust wishes to appoint CTC as a Foreign Custody Manager on the terms and conditions contained herein; WHEREAS, CTC wishes to serve as a Foreign Custody Manager and perform the duties set forth herein on the term and conditions contained herein; NOW THEREFORE, in consideration of the agreements made herein, the Trust and CTC hereby agrees as follows: ARTICLE I DEFINITIONS ----------- 1.1 Specific Definitions. Whenever used in this Agreement, the following -------------------- terms, unless the context otherwise requires, shall mean: (a) "Board" means the Board of Trustees of the Trust. (b) "Compulsory Foreign Securities Depository" means any Foreign Securities Depository the use of which is mandatory (i) under applicable law or regulation, (ii) because securities cannot be withdrawn from it, or (iii) because maintaining securities outside it is not consistent with prevailing custodial practices. (c) "Eligible Foreign Custodian" has the same meaning as in the Rule, except that it does not include any Compulsory Foreign Securities Depository. (d) "Foreign Assets" of any Fund means investments of such Fund (including foreign currencies) for which the primary market is outside the United States, and such cash and cash equivalents as such Fund considers necessary to effect its transactions in such investments. (e) "Foreign Securities Depository" means any securities depository or clearing agency within the meaning of Sections (a)(1)(ii) or (iii) of the Rule. (f) "Qualified Foreign Bank" has the same meaning as in the Rule. (g) "Rule" means Rule 17f-5 under the Investment Company Act of 1940, as amended, as effective on June 16, 1997. (h) "Specified Country" means any country listed on Exhibit B hereto (as amended from time to time) in which Foreign Assets of any Fund are or are to be held in custody. 1.2 Other Definitions. Capitalized terms used in this Agreement and not ----------------- otherwise defined in this Agreement shall have the meanings given such terms in the Rule. -2- ARTICLE II CTC AS A FOREIGN CUSTODY MANAGER -------------------------------- 2.1 Delegation and Acceptance. The Trust hereby delegates to CTC, and CTC ------------------------- hereby accepts such delegation and agrees to perform, with respect to each Specified Country, the duties of Foreign Custody Manager set forth in this Agreement. 2.2 Standard of Care. In performing the duties of Foreign Custody Manager set ---------------- forth in this Agreement, CTC shall exercise reasonable care, prudence and diligence such as a bailee for hire having responsibility for the safekeeping of the assets of the Funds would exercise. ARTICLE III DUTIES OF FOREIGN CUSTODY MANAGER --------------------------------- 3.1 Selection of Eligible Foreign Custodians. (a) For each Specified Country ---------------------------------------- in which Foreign Assets of the Funds are not held (or are not to be held) in custody solely by an overseas branch of a U.S. Bank, CTC shall select from among the Eligible Foreign Custodians in such Specified Country (if there are any) one or more Eligible Foreign Custodians in whose care Foreign Assets held or to be held in custody in such Specified Country may be placed and maintained, provided that CTC has determined with respect to each such selected Eligible Foreign Custodian (i) that Foreign Assets placed and maintained with it will be subject to reasonable care based on the standards applicable to custodians in the relevant market, and (ii) that any custody arrangement with such Eligible Foreign Custodian will be governed by a written contract containing the provisions specified in Section 3.1(c) below (or, in the case of a Foreign Securities Depository, by such a contract, by the rules or established practices or procedures of the depository, or by any combination of the foregoing) which will provide reasonable care for such Foreign Assets based on the standards applicable to custodians in the relevant market. -3- (b) In making with respect to any Eligible Foreign Custodian the determination required by Section 3.1(a)(i) above, CTC shall consider all factors that it deems relevant to the safekeeping of Foreign Assets by such Eligible Foreign Custodian including, without limitation: (i) such Eligible Foreign Custodian's practices, procedures and internal controls, including, but not limited to, the physical protection available for certificated securities, the method of keeping custodial records, and security and data protection practices; (ii) whether such Eligible Foreign Custodian has the requisite financial strength to provide reasonable care for the Foreign Assets of the Funds placed in its care; (iii) the general standing and reputation of such Eligible Foreign Custodian and, in the case of a Foreign Securities Depository, its operating history and number of participants; and (iv) whether each Fund whose Foreign Assets are placed in the care of such Eligible Foreign Custodian will have jurisdiction over and be able to enforce judgments against it, due to, for example, such Eligible Foreign Custodian having an office in the United States, or having otherwise submitted to jurisdiction in the United States, or having appointed an agent for the service of process in the United States. (c) CTC shall not with respect to any written contract with any Eligible Foreign Custodian make the determination required by Section 3.1(a)(ii) above unless such contract contains at least (i) provisions that provide: (A) for indemnification or insurance (or any combination of the foregoing) such that the Funds will be adequately protected against the risk of loss of Foreign Assets held in accordance with such contract; (B) that Foreign Assets in the care of such Eligible Foreign Custodian will not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Eligible Foreign Custodian except a claim of payment for their safe custody or administration or, in the case of cash deposits, liens or rights in favor of creditors of such Eligible Foreign Custodian arising under bankruptcy, insolvency or similar laws; (C) that beneficial ownership of Foreign Assets in the care of such Eligible Foreign Custodian will be freely transferable without the payment of money or value to such Eligible Foreign Custodian other than for safe custody or administration; -4- (D) that adequate records will be maintained identifying the Foreign Assets of the Funds in the care of such Eligible Foreign Custodian either as belonging to the Funds or as being held by a third party for their benefit; (E) that the independent public accountants of any Fund whose Foreign Assets are in the care of such Eligible Foreign Custodian will be given access to such records (concerning such Foreign Assets) or confirmation of the contents of such records; and (F) that such Eligible Foreign Custodian will provide, for delivery to any Fund whose Foreign Assets are in its care, sufficient and timely periodic reports with respect to the safekeeping of such Foreign Assets, including, but not limited to, notification of any transfer to or from such Fund's account or a third party account containing such Foreign Assets; or (ii) in lieu of any or all of the foregoing provisions (the "Omitted Provisions"), such other provisions as CTC may determine will provide, in their entirety, the same or greater level of care for the Foreign Assets in the care of such Eligible Foreign Custodian as the Omitted Provisions in their entirety. 3.2 Conditions of Selection Process. (a) In selecting an Eligible Foreign ------------------------------- Custodian in any Specified Country in the manner provided for in Section 3.1 above, CTC need not examine all Eligible Foreign Custodians in such Specified Country, but may select the first Eligible Foreign Custodian with respect to which it makes the determinations required by Section 3.1(a) above. (b) The Trust understands that in making any selection of an Eligible Foreign Custodian pursuant to Section 3.1 above, CTC may, without independent examination on its part but subject to the standard of care to which it is held in Section 2.2 above, rely upon examinations performed and determinations made by Citibank, N.A. or such other operator of a global custody system as the Trust may from time to time approve. 3.3 Monitoring. By means of a system established either by CTC or by Citibank, ---------- N.A. or such other operator of a global custody system as the Trust may from time to time approve, and -5- subject to Section 3.4 below, CTC shall monitor at reasonable intervals (but at least annually) (a) based on factors that include those specified in Section 3.1 (b) above, the continuing appropriateness of maintaining the Foreign Assets of each Fund with each Eligible Foreign Custodian in whose care the Foreign Assets of such Fund have been placed pursuant to Section 3.1 above and (b) based on the factors specified in Section 3.1(c) above, the continuing appropriateness of the written contract that governs each Fund's custody arrangement with each such Eligible Foreign Custodian. 3.4 Appropriateness. In making any determination of appropriateness pursuant --------------- to Section 3.3 above, CTC shall not be required to consider or evaluate any prevailing country risk associated with investment in a particular country. Country risk includes, but is not limited to (a) nationalization, expropriation or other governmental actions, (b) market conditions which affect the orderly execution of securities transactions or affect the value of securities, (c) currency devaluations and other currency fluctuations, and (d) systemic risks of holding assets in a particular country such as (i) financial infrastructure, (ii) prevailing custody and settlement practices (including the use of Compulsory Foreign Securities Depositories), (iii) regulation of the banking and securities industries (including laws and regulations relating to the safekeeping and recovery of assets held pursuant to custody agreements), and (iv) currency controls and restrictions. 3.5 Reporting. (a) At such times as the Board and CTC may agree, but no less --------- often than annually, CTC shall provide the Board with written reports of (i) the placement of any Foreign Assets of any Fund with a particular Eligible Custodian, and (ii) any material change in the custody arrangements of any Fund with any Eligible Foreign Custodian (including, in the case of -6- any Foreign Securities Depository, any material change in such Depository's rules or established practices or procedures). (b) CTC shall promptly advise the Trust whenever a custody arrangement of any Fund with any Eligible Foreign Custodian selected by CTC pursuant to Section 3.1 above no longer meets the requirements of the Rule. 3.6 Limitation Regarding Compulsorv Foreign Securities Depositories. --------------------------------------------------------------- Notwithstanding anything in this Agreement to the contrary, CTC's duties as Foreign Custody Manager under this Agreement shall not apply to Compulsory Foreign Securities Depositories or to any custody arrangement with any of them. 3.7 Prior Notice. The Trust understands that CTC in order to perform its ------------ duties with respect to custody arrangements in a particular Specified Country may require reasonable advance notice of a Fund's intention to invest in such Specified Country. ARTICLE IV REPRESENTATIONS AND WARRANTIES ------------------------------ 4.1 Representations of the Trust. The Trust represents and warrants (a) that ---------------------------- this Agreement has been duly authorized, executed and delivered by the Trust, and constitutes a valid and legally binding obligation of the Trust enforceable in accordance with its terms, (b) that no statute, regulation, rule, order, judgement or contract binding on the Trust prohibits the Trust's execution or performance of this Agreement, and (c) that the Board and/or the investment adviser of each Fund has or will have considered the country risks (as described in part in Section 3.4 above) associated with investment in each Specified Country in which such Fund has or will have invested. -7- 4.2 Representations of CTC. CTC represents and warrants (a) that it is duly ---------------------- organized and existing under the laws of the State of New Jersey, with full corporate power to carry on its businesses as now conducted, to enter into this Agreement and to perform its obligations hereunder, (b) that this Agreement has - been duly authorized, executed and delivered by CTC, and constitutes a valid and legally binding obligation of CTC enforceable in accordance with its terms, and (c) that no statute, regulation, rule, order, judgement or contract binding on - CTC prohibits its execution or performance of this Agreement. ARTICLE V LIABILITIES AND INDEMNIFICATION ------------------------------- 5.1 Limitation on CTC Liability. CTC shall be without liability to any Fund or --------------------------- the Trust for any loss, damage, cost, expense (including attorneys' fees and disbursements), liability or claim which does not arise from CTC's failure to adhere to the standard of care imposed in Section 2.2 above. In no event shall CTC be liable (i) for any such loss, damage, cost, expense, liability or claim - arising from war, riots, civil commotion, strikes, labor disputes, governmental actions, laws or regulations, embargoes, natural disasters, or any other such cause or contingency (whether constituting a form of country risk or not) beyond the control of CTC or any Eligible Foreign Custodian selected by it pursuant to this Agreement, or (ii) for special, incidental or consequential damages, even -- if CTC has been advised of the possibility of such damages. 5.2 Indemnification by CTC. CTC shall indemnify and hold harmless the Trust ---------------------- and each Fund from and against any and all costs, expenses, damages, liabilities or claims (including reasonable attorney's and accountants' fees) arising from any failure by CTC to perform its obligations under this Agreement at the standard of care to which it is held in Section 2.2 above if such failure arises from bad faith, willful misconduct or negligence on the part of CTC, -8- provided that neither the Trust nor any Fund shall be indemnified and held harmless from and against special, incidental or consequential damages, even if CTC has been advised of the possibility of such damages. 5.3 Indemnification by Funds. Each Fund, severally and not jointly, shall ------------------------ indemnify and hold harmless CTC from and against any and all costs, expenses, damages, liabilities or claims (including reasonable attorneys' and accountants' fees) arising from CTC's performance of its obligations under this Agreement with respect to such Fund, provided that CTC shall not be indemnified and held harmless from and against (a) any such costs, expenses, damages, liabilities or - claims arising from bad faith, willful misconduct or negligence on the part of CTC, or (b) special, incidental or consequential damages, even if the Trust or - any Fund has been advised of the possibility of such damages. 5.4 Express Duties Only. CTC shall have no duties or obligations whatsoever ------------------- except such duties and obligations as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against CTC. CTC shall have no discretion whatsoever with respect to the management, disposition or investment of the assets of any Fund and is not a fiduciary to the Trust or any Portfolio. In no event shall CTC be liable for any country risks (as described in part in Section 3.4 above) associated with investments in a particular country. ARTICLE VI MISCELLANEOUS ------------- 6.1 Address for Notices. Unless otherwise specified herein, all demands, ------------------- notices, instructions, and other communications to be given hereunder shall be sent, delivered or given to -9- the recipient at the address, or the relevant telephone number, set forth after its name hereinbelow: If to the Trust: THE BEAR STEARNS FUNDS 575 Lexington Avenue New York, NY 10022 Attention: Stenhen A. Bornstein -------------------- Telephone: (212) 272-2553 Facsimile: (212) 350-4105 If to CTC: CUSTODIAL TRUST COMPANY 101 Carnegie Center Princeton, New Jersey 08540-6231 Attention: Senior Vice President - Compliance ---------------------------------- Telephone: (609) 951-2313 Facsimile: (609) 951-2317 or at such other address as either party hereto shall have provided to the other by notice given in accordance with this Section 6.1. 6.2 No Waiver. No failure by either party hereto to exercise, and no delay by --------- such party in exercising, any right hereunder shall operate as a waiver thereof. The exercise by either party hereto of any right hereunder shall not preclude the exercise of any other right, and the remedies provided herein are cumulative and not exclusive of any remedies provided at law or in equity. 6.3 Amendments. This Agreement and the Exhibits hereto cannot be changed ---------- orally and no amendment to this Agreement or any of such Exhibits shall be effective unless evidenced by an instrument in writing executed by the parties hereto. -10- 6.4 Counterparts. This Agreement may be executed in one or more counterparts, ------------ and by the parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute but one and the same instrument. 6.5 Severability. If any provision of this Agreement shall be invalid, illegal ------------ or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. 6.6 Successors and Assigns. This Agreement shall be binding upon and shall ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by -------- ------- either party hereto without the written consent of the other party. Any purported assignment in violation of this Section 6.6 shall be void. 6.7 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New York, without regard to the conflict of law principles thereof. 6.8 Jurisdiction. Any suit, action or proceeding with respect to this ------------ Agreement may be brought in the Supreme Court of the State of New York, County of New York, or in the United States District Court for the Southern District of New York, and the parties hereto hereby submit to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding, and hereby waive for such purpose any other preferential jurisdiction by reason of their present or future domicile or otherwise. 6.9 Headings. The headings of sections in this Agreement are for convenience -------- of reference only and shall not affect the meaning or construction of any provision of this Agreement. -11- 6.10 Termination. This Agreement shall automatically terminate as soon as none ----------- of the custody agreements set forth in Exhibit A hereto are in effect, and may otherwise be terminated by either party giving to the other party a notice in writing specifying the date of such termination, which shall not be less than thirty (30) days after the date of the giving of such notice. 6.11 Fees. In consideration of the services provided by CTC hereunder, each ---- Fund shall pay to CTC such compensation and out-of-pocket expenses as may be agreed upon from time to time. 6.12 Conflicts With Custody Agreements. In the event of any conflict between --------------------------------- this Agreement and any of the custody agreements set forth in Exhibit A hereto, the terms of this Agreement shall prevail. 6.13 Separate Funds. Every reference in this Agreement to a Fund shall be -------------- deemed a reference solely to the particular Fund referred to. 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 Section 6.13, CTC shall have no right to set off claims against one Fund by applying thereto the property of any other Fund. -12- IN WITNESS WHEREOF, the Trust, on behalf of each Fund individually and not jointly, and CTC have caused this Agreement to be executed by their respective officers thereunto duly authorized, all as of the date first above written. CUSTODIAL TRUST COMPANY THE BEAR STEARNS FUNDS on behalf of each Fund identified on Exhibit A attached hereto, individually and not jointly By: /s/ Ronald D. Watson By: /s/ Frank J. Maresca ------------------------------ ----------------------------- Name: Ronald D. Watson Name: Frank J. Maresca Title: President Title: Vice President & Treasurer -13- Exhibit A --------- Name of Fund Custody Agreement dated - ------------ ----------------------- Balanced Portfolio December 22, 1997 High Yield Total Return Portfolio Ibid International Equity Portfolio Ibid Focus List Portfolio June 23, 1997 The Insiders Select Portfolio June 7, 1995 Large Cap Value Portfolio February 22, 1995 S & P Stars Portfolio Ibid Small Cap Value Portfolio Ibid Total Return Bond Portfolio Ibid -14- Exhibit B --------- Countries - --------- Australia Austria Belgium Canada Denmark Finland France Germany Hong Kong Ireland Italy Japan Malaysia Mexico The Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland United Kingdom -15- EX-99.G(4) 9 0009.txt FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT EXHIBIT G(4) FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT AGREEMENT made as of this ____ day of ____________ 1998 between Bear Stearns Investment Trust (the "Fund"), a management investment company registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940 as amended, (the "Act"), acting through its Board of Trustees or its duly appointed representative, and BROWN BROTHERS HARRIMAN & CO., a New York limited partnership with an office in Boston, Massachusetts (the "Delegate"). WITNESSETH ---------- WHEREAS the Fund has appointed the Delegate as custodian (the "Custodian") of the Fund's Assets pursuant to a Custodian Agreement dated January 8, 1993 as heretofore amended (the "Custodian Agreement"); WHEREAS the Fund may, from time to time, determine to invest and maintain some or all of the Fund's Assets outside the United States; WHEREAS the Trustees (the "Board") wish to delegate to the Delegate certain functions with respect to the custody of Fund's Assets outside the United States; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Fund and the Delegate agree as follows. Capitalized terms shall have the meaning indicated in Section 12 unless otherwise indicated. 1. Maintenance of Fund's Assets Abroad. The Fund, acting through its ----------------------------------- Board or its duly authorized representative, hereby instructs Delegate pursuant to the terms of the Custodian Agreement to place and maintain the Fund's Assets within the countries listed in Schedule 1 attached hereto (as such Schedule may be amended from time to time in accordance herewith). Such instruction shall be deemed to include an instruction to use any Compulsory Securities Depository in any such country and shall represent a Proper Instruction under the terms of the Custodian Agreement. Countries may be added to Schedule 1 by written instruction of the Fund that is accepted in writing by the Delegate as an amendment to Schedule 1. With respect to amendments adding countries to Schedule 1, the Fund acknowledges that - (a) the Delegate shall perform services hereunder only with respect to the countries where it provides custodial services to the Fund under the Custodian Agreement; (b) depending on conditions in the particular country, advance notice may be required before the Delegate shall be able to perform its duties hereunder in or with respect to such country (such advance notice to be reasonable in light of the specific facts and circumstances attendant to performance of duties in such country); and (c) nothing in this Agreement shall require the Delegate to provide delegated or custodial services in any country not listed in Schedule 1 until such amended Schedule 1 has been accepted by the Delegate in accordance herewith. 2. Delegation. Pursuant to the provisions of Rule 17f-5 under the Act ---------- as amended, the Board hereby delegates to the Delegate, and the Delegate hereby accepts such delegation and agrees to perform, only those duties set forth in this Agreement concerning the safekeeping of the Fund's Assets in each of the countries set forth in Schedule 1 hereto as amended from time to time. The Delegate is hereby authorized to take such actions on behalf of or in the name of the Fund as are reasonably required to discharge its duties under this Agreement, including, without limitation, to cause the Fund's Assets to be placed with a particular Eligible Foreign Custodian in accordance herewith. The Fund confirms to the Delegate that the Fund or its investment adviser has considered the Sovereign Risk and prevailing Country -2- Risk as part of its continuing investment decision process, including such factors as may be reasonably related to the systemic risk of maintaining the Fund's Assets in a particular country, including, but not limited to, financial infrastructure, prevailing custody and settlement systems and practices (including the use of any Compulsory Securities Depository), and the laws relating to the safekeeping and recovery of the Fund's Assets held in custody pursuant to the terms of the Custodian Agreement. 3. Selection of Eligible Foreign Custodian and Contract ---------------------------------------------------- Administration. The Delegate shall perform the following duties with respect to - -------------- the selection of Eligible Foreign Custodians and administration of certain contracts governing the Fund's foreign custodial arrangements: (a) Selection of Eligible Foreign Custodian. The Delegate shall place --------------------------------------- and maintain the Fund's Assets with an Eligible Foreign Custodian; provided that the Delegate shall have determined that the Fund's Assets will be subject to reasonable care based on the standards applicable to custodians in the relevant market after considering all factors relevant to the safekeeping of such assets including without limitation: (i) The Eligible Foreign Custodian's practices, procedures, and internal controls, including, but not limited to, the physical protections available for certificated securities (if applicable), the controls and procedures for dealing with any Securities Depository, the method of keeping custodial records, and the security and data protection practices; -3- (ii) Whether the Eligible Foreign Custodian has the requisite financial strength to provide reasonable care for the Fund's Assets; (iii) The Eligible Foreign Custodian's general reputation and standing and, in the case of a Securities Depository, the depository's operating history and number of participants; and (iv) Whether the Fund will have jurisdiction over and be able to enforce judgments against the Eligible Foreign Custodian, such as by virtue of the existence of any offices of such Eligible Foreign Custodian in the United States or such Eligible Foreign Custodian's appointment of an agent for service of process in the United States or consent to jurisdiction in the United States. The Delegate shall be required to make the foregoing determination to the best of its knowledge and belief based only on information reasonably available to it. (b) Contract Administration. In the case of an Eligible Foreign ----------------------- Custodian that is not a Securities Depository or a U.S. Bank, the Delegate shall cause that the foreign custody arrangements shall be governed by a written contract that the Delegate has determined will provide reasonable care for Fund assets based on the standards applicable to custodians in the relevant market (or, in the case of a Securities Depository, by such contract, by the rules or established practices and procedures of the Securities Depository, or by an combination of the foregoing). Each such contract shall, except as set forth in the last paragraph of this subsection (b), include provisions that provide: -4- (i) For indemnification or insurance arrangements (or any combination of the Page 3 foregoing) such that the Fund will be adequately protected against the risk of loss of assets held in accordance with such contract; (ii) That the Fund's Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors except a claim of payment for their safe custody or administration or, in the case of cash deposits, liens or rights in favor of creditors of such Custodian arising under bankruptcy, insolvency or similar laws; (iii) That beneficial ownership of the Fund's Assets will be freely transferable without the payment of money or value other than for safe custody or administration; (iv) That adequate records will be maintained identifying the Fund's Assets as belonging to the Fund or as being held by a third party for the benefit of the Fund; (v) That the Fund's independent public accountants will be given access to those records described in (iv) above, or confirmation of the contents of such records; and (vi) That the Delegate will receive sufficient and timely periodic reports with respect to the safekeeping of the Fund's Assets, including, but not limited to, notification of any transfer to or from the Fund's account or a third party account containing the Fund's Assets. Such contract may contain, in lieu of any or all of the provisions specified in this Section 3 (b), such other provisions that the Delegate determines will provide, in their entirety, -5- the same or a greater level of care and protection for the Fund's Assets as the specified provisions, in their entirety. (c) Limitation to Delegated Selection. Notwithstanding anything in this Agreement to the contrary, the duties under this Section 3 shall apply only to Eligible Foreign Custodians selected by the Delegate and shall not apply to Compulsory Securities Depositories or to any Eligible Foreign Custodian that the Delegate is directed to use pursuant to Section 7. 4. Monitoring. The Delegate shall establish a system to monitor at ---------- reasonable intervals (but at least annually) the appropriateness of maintaining the Fund's Assets with each Eligible Foreign Custodian that has been selected by the Delegate pursuant to Section 3 of this Agreement. The Delegate shall monitor the continuing appropriateness of placement of the Fund's Assets in accordance with the criteria established under Section 3(a) of this Agreement. The Delegate shall monitor the continuing appropriateness of the contract governing the Fund's arrangements in accordance with the criteria established under Section 3(b) of this Agreement. 5. Reporting. At least annually and more frequently as mutually --------- agreed between the parties, the Delegate shall provide to the Board written reports specifying placement of the Fund's Assets with each Eligible Foreign Custodian selected by the Delegate pursuant to Section 3 of this Agreement and shall promptly report as to any material changes to such foreign custody arrangements. The Delegate will prepare such a report with respect to any Eligible Foreign Custodian that the Delegate has been instructed to use pursuant to Section 7 only to the extent specifically agreed with respect to the particular situation. The Delegate shall promptly advise the Fund whenever a custody arrangement of the Fund with any Eligible Foreign -6- Custodian selected by the Delegate pursuant to Section 3 above no longer meets the requirements of Rule 17f-5. 6. Withdrawal of Fund's Assets. If the Delegate determines that an --------------------------- arrangement with a specific Eligible Foreign Custodian selected by the Delegate under Section 3 of this Agreement no longer meets the requirements of said Section, Delegate shall withdraw the Fund's Assets from the non-complying arrangement as soon as reasonably practicable; provided, however, that if in the reasonable judgment of the Delegate, such withdrawal would require liquidation of any of the Fund's Assets or would materially impair the liquidity, value or other investment characteristics of the Fund's Assets, it shall be the duty of the Delegate to provide information regarding the particular circumstances and to act only in accordance with Proper Instructions of the Fund or its Investment Advisor with respect to such liquidation or other withdrawal. 7. Direction as to Eligible Foreign Custodian. Notwithstanding this ------------------------------------------ Delegation Agreement, the Fund, acting through its Board, its Investment Adviser or its other authorized representative, may direct the Delegate to place and maintain the Fund's Assets with a particular Eligible Foreign Custodian. In such event, the Delegate shall be entitled to rely on any such instruction as a Proper Instruction under the terms of the Custodian Agreement and shall have no duties under this Delegation Agreement with respect to such arrangement save those that it may undertake specifically in writing with respect to each particular instance. 8. Standard of Care. In carrying out its duties under this ---------------- Agreement, the Delegate agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for safekeeping the Fund's Assets would exercise. -7- 9. Provision of Information Regarding Country Risk. With respect to ----------------------------------------------- the jurisdictions listed in Schedule 1, or added thereto pursuant to Section 1, the Delegate agrees to provide annually to the Board such information relating to Country Risk, if known by the Custodian, as is specified in Schedule 2 of this Agreement. 10. Indemnification. The Delegate hereby agrees to indemnify the --------------- Fund, its officers, trustees, employees or agents from any losses or liabilities arising out of its failure to exercise the standard of care set forth in this Agreement. 11. Arbitration of Disputes. To the extent permitted by law, all ----------------------- disputes or claims arising under this Agreement shall be resolved through arbitration. Arbitration under this Article shall be conducted according to the Rules of the American Arbitration Association. Any arbitration will be conducted in New York, New York and under the laws of the State of New York. This Article shall be enforced and interpreted exclusively in accordance with applicable federal law, including the Federal Arbitration Act. 12. Representations. The Delegate hereby represents and warrants that --------------- it is a U.S. Bank and that this Agreement has been duly authorized, executed and delivered by the Delegate and is a legal, valid and binding agreement of the Delegate. The Fund hereby represents and warrants that its Board of Directors has determined that it is reasonable to rely on the Delegate to perform the delegated responsibilities provided for herein and that this Agreement has been duly authorized, executed and delivered by the Fund and is a legal, valid and binding agreement of the Fund. -8- 13. Effectiveness; Termination. This Agreement shall be effective as -------------------------- of the date on which this Agreement shall have been accepted by the Delegate, as indicated by the date set forth below the Delegate's signature. This Agreement may be terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Such termination shall be effective on the 30th day following the date on which the non-terminating party shall receive the foregoing notice. The foregoing to the contrary notwithstanding, this Agreement shall be deemed to have been terminated concurrently with the termination of the Custodian Agreement. 14. Notices. Notices and other communications under this Agreement ------- are to be made in accordance with the arrangements designated for such purpose under the Custodian Agreement unless otherwise indicated in a writing referencing this Agreement and executed by both parties. 15. Limitation of Liability. The Delegate understands that the ----------------------- obligations of the Fund under this Agreement are not binding upon any Trustee or shareholder of the Fund personally but bind only the Fund and the Fund's Property. The Delegate represents that it has notice of the provision disclaiming shareholder liability for acts or obligations of the Fund. 16. Definitions. Capitalized terms in this agreement have the ----------- following meanings: a. Compulsory Securities Depository - shall mean a Securities Depository the use of which is mandatory (i) under applicable law or regulation; (ii) because securities cannot be withdrawn from the depository; or, (iii) because maintaining securities outside the Securities Depository is not consistent with prevailing custodial practices. -9- b. Country Risk - shall mean the systemic risk of holding ------------ assets in a particular country including, but not limited to, (a) the necessity to use any Compulsory Securities Depository, (b) such country's financial infrastructure, (c) such country's prevailing custody and settlement practices, (d) nationalization, expropriations or other government actions, (e) regulations of the banking or securities industry, (f) currency controls, restrictions, devaluations or fluctuations, and (g) market conditions which affect the orderly execution of securities transaction or affect the value of securities. c. Eligible Foreign Custodian - shall have the meaning set -------------------------- forth in Rule 17f-5(a)(1) and shall also include a U.S. Bank. d. Fund's Assets - shall mean any of the Fund's investments ------------- (including foreign currencies) for which the primary market is outside the United States, and such cash and cash equivalents as are reasonably necessary to effect the Fund's transactions in such investments. e. Proper Instructions - shall have the meaning set forth in ------------------- the Custodian Agreement. f. Securities Depository - shall have the meaning set forth in --------------------- Rule 17f-5(a)(6). g. Sovereign Risk - shall have the meaning set forth in Section -------------- 6.C. of the Custodian Agreement. h. U.S. Bank - shall mean a bank which qualifies to serve as a --------- custodian of assets of investment companies under Section 17(f) of the Act. 17. Governing Law and Jurisdiction. This Agreement shall be construed ------------------------------ in accordance with the laws of the State of New York. The parties hereby submit to the exclusive jurisdiction of the Federal courts sitting in the State of New York or the Commonwealth of Massachusetts or of the state courts of either such State or such Commonwealth. 18. Fees. Delegate shall perform its functions under this agreement ---- for the compensation determined under the Custodian Agreement. -10- 19. Integration. This Agreement sets forth all of the Delegate's ----------- duties with respect to the selection and monitoring of Eligible Foreign Custodians, the administration of contracts with Eligible Foreign Custodians, the withdrawal of assets from Eligible Foreign Custodians and the issuance of reports in connection with such duties. The terms of the Custodian Agreement shall apply generally as to matters not expressly covered in this Agreement, including dealings with the Eligible Foreign Custodians in the course of discharge of the Delegate's obligations under the Custodian Agreement. 20. Severability. Amendment and Assignment. In case any provision in ------------ or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other. 21. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original but such counterparts shall together, constitute only one instrument 22. Conflicts. In the event of any conflict between the Custodian --------- Agreement between the parties and this Agreement, the terms of this Agreement shall prevail. -11- NOW THEREFORE, the parties have caused this Agreement to be executed by its duly authorized representatives, effective as of the date first above written. BROWN BROTHERS HARRIMAN & CO. BEAR STEARNS INVESTMENT TRUST By: /s/ Douglas A. Donahue By: /s/ Frank J. Maresca ----------------------------- ---------------------------------- Name: Douglas A. Donahue Name: Frank J. Maresca ---------------------- --------------------------- Title: Partner Title: Vice President & Treasurer ---------------------- --------------------------- Date: 11/17/98 Date: 11/25/98 ---------------------- --------------------------- -12- SCHEDULE 1 TO BEAR STEARNS INVESTMENT TRUST DELEGATION AGREEMENT AS OF ________________, 1998 ARGENTINA AUSTRALIA AUSTRIA BAHRAIN BANGLADESH BELGIUM BERMUDA BOTSWANA BRAZIL BULGARIA CANADA CHILE CHINA COLOMBIA CZECH REPUBLIC DENMARK ECUADOR EGYPT FINLAND FRANCE GERMANY GHANA GREECE HONG KONG HUNGARY INDIA INDONESIA IRELAND ISRAEL ITALY JAPAN JORDAN KENYA KOREA LEBANON MALAYSIA MAURITIUS MEXICO MOROCCO NAMIBIA -13- BROWN BROTHERS HARRIMAN CO. - GLOBAL CUSTODY NETWORK BEAR STEARNS INVESTMENT TRUST - EMERGING MARKETS DEBT PORTFOLIO APPENDIX A
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 10 ARGENTINA CITIBANK, N.A., BUENOS AIRES Caja de Valores Citibank, N.A., New York Agt. 7/16/81 CRYL New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 15 AUSTRALIA NATIONAL AUSTRALIA BANK LTD., MELBOURNE Austraclear Ltd. National Australia Bank Agt. 5/1/85 CHESS Agreement Amendment 2/13/92 Reserve Bank of Omnibus Amendment 11/22/93 Australia - ------------------------------------------------------------------------------------------------------------------------------------ 20 AUSTRIA CREDITANSTALT AG OeKB Creditanstalt Bankverein Agreement 12/18/89 Omnibus Amendment 1/17/94 - ------------------------------------------------------------------------------------------------------------------------------------ 30 BAHRAIN BRITISH BANK OF THE MIDDLE EAST FOR HONGKONG & SHANGHAI BANKING CORP. None LTD. Honkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side Letter Agreement dated 7/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ 35 BANGLADESH STANDARD CHARTERED BANK, DHAKA None Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 - ------------------------------------------------------------------------------------------------------------------------------------ 40 BELGIUM BANQUE BRUXELLES LAMBERT CIK Banque Bruxelles Lambert Agt. 11/15/90 National Bank of Belgium Omnibus Amendment 3/1/94 - ------------------------------------------------------------------------------------------------------------------------------------ 45 BERMUDA THE BANK OF N.T. BUTTERFIELD & SON LTD. None The Bank of N.T. Butterfield & Son Ltd. Agreement 5/27/97 - ------------------------------------------------------------------------------------------------------------------------------------ 55 BOTSWANA STANBIC BANK BOTSWANA LIMITED for STANDARD BANK OF SOUTH AFRICA None Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/79 - ------------------------------------------------------------------------------------------------------------------------------------ 60 BRAZIL BANKBOSTON, N.A., SAO PAULO BOVESPA The First National Bank of Boston Agreement 1/5/88 CLC Omnibus Amendment 2/22/94 Amendment 7/29/96 - ------------------------------------------------------------------------------------------------------------------------------------ 70 BULGARIA ING BANK, N.V. CDAD ING Bank N.V. Agreement 9/15/97 BNB - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 75 CANADA CANADIAN IMPERIAL BANK OF COMMERCE Bank of Canada Canadian Imperial Bank of Commerce Agreement 9/9/88 CDS Omnibus Amendment 12/1/93 - ------------------------------------------------------------------------------------------------------------------------------------ 80 CANADA THE ROYAL BANK OF CANADA Bank of Canada The Royal Bank of Canada Agreement 2/23/96 CDS - ------------------------------------------------------------------------------------------------------------------------------------ 85 CHILE CITIBANK, N.A., SANTIAGO DCV Citibank, N.A., New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 90 CHINA STANDARD CHARTERED BANK, SHANGHAI SSCCRC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 - ------------------------------------------------------------------------------------------------------------------------------------ 95 CHINA STANDARD CHARTERED BANK, SHENZHEN SSCC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 - ------------------------------------------------------------------------------------------------------------------------------------ 100 COLOMBIA CITITRUST COLOMBIA, S.A. SOCIEDAD FIDUCIARIA FOR CITIBANK, N.A. DCV Citibank, N.A., New York Agreement 7/16/81 Deceval New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, N.A./Cititrust Colombia Agreement 12/2/91 Citibank, N.A. Subsidiary Amendment 10/19/95 - ------------------------------------------------------------------------------------------------------------------------------------ 118 CZECH REPUBLIC CESKOSLOVENSKA OBCHODNI BANKA, A.S., PRAGUE SCP Ceskoslovenska Obchondi Banka Agreement 2/28/94 Czech National Bank - ------------------------------------------------------------------------------------------------------------------------------------ 120 CZECH REPUBLIC CITIBANK, A.S. FOR CITIBANK N.A. SCP Citibank, N.A., New York Agreement 7/16/81 Czech National Bank New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank N.A. / Citibank A.S. Agreement 6/24/96 - ------------------------------------------------------------------------------------------------------------------------------------ 125 DENMARK DEN DANSE BANK VP Den Danske Bank Agreement 1/1/89 Omnibus Amendment 12/1/93 - ------------------------------------------------------------------------------------------------------------------------------------ 130 ECUADOR CITIBANK, N.A., QUITO Deceval Citibank, N.A., New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, Quito Side Letter 7/3/95 - ------------------------------------------------------------------------------------------------------------------------------------ 135 EGYPT CITIBANK, N.A., CAIRO MCSD Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------
-15-
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 145 FINLAND MERITA BANK FCSD Union Bank of Finland Agreement 2/27/89 Omnibus Amendment 4/6/94 - ------------------------------------------------------------------------------------------------------------------------------------ 155 FRANCE CREDIT AGRICOLE INDOSUEZ SICOVAM Banque Indosuez Agreement 7/19/90 Banque de France Omnibus Amendment 3/10/94 - ------------------------------------------------------------------------------------------------------------------------------------ 160 GERMANY DEUTSCHE BANK DBC Deutsche Bank Agreement 8/21/96 - ------------------------------------------------------------------------------------------------------------------------------------ 170 GHANA MERCHANT BANK (GHANA) LIMITED FOR STANDARD BANK OF SOUTH AFRICA None Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 - ------------------------------------------------------------------------------------------------------------------------------------ 175 GREECE CITIBANK, N.A., ATHENS Apothetirion Titlon A.E. Citibank, N.A., New York Agreement 7/16/81 Bank of Greece New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 185 HONG KONG HONGKONG & SHANGHAI BANKING CORP. LTD., HONG KONG HKSCC Hongkong & Shanghai Banking Corp. Agt. 4/19/91 CMU Omnibus Supplement 12/29/93 Schedule 5/14/96 - ------------------------------------------------------------------------------------------------------------------------------------ 195 HUNGARY CITIBANK BUDAPEST RT. FOR CITIBANK, N.A. KELER Citibank, N.A., New York Agreement 7/16/81 Ltd. New York Agreement Amendments 8/31/90 and 7/26/96 Citibank, N.A. Subsidiary Amendment 10/19/9 Citibank, N.A. / Citibank Budapest Agreement 6/23/92 Citibank, N.A. / Citibank Budapest Amendment 9/29/92 - ------------------------------------------------------------------------------------------------------------------------------------ 200 INDIA CITIBANK, N.A, MUMBAI NSDL Citibank, N.A., New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, Mumbai Amendment 11/17/93 - ------------------------------------------------------------------------------------------------------------------------------------ 215 INDONESIA CITIBANK, N.A., JAKARTA None Citibank, N.A. New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 220 IRELAND ALLIED IRISH BANKS PLC CrestCo. Allied Irish Banks Agreement 1/10/89 Gilt Settlement Office Omnibus Amendment 4/8/94 - ------------------------------------------------------------------------------------------------------------------------------------ 225 ISRAEL BANK HAPOALIM B.M. TASE Clearinghouse Ltd. Bank Hapoalim Agreement 8/27/92 - ------------------------------------------------------------------------------------------------------------------------------------ 230 ISRAEL ISRAEL DISCOUNT BANK TASE Clearinghouse Ltd. Israel Discount Bank Agreement 3/10/93 - ------------------------------------------------------------------------------------------------------------------------------------
-16-
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 235 ISRAEL UNITED MIZRAHI BANK TASE Clearinghouse Ltd. United Mizrahi Bank Agreement 3/4/93 - ------------------------------------------------------------------------------------------------------------------------------------ 240 ITALY BANCA COMMERCIALE ITALIANA Monte Titoli Banca Commerciale Italiana Agreement 5/8/89 Banca D'Italia Agreement Amendment 10/8/93 Omnibus Amendment 12/14/93 - ------------------------------------------------------------------------------------------------------------------------------------ 250 JAPAN THE BANK OF TOKYO - MITSUBISHI, LTD. JASDEC Bank of Tokyo - Mitsubishi Agreement 6/17/96 Bank of Japan - ------------------------------------------------------------------------------------------------------------------------------------ 260 JORDAN ARAB BANK PLC None Arab Bank PLC Agreement 4/5/95 - ------------------------------------------------------------------------------------------------------------------------------------ 265 KENYA STANBIC BANK KENYA LIMITED FOR STANDARD BANK OF SOUTH AFRICA None Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 - ------------------------------------------------------------------------------------------------------------------------------------ 270 KOREA CITIBANK, N.A SEOUL KSD Citibank, N.A. New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, Seoul Agreement Supplement 10/28/94 - ------------------------------------------------------------------------------------------------------------------------------------ 280 LEBANON BRITISH BANK OF THE MIDDLE EAST FOR HONGKONG & SHANGHAI BANKING CORP. Midclear Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side letter Agreement dated 7/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ 295 MALAYSIA HONGKONG BANK AMLAYSIA BERHAD Bank Negara Malaysia MCD Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 Malaysia Subsidiary Supplement 5/23/94 Side letter Agreement dated 7/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ 300 MAURITIUS HONGKONG & SHANGHAI BANKING CORP. LTD., MAURITIUS CDS Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 - ------------------------------------------------------------------------------------------------------------------------------------ 310 MEXICO CITIBANK MEXICO, S.A. Indeval Citibank, N.A. New York Agreement 7/16/81 Banco de Mexico New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank Mexico, S.A. Amendment 2/28/95 - ------------------------------------------------------------------------------------------------------------------------------------ 315 MOROCCO BANQUE MAROCAINE DU COMMERCE EXTERIEUR MAROCLEAR BMCE Agreement 7/6/94 - ------------------------------------------------------------------------------------------------------------------------------------
-17-
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 320 NAMIBIA STANDARD BANK NAMIBIA FOR STANDARD BANK OF SOUTH AFRICA None Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 10/3/96 - ------------------------------------------------------------------------------------------------------------------------------------ 325 NETHERLANDS ABN-AMRO BANK NECIGEF ABN-AMRO Agreement 12/19/88 - ------------------------------------------------------------------------------------------------------------------------------------ 330 NEW ZEALAND NATIONAL AUSTRALIA BANK LTD., AUCKLAND NZCSD National Australia Bank Agreement 5/1/85 Agreement Amendment 2/13/92 Omnibus Amendment 11/22/93 New Zealand Addendum 3/7/89 - ------------------------------------------------------------------------------------------------------------------------------------ 335 NORWAY CHRISTIANIA BANK VPS Christiania Bank Agreement 3/2/89 - ------------------------------------------------------------------------------------------------------------------------------------ 345 OMAN BRITISH BANK OF THE MIDDLE EAST FOR HONGKONG & SHAGHAI BANKING CORP. MSM LTD. Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side letter Agreement dated 7/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ 350 PAKISTAN STANDARD CHARTERED BANK, KARACHI CDC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 - ------------------------------------------------------------------------------------------------------------------------------------ 360 PERU CITIBANK N.A., LIMA CAVALI Citibank, N.A., New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 365 PHILIPPINES CITIBANK, N.A., MANILA PCD Citibank, N.A., New York Agreement 7/16/81 ROSS New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 375 POLAND CITIBANK (POLAND), S.A. FOR CITIBANK, N.A. NDS Citibank, N.A., New York Agreement 7/16/81 National Bank of Poland New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank Subsidiary Amendment 10/30/95 Citibank, N.A./Citibank Poland S.A. Agt. 11/6/92 - ------------------------------------------------------------------------------------------------------------------------------------ 380 PORTUGAL BANCO COMERCIAL PORTUGUES CVM Banco Comercial Portugues 5/18/98 - ------------------------------------------------------------------------------------------------------------------------------------ 383 PORTUGAL BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, S.A. CVM BESCL Agreement 4/26/89 Omnibus Amendment 2/23/94 - ------------------------------------------------------------------------------------------------------------------------------------
-18-
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 385 ROMANIA ING BANK N.V. SNCDD ING Bank N.V. Agreement 9/29/97 BSE NBR - ------------------------------------------------------------------------------------------------------------------------------------ 395 RUSSIA CITIBANK T/O FOR CITIBANK, N.A. VTD Citibank, N.A., New York Agt. 7/16/81 NDC New York Agreement Amendments 8/31/90 and 7/26/96 Citibank, N.A. Subsidiary Amendment 10/19/95 Citibank N.A./Citibank T/O Agt. 6/16/97 Side Letter Agt. 8/18/97 Requires an Amendment to the Custodian Agreement - ------------------------------------------------------------------------------------------------------------------------------------ 400 SINGAPORE HONGKONG & SHANGHAI BANKING CORP. LTD., SINGAPORE CDP Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 - ------------------------------------------------------------------------------------------------------------------------------------ 413 SLOVAKIA CESKOSLOVENSKA OBCHODNA BANKA, A.S., BRATISLAVA SCP Ceskoslovenska Obchodna Banka Agreement 10/12/94 National Bank of Slovakia - ------------------------------------------------------------------------------------------------------------------------------------ 415 SLOVAKIA ING BANK N.V. SCP Master Subcustodian Agreement Pending National Bank of Slovakia - ------------------------------------------------------------------------------------------------------------------------------------ 425 SOUTH AFRICA FIRST NATIONAL BANK OF SOUTHERN AFRICA CD First National Bank of Southern Africa Agt. 8/7/91 - ------------------------------------------------------------------------------------------------------------------------------------ 440 SPAIN BANCO SANTANDER SCLV Banco Santander Agreement 12/14/88 Banco de Espana - ------------------------------------------------------------------------------------------------------------------------------------ 445 SRI LANKA HONGKONG & SHANGHAI BANKING CORP. LTD., COLOMBO CDS Hongkong & Shanghai Banking Corp., Agt. 4/19/91 Omnibus Supplemental 12/29/93 Schedule 5/14/96 - ------------------------------------------------------------------------------------------------------------------------------------ 450 SWAZILAND STANBIC BANK SWAZILAND LIMITED FOR STANDARD None BANK OF SOUTH AFRICA Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 - ------------------------------------------------------------------------------------------------------------------------------------ 455 SWEDEN SKANDINAVISKA ENSKILDA BANKEN VPC Skandinaviska Enskilden Banken Agreement 2/20/89 Omnibus Amendment 12/3/93 - ------------------------------------------------------------------------------------------------------------------------------------ 460 SWITZERLAND UBS AG SEGA Union Bank of Switzerland Agreement 12/20/88 Omnibus Amendment 11/29/94 - ------------------------------------------------------------------------------------------------------------------------------------
-19-
- ------------------------------------------------------------------------------------------------------------------------------------ COUNTRY SUBCUSTODIAN DEPOSITORIES ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ 475 TAIWAN STANDARD CHARTERED BANK, TAIPEI TSCD Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 - ------------------------------------------------------------------------------------------------------------------------------------ 480 THAILAND HONGKONG & SHANGHAI BANKING CORP. LTD., BANGKOK TSDC Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Amendment 12/29/93 Schedule 5/14/96 - ------------------------------------------------------------------------------------------------------------------------------------ 483 TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. Cedel Euroclear - ------------------------------------------------------------------------------------------------------------------------------------ 485 TURKEY CITIBANK, N.A., ISTANBUL Takasbank Citibank, N.A., New York Agreement 7/16/81 Central Bank of Turkey New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 510 UNITED KINGDOM MIDLAND BANK PLC CGO Midland Bank Agreement 8/8/90 CMO Omnibus Amendment 12/15/93 CrestCo. - ------------------------------------------------------------------------------------------------------------------------------------ 520 URUGUAY BANKBOSTON, N.A., MONTEVIDEO None The First National Bank of Boston Agreement 1/5/88 Omnibus Amendment 2/22/94 Amendment 7/29/96 - ------------------------------------------------------------------------------------------------------------------------------------ 525 VENEZUELA CITIBANK, N.A., CARACAS CVV Citibank, N.A., New York Agreement 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 - ------------------------------------------------------------------------------------------------------------------------------------ 530 ZAMBIA STANBIC BANK ZAMBIA LTD. FOR STANDARD BANK OF SOUTH AFRICA LuSE Central Shares Standard Bank of South Africa Agreement 3/11/94 Depository Ltd. Subsidiary Amendment 10/3/96 - ------------------------------------------------------------------------------------------------------------------------------------ 535 ZIMBABWE STANBIC BANK ZIMBABWE LTD. FOR STANDARD BANK OF SOUTH AFRICA None Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 10/3/96 - ------------------------------------------------------------------------------------------------------------------------------------
-20- I HEREBY CERTIFY THAT AT ITS MEETING ON NOVEMBER 12, 1998, THE BOARD APPROVED THE COUNTRIES, SUBCUSTODIANS, AGREEMENTS AND CENTRAL DEPOSITORIES LISTED ON THIS APPENDIX. /s/ Frank M. Maresca - ------------------------------ SIGNATURE NAME: Frank J. Maresca TITLE: Vice President & Treasurer DATE: November 12, 1998 -21- NETHERLANDS NEW ZEALAND NORWAY OMAN PAKISTAN PERU PHILIPPINES POLAND PORTUGAL ROMANIA RUSSIA SINGAPORE SLOVAKIA SOUTH AFRICA SPAIN SRI LANKA SWAZILAND SWEDEN SWITZERLAND TAIWAN THAILAND TURKEY UNITED KINGDOM URUGUAY VENEZUELA ZAMBIA ZIMBABWE -22- SCHEDULE 2 INFORMATION REGARDING COUNTRY RISK To aid the Board in its determinations regarding Country Risk, the Delegate will furnish the Board annually with respect to the jurisdictions specified in Schedule 1, the following information: 1. Copy of Addenda or Side Letters to Subcustodian Agreements 2. Legal Opinion, if available, with regard to: (a) Access to books and records by the Fund's accountants (b) Ability to recover assets in the event of bankruptcy of a custodian (c) Ability to recover assets in the event of a loss (d) Likelihood of expropriation or nationalization, if available (e) Ability to repatriate or convert cash or cash equivalents 3. Audit Report of Subcustodian 4. Copy of Balance Sheet from Annual Report of Subcustodian 5. Summary of Central Depository Information including (on an ongoing basis) prompt information as to any material change in the established practices and procedures of any Securities Depository. 6. Country Profile Matrix containing market practice for: (a) Delivery versus payment (b) Settlement method (c) Currency restrictions (d) Buy-in practice -23- (e) Foreign ownership limits (f) Unique market arrangements affecting custody or settlement -24- ADDENDUM TO THE APPENDIX A -------------------------- Brown Brothers Harriman & Co. acting as delegate of the Board under Rule 17f-5 has reviewed and approved the subcustodians listed on this Appendix as well as Agreements associated with these subcustodians, this Appendix is intended to confirm placement of assets with these subcustodians. Depositories listed on this Appendix that are not included in the next paragraph are considered compulsory. Brown Brothers Harriman & Co. does not accept delegation for compulsory depositories. The depositories in Chile, Colombia, and Venezuela are presently elective. It is not the current intention of Brown Brothers Harriman & Co. to use such depositories unless their use becomes compulsory. Euroclear is compulsory for fixed income obligations and elective for equities. Currently, Brown Brothers Harriman & Co. uses Euroclear for settlement of equities where we are instructed to do so. We do not use Euroclear for the ongoing safekeeping of equities. We will be replacing Canadian Imperial Bank of Commerce (CIBC) with Royal Bank of Canada (RBC) as subcustodian in Canada in the first quarter of 1999. As you may know, BBH&Co. has employed a strategy of appointing multiple subcustodians in certain markets when conditions warrant. Brown Brothers Harriman & Co. will be converting assets from CSOB in the Czech Republic to Citibank a.s. for Citibank N.A. in the first quarter of 1999. Brown Brothers Harriman & Co. will be converting assets from BESCL in Portugal to Banco Comercial Portugues in the fourth quarter of 1998. Brown Brothers Harriman & Co. will be converting assets from CSOB in Slovakia to Internationale Nederlanden Bank N.V. in the first quarter of 1999. -25- EX-99.H(1) 10 0010.txt FORM OF DEALER AGREEMENT EXHIBIT H(1) 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 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 14 and without incurring any liability or obligation to you, (e) that we may, upon notice, change the public offering price, sales load, or dealer allowance or modify, cancel or change the terms of this Agreement, and (f) we shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. All purchases of Shares from, and redemptions of Shares by, the 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 for Shares may include such transaction fees ("Transaction Fees") as may be described in the relevant Prospectus and SAI. In addition, you may make available Shares through a "no transaction fee" program, to the extent permitted in 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, 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 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 supplemental sales material. We will indemnify you and hold you harmless as to any representations made in the then-current Prospectus, SAI and any other supplemental material which we supply to you and you have not altered. You will not furnish to any person any information relating to the Shares, the 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 in any public place 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. 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 Standard 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 agent, PFPC Inc., within three business days of a receipt and acceptance by us of an order. You agree that before transmitting investors' funds, you will comply with Rule 15c2-4 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 5. Blue Sky 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 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 may not offer or sell Shares outside the United States, its territories or its possessions, and you agree to take, at your expense, such action, if any, as may be necessary to comply with the laws of such foreign jurisdictions. 3 6. Representations, Warranties and Undertakings. You represent and -------------------------------------------- warrant to and undertake that: (a) You are familiar with Securities Act Release No. 4968, Rule 15c2-8 under the Exchange Act, Section 4(3) of Securities Act and Section 24(d) of the Investment Company Act relating to the distribution and delivery of preliminary and final prospectuses and will comply therewith. You will deliver thereafter to any customer whose Shares you are holding as record holder copies of the annual and interim reports and proxy solicitation materials relating to the Shares. (b) You agree to keep an accurate record of distributions (including dates, number of copies and persons to whom sent) of copies of any Prospectus (and any SAI) for each 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. If you are such an NASD member, you agree that in making sales of shares of the one or more Classes of Shares of each Series of the Trust, you will comply with all applicable rules of the NASD, including without limitation, rules pertaining to the opening, approval, supervision and monitoring of customer accounts, the NASD's Interpretation with Respect to Free-Riding and Withholding and Sections 2730, 2740 and 2750 of the NASD's Conduct Rules. If you are such an unregistered foreign dealer or bank, you agree not to offer or sell, or to agree to offer or sell, directly or indirectly, any shares to any party to whom such shares may not be sold (unless 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 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 4 view toward distribution unless you have obtained such person's or entity's written consent to be bound by the terms of this Agreement. (e) You undertake to comply, with respect to your offering of Shares to the public pursuant to this Agreement, with all applicable provisions of the Securities Act, the Exchange Act the Investment Company Act, the rules and regulations under these Acts and with applicable rules of the NASD. (f) You represent that any compensation payable to you hereunder (i) will be disclosed to your customers; (ii) will be authorized by your customers; and (iii) will not result in an excessive fee to you. In addition, if an issue relating to a Class' 12b-1 Plan (as defined below) is submitted for shareholder approval, you will vote any Shares held for your own account in the same proportion as the vote of the Shares held by your customers on such issue. You further represent that in effecting the purchase or redemption of Shares in accordance with the terms of this Agreement: (i) you shall act solely as agent for the account of your customer; (ii) purchases or redemptions of Shares shall be initiated solely upon the instruction and order of your customer; (iii) the customer will have full beneficial ownership of any Shares purchased upon its authorization and order; and (iv) all transactions shall be for the account of the customer and under no circumstances for your account, and shall be without recourse to you. Under no circumstances will you make any oral or written representations to the contrary. 7. l2b-1 Plan. Those Series or Classes set forth as having a l2b-1 Plan ---------- have adopted a plan 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. All compensation, including fees under the l2b-1 Plan, shall be payable to you only to the extent that funds are received and are in the possession of the Distributor. 8. Shareholder Servicing Plan. Those Series or Classes set forth as -------------------------- having a Shareholder Servicing Plan have adopted such 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 subaccounting with respect to shares beneficially owned by shareholders, or the information to the Trust necessary for subaccounting; (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 5 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. All compensation, including the fees under the Shareholder Servicing Plan, shall be payable to you only to the extent that funds are received and are in the possession of the Distributor. 9. Indemnification. The parties to this Agreement hereby agree to --------------- indemnify and hold harmless each other, their officers and directors, and any person who is or may be deemed to be a controlling person of each other, and any person who is or may be deemed to be a controlling person of each other, from and against any losses, claims, damages, liabilities or expenses (including reasonable fees of counsel) to which any such person or entity may become subject insofar as such losses, claims, damages, liabilities or expense (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of material fact, or any omission or alleged omission to state a material fact made or omitted by it herein, or (b) any willful misfeasance or gross misconduct by it in the performance of its duties and obligations hereunder. 10. NSCC Indemnity - Shareholder and House Accounts. In consideration of ----------------------------------------------- the Distributor liquidating, exchanging and/or transferring uncertificated Shares for your customers without the use of original or underlying documentation supporting such instruction (e.g. a signed stock power or signature guarantees), you hereby agree to indemnify the Distributor and the 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. 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, officers, employees or agents. All transactions shall be settled upon your confirmation through NSCC transmission to the Distributor. The Distributor or the Trust may revoke the indemnity contained in this Section ten upon written notice to each of the other parties hereto, and in the case of such revocation, this indemnity agreement shall remain effective as to trades made prior to such revocation. 11. Termination. Either party to this Agreement may cancel this Agreement ----------- by written notice to the other party. Such cancellation shall be effective upon receipt of such notice. Bear Stearns agrees to cancel this Agreement upon instruction to do so by a majority of the Trustees 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 this Agreement. 12. Representations to Survive. The agreements, representations, -------------------------- warranties and other statements set forth in or made pursuant to this Agreement will remain in full force and effect, to the extent permitted by applicable law, regardless of any investigation made by or on behalf of us or any Authorized Dealer. The provisions of Section six and nine of this Agreement 6 shall survive the offer and sale of the Shares and the termination or cancellation of this Agreement, to the extent permitted by applicable law. 13. No Association. Nothing herein contained constitutes an agreement to -------------- become partners with you or with any other Authorized Dealer, but you shall be liable for your proportionate share of any tax, liability or expense based on any claim arising from the sale of Shares under this Agreement. We shall not be under any liability to you, except for obligations expressly assumed by us in this Agreement and liabilities under Section 11(f) of the Securities Act, and no obligations on our part shall be implied or inferred herefrom. We and you hereby elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and agree not to take any position inconsistent with that election. 14. Recordkeeping. You will maintain all records required by law to be ------------- kept by you relating to transactions in the Shares and, upon request by the Trust, promptly make such of these records available to the Trust as the Trust may reasonably request in connection with its operations. 15. Notices. Notices hereunder shall be deemed to have been duly given if ------- delivered by hand or facsimile (a) if to you, at your address or facsimile number set forth below and (b) if to us, to Bear, Stearns & Co. Inc., 575 Lexington Avenue, New York, New York 10022, Attention: Frank J. Maresca or, in each case, such other address as may be notified to the other party. 16. Amendments. We may modify this Agreement at any time by written ---------- notice to you. The first order placed by you subsequent to the giving of such notice shall be deemed to be acceptance by you of the modification described in such notice. 17. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of New York. 18. Arbitration. Any controversy or claim arising out of or relating to ----------- this Agreement, or any breach thereof, shall be settled by arbitration in accordance with the Rules of the New York Stock Exchange, Inc. Such arbitration shall be commenced within one year after the cause of action forming the basis of the controversy or claim accrued. The arbitration shall be conducted in New York, New York before three arbitrators, all of whom shall be from the securities industry. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 7 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. 8 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: ______ 1/st/ & 3/rd/ Friday ________ 2/nd/ & 4/th/ Friday _______ 1/st/ & 3/rd/ Thursday ________ 2/nd/ & 4/th/ Thursday Please note: Any additional position files are on an as requested basis. Please contact Broker services at the 800 number listed below. - ---------------------------------------------------------------------------------------------------------------------------- **8. If using networking, indicate network level:_____________________________________________ - ---------------------------------------------------------------------------------------------------------------------------- **9. If another dealer is clearing for them, what is the other dealer's name: ________________________________________________ Address ________________________________________________ ________________________________________________ ________________________________________________ NSCC number:____________________________________________________________________ Alpha indicator:________________________________________________________________ Network level:__________________________________________________________________ Contact name:___________________________________________________________________ Contact phone: Area Code:(_____) ___________________ - ---------------------------------------------------------------------------------------------------------------------------- 10. What is the address of the main office for mailing purposes of commission checks? (MAIN OFFICE ONLY) - ---------------------------------------------------------------------------------------------------------------------------- 11. Will statements go to main office or branch? Main Office____________ Branch - ---------------------------------------------------------------------------------------------------------------------------- 12. Omnibus account? Yes_________ or No_________ - ---------------------------------------------------------------------------------------------------------------------------- Completed fact sheet to be forwarded with signed Selected Dealer Agreement to: Bear Stearns Asset Management Inc. 575 Lexington Avenue, 10/th/ Floor New York, NY 10022 Any questions regarding the completion of this form, please contact Eric Tepper at (212) 272-2782 - ---------------------------------------------------------------------------------------------------------------------------
9 EX-99.H(2) 11 0011.txt FORM OF FINANCIAL INSTITUTION AGENCY AGREEMENT EXHIBIT H(2) FORM OF FINANCIAL INSTITUTION AGENCY AGREEMENT This Agreement is entered into between the financial institution executing this Agreement ("Financial Institution") and Bear, Stearns & Co. Inc. ("BSC") for the mutual funds (referred to individually as the "Fund" and collectively as the "Funds") for which BSC serves as Distributor of shares of beneficial interest or capital stock ("Shares"). The Funds include, but are not limited to, those offered as part of The Bear Stearns Funds. 1. Status of Financial Institution as "Bank" or Registered Broker-Dealer. The Financial Institution represents and warrants to BSC that: (a) It is either a "bank" as that term is defined in Section 3(a)(6) of the Securities Exchange Act of 1934 (the "Exchange Act") or a broker- dealer registered with the Securities and Exchange Commission. (b) If the Financial Institution is a "bank", it is a duly organized and validly existing bank in good standing under the laws of the jurisdiction in which it is organized. The Financial Institution agrees to give written notice to BSC promptly in the event that it shall cease to be a "bank" as defined in Section 3(a)(6) of the Exchange Act. In that event, this Agreement shall be automatically terminated upon such written notice. (c) If the Financial Institution is a registered broker-dealer, it is a member of the National Association of Securities Dealers, Inc. ("NASD") and it agrees to abide by all of the rules and regulations of the NASD including, without limitation, the NASD Conduct Rules. The Financial Institution agrees to notify BSC immediately in the event of (1) its expulsion or suspension from the NASD, or (2) its being found to have violated any applicable federal or state law, rule or regulation arising out of its activities as a broker-dealer or in connection with this Agreement, or which may otherwise affect in any material way its ability to act in accordance with the terms of this Agreement. The Financial Institution's expulsion from the NASD will automatically terminate this Agreement immediately without notice. Suspension of the Financial Institution from the NASD for violation of any applicable federal or state law, rule or regulation will terminate this Agreement effective immediately upon BSC's written notice of termination to the Financial Institution. 2. Financial Institution Acts as Agent for its Customers. The parties agree that in each transaction in the Shares of any Fund: (a) the Financial Institution is acting as agent for the customer; (b) each transaction is initiated solely upon the order of the customer; (c) as between the Financial Institution and its customer, the customer will have full beneficial ownership of all Shares of the Funds; (d) each transaction shall be for the account of the customer and not for the Financial Institution's account; and (e) each transaction shall be without recourse to the Financial Institution provided that the Financial Institution acts in accordance with the terms of this Agreement. The Financial Institution shall not have any authority in any transaction to act as BSC's agent or as agent for the Funds. 3. Execution of Orders for Purchase and Redemption of Shares. (a) The procedures relating to all orders and the handling of them will be subject to the terms of the relevant Prospectus and Statement of Additional Information as most currently amended or supplemented ("SAI") and BSC's written instructions to the Financial Institution from time to time. (b) All orders for the purchase of any Shares shall be executed at the then current public offering price per share (i.e., the net asset value per share plus the applicable sales load, if any) subject to the minimum investment amount set forth in the relevant Prospectus and SAI and 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 and all orders for the redemption of any Shares shall be executed at the net asset value per share, plus any applicable redemption charge, in each case as described in the relevant Prospectus and SAI. Any amendment to a Prospectus which affects the Sales Load, Dealer Allowances, waivers or discounts shall not affect the Sales Load, Dealer Allowances, discounts or waivers with respect to sales on which orders have been accepted by BSC prior to the date of notice of such amendment. The Financial Institution's placement of an order for Shares after the date of any notice of such amendment shall conclusively evidence the Financial Institution's agreement to be bound thereby. The Funds and BSC reserve the right to modify any minimum investment requirements, the subsequent investment requirements, the manner in which Shares are offered and the Sales Load rates applicable to future purchase of Shares. The Financial Institution acknowledges that the amounts charged to the public for Shares may include such transaction fees ("Transaction Fees") as may be described in the relevant Prospectus and SAI. In addition, the Financial Institutions may make available Shares through a "no transaction fee" program, to the extent permitted in a Fund's Prospectus or SAI. BSC shall make a reasonable effort to notify the Financial Institution of any redetermination or suspension of the public offering price, but BSC 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. The Financial Institution agrees to advise BSC promptly as to the amounts of any sales made by you to the public qualifying for reduced Sales Loads. BSC and the Funds reserve the right to reject any purchase request at their sole discretion. If required by law, each transaction shall be confirmed in writing on a fully disclosed basis and, if confirmed by BSC, a copy of each confirmation shall be sent 2 simultaneously to the Financial Institution if the Financial Institution so requests. (c) Upon receipt from the Financial Institution of any order to purchase Shares and, if a new account, an Account Information Form, BSC shall confirm such order to the Financial Institution 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 Standard Time. Any faxes sent to the Transfer Agent must be followed with a phone call to confirm receipt. Additional instructions may be forwarded to the Financial Institution from time to time. Payment for Shares ordered from BSC shall be made in Federal Funds and must be received by the Funds' agent, PFPC Inc., within three business days of a receipt and acceptance by BSC of an order. If payment in Federal Funds is not received by the third business day after the Subscription Date or, in the case of orders, within three days after the execution of the order described in this paragraph 3(c), BSC reserves the right, without notice, to cancel the sale and to hold the Financial Institution responsible for any loss sustained as a result thereof. (d) The Financial Institution agrees to provide such security as is necessary to prevent any unauthorized use of the Funds' recordkeeping system, accessed via any computer hardware or software provided to the Financial Institution by BSC. 4. Fees Payable to the Financial Institution from Sales Loads. On each order accepted by BSC, in exchange for the performance of sales and/or administrative services, the Financial Institution will be entitled to receive that portion of the Sales Load allocated to Authorized Dealers as set forth in the relevant Prospectus in connection with purchases of Shares effected by or through the Financial Institution. The Financial Institution acknowledges that the Prospectuses will set forth a description of waivers or reduction of the Sales Load in certain cases and the Financial Institution hereby waives such portion of the Sales Load otherwise allocated to it. BSC will promptly remit or cause to be remitted to the Financial Institution, by wire transfer of same day funds to an account the Financial Institution shall designate, that portion of the Sales Load or Transaction Fees, if any, to which the Financial Institution is entitled, after deduction of the portion allocated to BSC, which was received by BSC and was not yet paid to the Financial Institution. 5. Payment of Rule 12-b Fees and Shareholder Servicing Fees to the Financial Institution. (a) Subject to and in accordance with the terms of each relevant Prospectus and SAI, the Rule 12b-1 Plan, if any adopted by resolution of the Board of Directors or Trustees of any Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, BSC may pay fees to certain financial institutions (such as banks and securities dealers) for 3 services as described in the Relevant Prospectus and SAI. To the extent the Financial Institution provides services of the type contemplated by the 12b-1 Plan, it may be entitled to receive compensation from BSC as set forth in the 12b-1 Plan. All compensation, including fees under the l2b-1 Plan, shall be payable to the Financial Institution only to the extent that funds are received and are in the possession of BSC. (b) Those Series or Classes set forth as having a Shareholder Servicing Plan have adopted such as plan as described in the relevant Prospectus and SAI. To the extent that the Financial Institution provides services of the type contemplated by the Shareholder Servicing Plan, it may be entitled to receive compensation from BSC as set forth in the Shareholder Servicing Plan. Such services may include: (i) establishing and maintaining accounts and records relating to shareholders; (ii) processing dividend and distribution payments from the Trusts on behalf of shareholders; (iii) providing information periodically to shareholders showing their positions in shares and integrating such statements with those of other transactions and balances in shareholders' other accounts serviced by such financial institution; (iv) arranging for bank wires; (v) responding to shareholder inquiries relating to the services performed; (vi) responding to routine inquiries from shareholders concerning their investments; (vii) providing subaccounting, with respect to shares beneficially owned by shareholders, or the information to the Funds necessary for subaccounting; (viii) if required by law, forwarding shareholder communications from the Funds (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 Funds or BSC may reasonably request to the extent you are permitted to do so under applicable statutes, rules and regulations. All compensation, including the fees under the Shareholder Servicing Plan, shall be payable to the Financial Institution only to the extent that funds are received and are in the possession of BSC. 6. Undertakings. (a) The Financial Institution will deliver or cause to be delivered to each customer, at or prior to the time of any purchase of Shares, a copy of the prospectus of the Fund. The Financial Institution will deliver thereafter to any customer whose Shares it is holding as record holder copies of the annual and interim reports and proxy solicitation materials relating to Shares. The Financial Institution shall not make any representations concerning any Shares other than those contained in the prospectus of 4 the applicable Fund or in any promotional materials or sales literature furnished to the Financial Institution by BSC or the Fund. (b) The Financial Institution agrees to keep an accurate record of distributions (including dates, number of copies and persons to whom sent) of copies of any Prospectus (and any SAI) for each Fund (or any amendment or supplement) and, promptly upon request by BSC, to bring all subsequent changes to such Prospectus to the attention of anyone to whom such material shall have been distributed. The Financial Institution further agrees to furnish to persons who receive a confirmation of sale of Shares of any Fund a copy of the Prospectus (and not the SAI for such fund of the Trusts filed pursuant to Rule 497 under the Securities Act of 1933, as amended). 7. Indemnification. (a) The Financial Institution shall indemnify and hold harmless BSC, each Fund, the transfer agents of the Funds, and their respective subsidiaries, affiliates, officers, directors, agents and employees from all direct or indirect liabilities, losses or costs (including attorneys fees) arising from, related to or otherwise connected with: (1) any breach by the Financial Institution of any provision of this Agreement; or (2) any actions or omissions of BSC, any Fund, the transfer agents of the Funds, and their subsidiaries, affiliates, officers, directors, agents and employees in reliance upon any oral, written or computer or electronically transmitted instructions believed to be genuine and to have been given by or on behalf of the Financial Institution. (b) BSC shall indemnify and hold harmless the Financial Institution and its subsidiaries, affiliates, officers, directors, agents and employees from and against any and all direct or indirect liabilities, losses or costs (including attorneys fees) arising from, related to or otherwise connected with: (1) any breach by BSC of any provision of this Agreement; or (2) any alleged untrue statement of a material fact contained in any Fund's Registration Statement or Prospectus, or as a result of or based upon any alleged omission to state a material fact required to be stated, or necessary to make the statements not misleading. (c) The agreement of the parties in the to indemnify each other is conditioned upon the party entitled to indemnification (the "Indemnified Party") giving notice to the party required to provide indemnification (the "Indemnifying Party") promptly after the summons or other first legal process or any claim as to which indemnity may be sought is served on the Indemnified Party. The Indemnified Party shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting from it, provided that counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be approved by the Indemnified 5 Party (which approval shall not unreasonably be withheld), and that the Indemnified Party may participate in such defense at its own expense. The failure of the Indemnified Party to give notice as provided in this subparagraph (c) shall not relieve the Indemnifying Party from any liability other than its indemnify obligation under this Paragraph. No Indemnifying Party, in the defense of any such claim or litigation, shall, without the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect to such claim or litigation. (d) The provisions of this Paragraph 7 shall survive the termination of this Agreement. 8. Customer Names Proprietary to the Financial Institution. (a) The names of the Financial Institution's customers are and shall remain the Financial Institution's sole property and shall not be used by BSC or its affiliates for any purpose except the performance of its duties and responsibilities under this Agreement and except as required by applicable federal or state law, rule, or regulation and except for servicing and informational mailings relating to the Funds. Notwithstanding the foregoing, this Paragraph 8 shall not prohibit BSC or any of its affiliates from utilizing the names of the Financial Institution's customers for any purpose if the names are obtained in any manner other than from the Financial Institution pursuant to this Agreement. (b) Neither party shall use the name of the other party in any matter without the other party's written consent, except as required by any applicable federal or state law, rule or regulation, and except pursuant to any mutually agreed upon promotional programs. (c) The provisions of this Paragraph 8 shall survive the termination of this Agreement. 9. Solicitation of Proxies. The Financial Institution agrees not to solicit or cause to be solicited directly, or indirectly, at any time in the future, any proxies from the shareholders of any or all of the Funds in opposition to proxies solicited by management of the Fund or Funds, unless a court of competent jurisdiction shall have determined that the conduct of a majority of the Board of Directors or Trustees of the Fund or Funds constitutes willful misfeasance, bad faith, gross negligence or reckless disregard of their duties. This Paragraph 9 will survive the termination of this Agreement. 6 10. Certification of Customers' Taxpayer Identification Numbers. The Financial Institution agrees to obtain any taxpayer identification number certification from its customers required under Section 3406 of the Internal Revenue Code of 1986, as amended, and any applicable Treasury regulations, and to provide BSC or its designee with timely written notice of any failure to obtain such taxpayer identification number certification in order to enable the implementation of any required backup withholding. 11. Notices. Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery by postage prepaid, registered or certified United States first class mail, return receipt requested, by facsimile, telegram or similar means of same day delivery (with a confirming copy by mail as provided herein). Unless otherwise notified in writing, all notices to BSC shall be given or sent to BSC at its offices located at _____________________________, and all notices to the Financial Institution shall be given or sent to it at its address shown below. 12. Termination and Amendment. (a) This Agreement shall become effective in this form as of the date set forth below and may be terminated at any time by either party upon thirty (30) days' prior notice to the other party. This Agreement supersedes any prior sales agreements between the parties. (b) This Agreement may be amended by BSC from time to time by the following procedure. BSC will mail a copy of the amendment to the Financial Institution's address, as shown below. If the Financial Institution does not object to the amendment within thirty (30) days after its receipt, the amendment will become part of the Agreement. The Financial Institution's objection must be in writing and be received by BSC within such thirty (30) days. 13. Arbitration. (a) 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 American Arbitration Association. 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. 7 14. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York. 8 The Financial Institution acknowledges that it is confirming its agreement by signing and returning to BSC the two enclosed duplicate copies of this Agreement. Upon BSC's acceptance hereof the Agreement shall constitute a valid and binding contract between the Financial Institution and BSC. After acceptance, BSC will deliver to the Financial Institution one fully executed copy of the Agreement. _________________________________ Financial Institution Name (Please Print or Type) _________________________________ Address _________________________________ City State Zip Code By: ______________________________ Authorized Signature _________________________________ Title _________________________________ Please Print or Type Name BEAR, STEARNS & CO. INC. Date:______________________ By: _____________________________ _____________________________ Title _____________________________ Please Print or Type Name 9 EX-99.H(3) 12 0012.txt SCHEDULE I TO ADMINISTRATION EXHIBIT H(3) SCHEDULE I TO ADMINISTRATION AGREEMENT DATED FEBRUARY 22, 1995 (AS REVISED APRIL 11. 1995) BETWEEN THE BEAR STEARNS FUNDS AND BEAR, STEARNS & CO. INC.
Name of Series Annual Fees as a Last Approved Must be Approved By -------------- Percentage of ------------- ------------------- Average Daily Net Assets ------ S&P Stars Portfolio .15 of 1% February 7, 2000 March 31, 2001 Large Cap Value Portfolio .15 of 1% February 7, 2000 March 31, 2001 Small Cap Value Portfolio .15 of 1% February 7, 2000 March 31, 2001 Total Return Bond Portfolio .15 of 1% February 7, 2000 March 31, 2001 The Insiders Select Portfolio .15 of 1% February 7, 2000 March 31, 2001 Prime Money Market Portfolio .15 of 1% February 7, 2000 March 31, 2001 Focus List Portfolio .15 of 1% February 7, 2000 March 31, 2001 High Yield Total Return Portfolio .15 of 1% February 7, 2000 March 31, 2001 International Portfolio .15 of 1% February 7, 2000 March 31, 2001 Balanced Portfolio .15 of 1% February 7, 2000 March 31, 2001 Emerging Markets Debt Portfolio .15 of 1% February 7, 2000 March 31, 2001
EX-99.H(4) 13 0013.txt EXHIBIT A TO THE PFPC ADMINISTRATIVE SERVICES AGREEMENT EXHIBIT H(4) Exhibit A TO ADMINISTRATIVE SERVICES AGREEMENT DATED FEBRUARY 22, 1995 (AS REVISED APRIL 11, 1995) BETWEEN THE BEAR STEARNS FUNDS AND PFPC INC. AMENDED AS OF JULY 29, 1999 S&P Stars Portfolio Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio The Insiders Select Portfolio Prime Money Market Portfolio Focus List Portfolio High Yield Total Return Portfolio International Portfolio Balanced Portfolio Emerging Markets Debt Portfolio EX-99.I(1) 14 0014.txt OPINION OF KRAMER LEVIN EXHIBIT I(1) [LETTERHEAD OF KRAMER LEVIN NAFTALIS & FRANKEL LLP] July 17, 2000 The Bear Stearns Funds 575 Lexington Avenue New York, New York 10022 Re: The Bear Stearns Funds - Post-Effective Amendment -------------------------------------------------- No. 26 to Registration Statement on Form N-1A --------------------------------------------- Ladies and Gentlemen: We have acted as counsel for The Bear Stearns Funds, a Massachusetts business trust (the "Trust"), in connection with certain matters relating to the creation of the Trust and the issuance and offering of its Shares. You have asked our opinion concerning certain matters in connection with the issuance of an indefinite number of Class A, Class B, Class C and Class Y shares of beneficial interest, all with $0.001 par value, representing interests in the S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, The Insiders Select Fund, Focus List Portfolio, Balanced Portfolio, High Yield Total Return Portfolio, Income Portfolio, International Equity Portfolio and Emerging Markets Debt Portfolio and an indefinite number of Class Y shares of beneficial interest, $0.001 par value, representing interests in the Prime Money Market Portfolio (collectively, the "Shares"), as more fully described in the prospectuses (the "Prospectuses") and statements of additional information (the "Statements of Additional Information") relating to the Shares contained in Post-Effective Amendment No. 26 (the "Amendment") to the Trust's Registration Statement on Form N-1A (Registration No. 33-84842) to be filed by the Trust with the Securities and Exchange Commission. We have examined the Agreement and Declaration of Trust dated as of September 29, 1994, and amended October 5, 1994 and May 4, 2000, the By-Laws of the Trust, the minutes of certain meetings of the Trustees, the Prospectuses and Statements of Additional Information contained in the Amendment, and such other documents, records and certificates as we have deemed necessary for the purposes of this opinion. We are members of the Bar of the State of New York and are not experts on, and we do not express any opinion as to, the law of any other state or jurisdiction other than the laws of the State of New York and applicable federal laws of the United States. As to matters involving Massachusetts law, with your permission, we have relied solely upon an opinion of Goodwin, Procter & Hoar LLP, special Massachusetts counsel to the Trust, a copy of which is attached hereto, concerning the organization of the Trust and the authorization and issuance of the Shares, The Bear Stearns Funds July 17, 2000 Page 2 and our opinion is subject to the qualifications and limitations set forth therein, which are incorporated herein by reference as though fully set forth herein. Based upon the foregoing, we are of the opinion that the Shares, when sold in accordance with the terms of the Prospectuses and Statements of Additional Information in effect at the time of sale, will be legally issued, fully paid and non-assessable by the Trust. This opinion is solely for your benefit and is not to be quoted in whole or in part, summarized or otherwise referred to, nor is it to be filed with or supplied to any governmental agency or other person without the written consent of this firm. This opinion letter is rendered as of the date hereof, and we specifically disclaim any responsibility to update or supplement this letter to reflect any events or statements of fact which may hereafter come to our attention or any changes in statutes or regulations or any court decisions which may hereafter occur. Notwithstanding the previous paragraph, we consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to Post- Effective Amendment No. 26 to the Trust's Registration Statement. Notwithstanding this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Kramer Levin Naftalis & Frankel LLP --------------------------------------- Kramer Levin Naftalis & Frankel LLP EX-99.I(2) 15 0015.txt OPINION OF GOODWIN, PROCTER EXHIBIT I(2) Letterhead of Goodwin Procter & Hoar LLP July 17, 2000 Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, NY 10022-3852 Ladies and Gentlemen: As special Massachusetts counsel to The Bear Stearns Funds (the "Trust"), a Massachusetts business trust, we have been asked to render our opinion in connection with the issuance of an indefinite number of Class A, Class B, Class C and Class Y shares of beneficial interest, all with $0.001 par value, representing interests in the S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, The Insiders Select Fund, Focus List Portfolio, Balanced Portfolio, High Yield Total Return Portfolio, Income Portfolio; International Equity Portfolio; and Emerging Markets Debt Portfolio and an indefinite number of Class Y shares of beneficial interest, $0.001 par value, representing interests in the Prime Money Market Portfolio (collectively, the "Shares"), as more fully described in the prospectuses (the "Prospectuses") and statements of additional information (the "Statements of Additional Information") relating to the Shares contained in Post-Effective Amendment No. 26 (the "Amendment") to the Trust's Registration Statement on Form N-1A (Registration No. 33-84842) to be filed by the Trust with the Securities and Exchange Commission. We have examined the Agreement and Declaration of Trust dated as of September 29, 1994, and amended October 5, 1994 and May 4, 2000, the By-Laws of the Trust, the minutes of certain meetings of the Trustees, the Prospectuses and Statements of Additional Information contained in the Amendment, and such other documents, records and certificates as we have deemed necessary for the purposes of this opinion. Based upon the foregoing, we are of the opinion that the Shares, when sold in accordance with the terms of the Prospectuses and Statements of Additional Information in effect at the time of sale, will be legally issued, fully paid and non-assessable by the Trust. We hereby consent to the filing of this opinion as an exhibit to the Amendment. Very truly yours, /s/ GOODWIN, PROCTER & HOAR LLP ------------------------------- GOODWIN, PROCTER & HOAR LLP EX-99.J 16 0016.txt CONSENT OF DELOITTE & TOUCHE EXHIBIT J CONSENT OF INDEPENDENT AUDITORS The Bear Stearns Funds: We consent to the incorporation by reference in this Post-Effective Amendment No. 26 to Registration Statement No. 33-84842 of our reports dated May 17, 2000 appearing in the annual reports to shareholders and to the references to us under the captions "Financial Highlights" in the Prospectuses and "Custodians, Transfer Agent and Dividend Disbursing Agent, Counsel and Independent Auditors" in the Statement of Additional Information, all of which are a part of such Registration Statement. DELOITTE & TOUCHE LLP New York, New York July 12, 2000 EX-99.M(1) 17 0017.txt DISTRIBUTION PLAN FOR CLASS A EXHIBIT M(1) THE BEAR STEARNS FUNDS AMENDED AND RESTATED DISTRIBUTION PLAN (CLASS A SHARES) WHEREAS, The Bear Stearns Funds (the "Trust") engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); WHEREAS, shares of the Trust are divided into separate portfolios of investments, each with different investment objectives and policies (each a "Portfolio") and, in turn each Portfolio is divided into separate classes (each a "Class"); WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act (the "Rule") with respect to each Class of "A" Shares of each Portfolio listed on Schedule 1 annexed hereto; WHEREAS, the public offering price for Class A Shares is the net asset value that the Trust calculates after an order is placed plus the applicable sales charge, all as described in the Trust's prospectuses or statement of additional information on file with the Securities and Exchange Commission which is part of the most recent registration statement effective from time to time under the Securities Act of 1933, as amended; WHEREAS, the Trust's Board has determined that there is a reasonable likelihood that adoption of this Plan will benefit the Portfolios and their shareholders; and WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the "Distributor") as Distributor of the Portfolios' shares (the "Shares") pursuant to a Distribution Agreement dated February 22, 1995. NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby agrees to the terms of, this Plan in accordance with Rule 12b-1 under the Act on the following terms and conditions: 1. (a) Each Portfolio shall pay the Distributor for distributing its Class "A" Shares a monthly fee at the annual rate set forth on Schedule 1. (b) The Distributor may pay one or more third parties a fee in respect of any Class "A" Shares owned by investors for whom the third party is the dealer or holder of record. The Distributor shall determine the amounts to be paid to such third parties and the basis on which such payments will be made. Payments to a third party are subject to compliance by the third party with the terms of any related Plan agreement between the third party and the Distributor. (c) To the extent that any payments made by the Distributor, Bear Stearns Funds Management Inc., Bear Stearns Asset Management Inc. 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 Class "A" Shares within the context of the Rule, then such payments shall be deemed to be authorized by this Plan. (d) For the purposes of determining the fees payable under this Plan, the value of the net assets of the Class "A" Shares of each Portfolio shall be computed in the manner specified in the Trust's charter documents as then in effect for the computation of the value of net assets. 2. The terms and provisions of this Plan shall be interpreted and defined in a manner consistent with the provisions and definitions contained in (i) the Act, (ii) the Rule and (iii) Section 2830 of the National Association of Securities Dealers, Inc. Business Conduct Rules or its successor. 3. As to any Portfolio or its Class "A" Shares, this Plan shall not take effect until it, together with any related agreement, has been approved by vote of a majority of both (a) the Trust's Board and (b) those Trustees who are not "interested persons" of the Trust (as defined by the Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Trustees") cast in person at a meeting (or meetings) called for the purpose of voting on this Plan and such related agreements. 4. As to any Portfolio or its Class "A" Shares, as the case may be, this Plan shall remain in effect for one year from the date on which the Plan was first executed and shall continue in effect thereafter so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in paragraph 3. 5. The Distributor shall provide to the Trust's Board and the Board shall review, at least quarterly, a written report of amounts paid hereunder and the purposes for which they were made. 6. As to any Portfolio or its Class "A" Shares, as the case may be, this Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by a vote of a majority of its outstanding voting securities. 7. This Plan may not be amended to increase materially the amount of compensation payable pursuant to paragraph 1 hereof unless such amendment is approved by a vote of at least a majority (as defined in the Act) of the outstanding voting securities of the relevant Portfolio or its Class "A" Shares. No material amendment to the Plan shall be made unless approved in the manner provided in paragraph 3 hereof. 8. While this Plan is in effect, the selection and nomination of the Trustees who are not interested persons (as defined in the Act) of the Trust shall be committed to the discretion of the Trustees who are not such interested persons. 9. The Trust shall preserve copies of this Plan and any related agreements and all reports made pursuant to paragraph 5 hereof, for a period of not less than six years from the date of this Plan, any such agreement or any such report, as the case may be, the first two years in an easily accessible place. 2 10. The name The Bear Stearns Funds is the designation of the Trustees for the time being under an Agreement and Declaration of Trust dated September 29, 1994, as amended from time to time, and all persons dealing with the Trust must look solely to the property of the Trust for enforcement of any claims against the Trust as neither the Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Trust. IN WITNESS WHEREOF, the Trust, on behalf each Portfolio and its Class "A" Shares, and the Distributor have executed this Plan as of the date set forth below. September 8, 1997; amended and restated February 10, 1999 and April 17, 2000. THE BEAR STEARNS FUNDS By: /s/ Frank Maresca ------------------------------- Vice President & Treasurer BEAR, STEARNS & CO. INC. By: /s/ Doni Fordyce -------------------------------- Senior Managing Director 3 SCHEDULE 1
Name of Series Class "A" Shares - -------------- ---------------- S&P STARS Portfolio 0.25% Large Cap Value Portfolio 0.25% Small Cap Value Portfolio 0.25% Income Portfolio 0.10% The Insiders Select Fund 0.25% Focus List Portfolio 0.25% Balanced Portfolio 0.25% High Yield Total Return Portfolio 0.10% International Equity Portfolio 0.25% Emerging Markets Debt Portfolio 0.10%
___________________________ Schedule I amended and restated as of April 17, 2000. * Annual Fee as a Percentage of Average Daily Net Assets. EX-99.M(2) 18 0018.txt DISTRIBUTION PLAN FOR CLASS B EXHIBIT M(2) THE BEAR STEARNS FUNDS AMENDED AND RESTATED DISTRIBUTION PLAN (CLASS "B" SHARES) WHEREAS, The Bear Stearns Funds (the "Trust") engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); WHEREAS, shares of the Trust are divided into separate portfolios of investments, each with different investment objectives and policies (each a "Portfolio") and, in turn each Portfolio is divided into separate classes (each a "Class"); WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act (the "Rule") with respect to each Class of "B" Shares of each Portfolio listed on Schedule 1 annexed hereto; WHEREAS, the public offering price for Class B Shares is the net asset value that the Trust calculates after an order is placed with no initial sales charge, but subject to a contingent deferred sales charge if the shares are sold within six years of purchase, all as described in the Trust's prospectuses or statement of additional information on file with the Securities and Exchange Commission which is part of the most recent registration statement effective from time to time under the Securities Act of 1933, as amended; WHEREAS, the Trust's Board has determined that there is a reasonable likelihood that adoption of this Plan will benefit the Portfolios and their shareholders; and WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the "Distributor") as Distributor of the Portfolios' shares (the "Shares") pursuant to a Distribution Agreement dated February 22, 1995. NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby agrees to the terms of, this Plan in accordance with Rule 12b-1 under the Act on the following terms and conditions: 1. (a) Each Portfolio shall pay the Distributor for distributing its Class "B" Shares a monthly fee at the annual rate set forth on Schedule 1. (b) The Distributor may pay one or more third parties a fee in respect of any Class "B" Shares owned by investors for whom the third party is the dealer or holder of record. The Distributor shall determine the amounts to be paid to such third parties and the basis on which such payments will be made. Payments to a third party are subject to compliance by the third party with the terms of any related Plan agreement between the third party and the Distributor. (c) To the extent that any payments made by the Distributor, Bear Stearns Funds Management Inc., Bear Stearns Asset Management Inc. 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 Class "B" Shares within the context of the Rule, then such payments shall be deemed to be authorized by this Plan. (d) For the purposes of determining the fees payable under this Plan, the value of the net assets of the Class "B" Shares of each Portfolio shall be computed in the manner specified in the Trust's charter documents as then in effect for the computation of the value of net assets. 2. The terms and provisions of this Plan shall be interpreted and defined in a manner consistent with the provisions and definitions contained in (i) the Act, (ii) the Rule and (iii) Section 2830 of the National Association of Securities Dealers, Inc. Business Conduct Rules or its successor. 3. As to any Portfolio or its Class "B" Shares, this Plan shall not take effect until it, together with any related agreement, has been approved by vote of a majority of both (a) the Trust's Board and (b) those Trustees who are not "interested persons" of the Trust (as defined by the Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Trustees") cast in person at a meeting (or meetings) called for the purpose of voting on this Plan and such related agreements. 4. As to any Portfolio or its Class "B" Shares, as the case may be, this Plan shall remain in effect for one year from the date on which the Plan was first executed and shall continue in effect thereafter so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in paragraph 3. 5. The Distributor shall provide to the Trust's Board and the Board shall review, at least quarterly, a written report of amounts paid hereunder and the purposes for which they were made. 6. As to any Portfolio or its Class "B" Shares, as the case may be, this Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by a vote of a majority of its outstanding voting securities. 7. This Plan may not be amended to increase materially the amount of compensation payable pursuant to paragraph 1 hereof unless such amendment is approved by a vote of at least a majority (as defined in the Act) of the outstanding voting securities of the relevant Portfolio or its Class "B" Shares. No material amendment to the Plan shall be made unless approved in the manner provided in paragraph 3 hereof. 8. While this Plan is in effect, the selection and nomination of the Trustees who are not interested persons (as defined in the Act) of the Trust shall be committed to the discretion of the Trustees who are not such interested persons. 9. The Trust shall preserve copies of this Plan and any related agreements and all reports made pursuant to paragraph 5 hereof, for a period of not less than six years from the date of this Plan, any such agreement or any such report, as the case may be, the first two years in an easily accessible place. 2 10. The name The Bear Stearns Funds is the designation of the Trustees for the time being under an Agreement and Declaration of Trust dated September 29, 1994, as amended from time to time, and all persons dealing with the Trust must look solely to the property of the Trust for enforcement of any claims against the Trust as neither the Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Trust. IN WITNESS WHEREOF, the Trust, on behalf each Portfolio and its Class "B" Shares, and the Distributor have executed this Plan as of the date set forth below. September 8, 1997; amended and restated February 10, 1999 and April 17, 2000. THE BEAR STEARNS FUNDS By: /s/ Frank Maresca -------------------------- Vice President & Treasurer BEAR, STEARNS & CO. INC. By: /s/ Doni Fordyce -------------------------- Senior Managing Director 3 SCHEDULE 1 Name of Series Class "B" Shares* - -------------- ---------------- S&P STARS Portfolio 0.75% Large Cap Value Portfolio 0.75% Small Cap Value Portfolio 0.75% Income Portfolio 0.75% The Insiders Select Fund 0.75% Focus List Portfolio 0.75% Balanced Portfolio 0.75% High Yield Total Return Portfolio 0.75% International Equity Portfolio 0.75% Emerging Markets Debt Portfolio 0.75% ________________________ Schedule I amended and restated as of April 17, 2000. * Annual Fee as a Percentage of Average Daily Net Assets. EX-99.M(3) 19 0019.txt DISTRIBUTION PLAN FOR CLASS C EXHIBIT M(3) THE BEAR STEARNS FUNDS AMENDED AND RESTATED DISTRIBUTION PLAN (CLASS "C" SHARES) WHEREAS, The Bear Stearns Funds (the "Trust") engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); WHEREAS, shares of the Trust are divided into separate portfolios of investments, each with different investment objectives and policies (each a "Portfolio") and, in turn each Portfolio is divided into separate classes (each a "Class"); WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act (the "Rule") with respect to each Class of "C" Shares of each Portfolio listed on Schedule 1 annexed hereto; WHEREAS, the public offering price for Class C Shares is the net asset value that the Trust calculates after an order is placed with no initial sales charge, but subject to a contingent deferred sales charge if the shares are sold within the first year of purchase, all as described in the Trust's prospectuses or statement of additional information on file with the Securities and Exchange Commission which is part of the most recent registration statement effective from time to time under the Securities Act of 1933, as amended; WHEREAS, the Trust's Board has determined that there is a reasonable likelihood that adoption of this Plan will benefit the Portfolios and their shareholders; and WHEREAS, the Trust employs Bear, Stearns & Co. Inc. (the "Distributor") as Distributor of the Portfolios' shares (the "Shares") pursuant to a Distribution Agreement dated February 22, 1995. NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby agrees to the terms of, this Plan in accordance with Rule 12b-1 under the Act on the following terms and conditions: 1. (a) Each Portfolio shall pay the Distributor for distributing its Class "C" Shares a monthly fee at the annual rate set forth on Schedule 1. (b) The Distributor may pay one or more third parties a fee in respect of any Class "C" Shares owned by investors for whom the third party is the dealer or holder of record. The Distributor shall determine the amounts to be paid to such third parties and the basis on which such payments will be made. Payments to a third party are subject to compliance by the third party with the terms of any related Plan agreement between the third party and the Distributor. (c) To the extent that any payments made by the Distributor, Bear Stearns Funds Management Inc., Bear Stearns Asset Management Inc. 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 Class "C" Shares within the context of the Rule, then such payments shall be deemed to be authorized by this Plan. (d) For the purposes of determining the fees payable under this Plan, the value of the net assets of the Class "C" Shares of each Portfolio shall be computed in the manner specified in the Trust's charter documents as then in effect for the computation of the value of net assets. 2. The terms and provisions of this Plan shall be interpreted and defined in a manner consistent with the provisions and definitions contained in (i) the Act, (ii) the Rule and (iii) Section 2830 of the National Association of Securities Dealers, Inc. Business Conduct Rules or its successor. 3. As to any Portfolio or its Class "C" Shares, this Plan shall not take effect until it, together with any related agreement, has been approved by vote of a majority of both (a) the Trust's Board and (b) those Trustees who are not "interested persons" of the Trust (as defined by the Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Trustees") cast in person at a meeting (or meetings) called for the purpose of voting on this Plan and such related agreements. 4. As to any Portfolio or its Class "C" Shares, as the case may be, this Plan shall remain in effect for one year from the date on which the Plan was first executed and shall continue in effect thereafter so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in paragraph 3. 5. The Distributor shall provide to the Trust's Board and the Board shall review, at least quarterly, a written report of amounts paid hereunder and the purposes for which they were made. 6. As to any Portfolio or its Class "C" Shares, as the case may be, this Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by a vote of a majority of its outstanding voting securities. 7. This Plan may not be amended to increase materially the amount of compensation payable pursuant to paragraph 1 hereof unless such amendment is approved by a vote of at least a majority (as defined in the Act) of the outstanding voting securities of the relevant Portfolio or its Class "C" Shares. No material amendment to the Plan shall be made unless approved in the manner provided in paragraph 3 hereof. 8. While this Plan is in effect, the selection and nomination of the Trustees who are not interested persons (as defined in the Act) of the Trust shall be committed to the discretion of the Trustees who are not such interested persons. 9. The Trust shall preserve copies of this Plan and any related agreements and all reports made pursuant to paragraph 5 hereof, for a period of not less than six years from the date of this Plan, any such agreement or any such report, as the case may be, the first two years in an easily accessible place. 2 10. The name The Bear Stearns Funds is the designation of the Trustees for the time being under an Agreement and Declaration of Trust dated September 29, 1994, as amended from time to time, and all persons dealing with the Trust must look solely to the property of the Trust for enforcement of any claims against the Trust as neither the Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Trust. IN WITNESS WHEREOF, the Trust, on behalf each Portfolio and its Class "C" Shares, and the Distributor have executed this Plan as of the date set forth below. September 8, 1997; amended and restated February 10, 1999 and April 17, 2000. THE BEAR STEARNS FUNDS By: /s/ Frank Maresca ------------------------- Vice President & Treasurer BEAR, STEARNS & CO. INC. By: /s/ Doni Fordyce ------------------------- Senior Managing Director 3 SCHEDULE 1 Name of Series Class "C" Shares* - -------------- ---------------- S&P STARS Portfolio 0.75% Large Cap Value Portfolio 0.75% Small Cap Value Portfolio 0.75% Income Portfolio 0.75% The Insiders Select Fund 0.75% Focus List Portfolio 0.75% Balanced Portfolio 0.75% High Yield Total Return Portfolio 0.75% International Equity Portfolio 0.75% Emerging Markets Debt Portfolio 0.75% - ------------------------ Schedule I amended and restated as of April 17, 2000. * Annual Fee as a Percentage of Average Daily Net Assets. EX-99.P(1) 20 0020.txt CODE OF ETHICS OF REGISTRANT EXHIBIT P(1) THE BEAR STEARNS FUNDS BEAR STEARNS INVESTMENT TRUST MANAGED INCOME SECURITIES PLUS FUND, INC. CODE OF ETHICS A. Legal Requirements. ------------------ Rule 17j-1(a) 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, Bear Stearns Investment Trust 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 to a Fund or Portfolio any untrue statement of a material fact or to omit to state to the Fund or Portfolio a material fact necessary in order to make the statements made, 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 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 the Funds and Portfolios. (b) 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 _________________________ /1/ In this Code of Ethics, "trustees" also refers to "directors" and "Board of Trustees" also refers to "Board of Directors." (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 other relative (parents, adult children, brothers, sisters, in-laws, etc.) whose investments the person directs or controls, whether they live together or not. 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 Service Provider" means the investment adviser, administrator and principal underwriter for each Fund. (6) "Ethics Committee" means the Ethics Committee established by BSAM. (7) "Exempt Security" means Government securities (as defined by Section 2(a)(16) of the 1940 Act); shares of registered open-end investment companies; securities that are not eligible for purchase or sale by any Fund; and any other security that BSAM's Ethics Committee from time to time may designate as an Exempt Security. (8) "Reportable Securities" means all securities other than Exempt Securities. (9) "Security" shall have the meaning set forth in Section 2(a)(36) of the 1940 Act, and shall include a related security. (a) A security is "being considered for purchase or sale" when a recommendation to purchase or sell 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. (b) A security is "held or to be acquired" if within the most recent 15 days it is or has been held by a Portfolio, or is being or has been considered by a Portfolio or BSAM for purchase by the Portfolio. (c) A purchase or sale includes the writing of an option to purchase or sell. 2 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(a) 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. D. Procedures. ---------- (1) In order to enable the Funds to determine with reasonable assurance whether the foregoing policies are being observed by its Access Persons: (a) Each Access Person, other than a Trustee who is not an "interested person" (as defined in the 1940 Act), shall submit reports in the form attached hereto as Exhibit A ("Securities Transaction Reports") to the Fund's Compliance Officer showing all transactions in Reportable 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, but need not show transactions over which such person had no direct or indirect influence or control. (b) Each Trustee who is not an "interested person" of a Fund shall submit the same quarterly report as required under paragraph (a), for each transaction in a Reportable Security when the Trustee knew at the time of the transaction or, in the ordinary course of fulfilling official duties as a Trustee, 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 Fund or Portfolio or the investment adviser for the Fund or Portfolio. No report is required if the Trustee has no direct or indirect influence or control over the transaction. 3 (2) 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. (3) 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. (4) The Board of Trustees shall consider reports made to it hereunder and shall determine whether the policies established in section B above have been violated, and what sanctions, if any, should be imposed. (5) The Board of Trustees, including a majority of the Trustees who are not "interested persons" of the Fund, with advice of counsel to the Funds and to the disinterested 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 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. (6) 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: (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 violations requiring significant remedial action during the past year; and 4 (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. (7) 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. Adopted: November 12, 1998 - ------- The Board of Trustees of The Bear Stearns Funds The Board of Trustees of Bear Stearns Investment Trust The Board of Directors of Managed Income Securities Plus Fund 5 EXHIBIT A THE BEAR STEARNS FUNDS BEAR STEARNS INVESTMENT TRUST MANAGED INCOME SECURITIES PLUS FUND, INC. SECURITY TRANSACTION REPORT For The Calendar Quarter Ended __________ Instructions: 1. List all transactions in Reportable Securities in any account in which you have a Beneficial Ownership. Please write "none" if you have no transactions in Reportable Securities during the quarter. If you submit copies of monthly brokerage statements covering all transactions in Reportable Securities, please write "see monthly statements." 2. If you are Trustee who is not an "interested person" of BSAM, BSFM, Bear, Stearns & Co. Inc., then you need only report transactions in Reportable 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 Reportable Securities during the quarter that meet the above conditions. 3. Use additional sheets if necessary.
===================================================================================================== No. of Shares Broker, Dealer or Other Party Name of Date of or Principal Through Whom Transaction Security Transaction Purchase/Sale Amount Price Was Made -------- ----------- ------------- ------ ----- -------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- =====================================================================================================
I certify that the information provided above is correct. Date: _______ Signature: ____________________ 6 EX-99.P(2) 21 0021.txt CODE OF ETHICS OF BSAM EXHIBIT P(2) BEAR STEARNS ASSET MANAGEMENT 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 (the "1940 Act"), and provides investment advisory services to investment companies and other clients; and 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 and their clients; and WHEREAS, BSAM has a fiduciary duty with respect to each portfolio under management and the interests of the Managed Accounts and of the shareholders of BSAM's investment company clients 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 officer or employee of BSAM which is, or appears to be, adverse to the interests of 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 officers and employees; and NOW, THEREFORE, BSAM hereby adopts the following Code of Ethics (the "Code") pursuant to the provisions of Rule 17j-1 under the 1940 Act. A. Legal Requirements. ------------------ Rule 17j-1(a) under the 1940 Act makes it unlawful for "any affiliated person" of BSAM 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 to any Fund any untrue statement of a material fact or to omit to state to any Fund a material fact necessary in order to make the statements made, 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. B. Definitions. ----------- 1. "Access Person" means a. all directors, officers and employees of BSAM. b. any director or officer of the Distributor who, in the ordinary course of his or her regular functions and duties, participates in or obtains information concerning the purchase or sale of securities for the Funds for which the Distributor acts as principal underwriter 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; c. any director or officer of the Administrator who, in the ordinary course of his or her regular functions and duties, 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 Persons; and e. any other person designated by the Compliance Officer to be an Access Person. 2. "Administrator" means Bear Stearns Funds Management Inc. 3. "Adviser" means Bear Stearns Asset Management Inc. 4. "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 other relative (parents, adult children, brothers, sisters, in-laws, etc.) whose investments the person directs or controls, whether they live together or not. 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. -1- 5. "Compliance Officer" means a person designated by BSAM as the compliance officer with respect to Managed Accounts. 6. "Control" will have the meaning set forth in Section 2(a)(9) of the Investment Company Act. 7. "Distributor" means Bear, Stearns & Co. Inc. 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 Beneficial Ownership. 9. "Ethics Committee" shall have the same meaning as given in paragraph H. 10. "Exempt Person" means any person listed on Schedule I of this Code. 11. "Exempt Security" means Government securities (as defined by Section 2(a)(16) of the 1940 Act); shares of registered open-end investment companies; securities that are not eligible for purchase or sale by any Managed Account; and any other security that the Ethics Committee from time to time may designate as an Exempt Security. 12. "Exempt Transaction" 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; e. a transaction or series of transactions 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 class of any corporate, municipal or international fixed-income security. The exception provided in this Section 12(e) is not available to 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. For purposes of this definition, "series of transactions" means transactions in a security or related securities within a rolling five business day period. -2- f. any other transaction otherwise prohibited by this Code upon a showing of good faith and that no Managed Account will be unfairly disadvantaged as approved in writing by the Compliance Officer. 13. "Fund" means any one of The Bear Stearns Funds, Bear Stearns Investment Trust or Managed Income Securities Plus Fund, Inc. or any other investment company registered under the 1940 Act of which BSAM is the adviser. 14. "Investment Person" means any Portfolio Manager and any person whose regular function or duty is to support, or participate in, the portfolio management function, 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 an Investment Person, then such Access Person shall be treated as an Investment Person for the purpose of complying with this Code of Ethics with respect to such information or activities. 15. "Managed Account" means each Fund and each separate account (including limited partnerships 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. 16. "Portfolio Manager" means any employee entrusted with direct responsibility and authority to make investment decisions affecting a Managed Account. 17. "Purchase or sale of a security" includes the writing of an option to purchase or sell a security. 18. "Reportable Securities" means all securities other than Exempt Securities. 19. "Security" shall have the meaning set forth in Section 2(a)(36) of the 1940 Act, and shall include a related security. a. A security is "being considered for purchase or sale" when a recommendation to purchase or sell 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. b. A security is "held or to be acquired" if within the most recent 15 days it is or has been held by a Managed Account, or is being or has been considered by a Managed Account or BSAM for purchase by the Managed Account. c. A purchase or sale includes the writing of an option to purchase or sell. -3- 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(a). 2. Fiduciary Duties. In keeping with the recommendations of the Board of ---------------- Governors of the Investment Company Institute, 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. D. Prohibited Activities. --------------------- 1. Disclosure of Activities of Managed Accounts. No Investment Person may -------------------------------------------- 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. No Investment Person may 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; -4- 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. Public Offerings of Securities. No Investment Person may acquire any ------------------------------ securities in a public offering (e.g., initial public offering or secondary offering). 5. Private Placements. No Investment Person will acquire any privately ------------------ placed securities (other than those managed by BSAM) without the prior written approval of 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 privately placed security must be disclosed to the Compliance Officer by such Investment Person 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, the Access Person is subject to the requirements and restrictions set forth in Exhibit A, the Policy Statement on Insider Trading. 7. 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. 8. "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 -5- 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. 9. 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 Employee Account. 10. 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. -6- For purposes of calculating the Seven Day Restriction, the trade date is not included. c. Retroactive Cancellation. The BSAM trading desk may cancel ------------------------ retroactively all non-Exempt Transactions in Employee Accounts in a 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. 11. Service as a Director. No Investment Person shall serve on the board --------------------- of directors of any for-profit company without the prior approval of the Compliance Officer. Investment Persons 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. E. 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. F. Procedures for Employee Accounts. -------------------------------- 1. Employee Accounts. Access Persons must maintain all Employee Accounts ----------------- relating to non-Exempt Securities at Bear Stearns. Trades for the Employee Accounts of Access Persons who are BSAM employees must be executed by the BSAM trading desk unless the Chief Investment Officer or his designee grants written permission otherwise. 2. Preclearance. ------------ a. General. Prior to effecting a purchase or sale transaction for an ------- Employee Account (other than an Exempt Security or an Exempt Transaction), 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 Chief Investment Officer and Compliance Officer. All ---------------------------------------------------------- trading for Employee Accounts of the Chief Investment Officer must be approved by the Compliance Officer (or designee), 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. -7- G. Reporting Requirements. ---------------------- 1. Same Day or Seven Day Blackout Period. 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. 2. Reports by Access Persons and Investment Persons. ------------------------------------------------ a. Quarterly Reports by Access Persons. Each Access Person will ----------------------------------- submit to the Compliance Officer a Security Transaction Report each quarter (See Exhibit B). The Security Transaction Report will show all transactions in "Reportable Securities" in which the Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership of Reportable Securities. Access Persons must submit the Security Transaction Report no later than 10 days after the end of each calendar quarter, but need not report transactions in securities purchased or sold in Exempt Transactions. b. Disclosure by Investment Persons of Securities Holdings. ------------------------------------------------------- (i) Annual Report. Each Investment Person will submit to the Compliance Officer annually (as of each December 31) a list of all holdings of Reportable Securities in which he or she has a direct or indirect Beneficial Ownership interest. (ii) Initial Report. Each Investment Person who has not already done so shall submit to the Compliance Officer (or designee) a complete report, on the Asset Certification Form (see Exhibit D), listing each of the securities held as of the end of the previous calendar quarter, in which the Investment Person has a direct or indirect Beneficial Ownership interest. This initial listing of Reportable Securities must be submitted no later than the end of the then-current calendar quarter. In the event that the Investment Person held no Reportable Securities as of the above reporting dates, the report should so specify. This report 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. c. Monthly Statements of Access Persons. An Access Person shall be deemed ------------------------------------ to have complied with the requirements of Paragraph 2(a) and an Investment Person shall be deemed to have complied with Paragraph 2(b) by sending or arranging to be sent to the Compliance Officer duplicate monthly brokerage statements on all transactions required to be reported hereunder. 3. 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 -8- subject to this reporting requirement and shall deliver a copy of this Code of Ethics to such person. 4. 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; (ii) any security that the Compliance Officer has designated as an Exempt Security; and (iii) any addition to or removal of an Exempt Person from Schedule I. b. Annual Report to Fund Trustees. The Ethics Committee will prepare an ------------------------------ annual report to the Board of Trustees of the Funds that: (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; and (iii) 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. 5. 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. H. Ethics Committee. ---------------- 1. A committee ("the Ethics Committee") composed of the Chief Investment Officer, General Counsel, Director of Fixed Income, Chief Financial Officer, Head Trader, and the 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 when there is reasonable ground to believe that the Employee Account has not improperly benefited from the transaction that has occurred in or -9- is being considered for a Managed Account, and that the Managed Account has not been improperly disadvantaged thereby. 3. Only the Ethics Committee 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. I. 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 Chief Investment Officer or his designee. J. Special Procedures for Managed Accounts in which Access Persons and ------------------------------------------------------------------- Investment Persons Have a Beneficial Ownership Interest. ------------------------------------------------------- 1. General Principle. The special procedures described in this Paragraph ----------------- J 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 -10- would preclude the transaction (e.g., the "Policy Statement on Insider Trading"). Paragraphs D and F 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 Persons 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 J, the term "Beneficial Ownership" includes the receipt of any performance fees and/or performance allocations. K. Exempt Persons. -------------- 1. Designation of Exempt Persons. From time to time, the Ethics Committee ----------------------------- may designate one or more persons who would otherwise be considered Access Persons or Exempt Persons on Schedule I of this Code of Ethics. 2. Considerations Used to Determine Status as Exempt Person. In -------------------------------------------------------- determining whether to designate any officer, director or employee as an Exempt 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 Persons; . 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. Termination of Status of Exempt Person. The Ethics Committee, in -------------------------------------- its sole discretion, may remove any Exempt Person from Schedule I for good cause, including, but not limited to, any violation of this Code. 4. Status as an Exempt Person. Exempt Persons shall be exempt from -------------------------- the provisions of this Code relating to Minimum Holding Periods (D. 9.); Blackout Periods (D. 10.) and Preclearance (F. 2.). 5. Special Procedures. Within a reasonable time thereafter, the ------------------ Compliance Officer shall review each trade executed by any Exempt Person, and may, in his or her sole discretion, cancel or rescind any such trade if it is determined that: a. the Exempt Person has benefited improperly by the trade; or -11- b. the trade has operated to the detriment of a Managed Account; or c. the Exempt Person has engaged in a transaction that creates the appearance of an impropriety (e.g., front running, etc.). Adopted: November 12, 1998 Revised: June 25, 1999 -12- Exhibit A BEAR STEARNS ASSET MANAGEMENT INC. Policy Statement on Insider Trading The following policies have been established to aid employees and other persons associated with Bear Stearns Asset Management Inc. ("BSAM"), The Bear Stearns Funds, Bear Stearns Investment Trust, and Managed Income Securities Plus Fund, Inc. (collectively, the "Funds") to avoid "insider trading" and to aid BSAM in preventing, detecting and imposing sanctions on those who engage in "insider trading." All employees and other persons must adhere to these policies or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties. If a BSAM employee or other person has a question about these policies, such person should contact his or her supervisor or the BSAM Compliance Officer (or designee). I. Description of Insider Trading The term "insider trading" is not defined in the federal securities laws, but generally refers to securities traded on the basis of material non- public information (whether or not someone is an "insider"). While the law concerning "insider trading" is not static, it is generally understood that the law prohibits: . trading by an "insider" while in possession of material non-public information regarding his/her company, which he/she was under a duty to keep confidential; and . trading by a "non-insider" ("tippee") while in possession of material non-public information, where the information was disclosed to the non-insider in violation of an insider's duty to keep it confidential and the tippee knew or should have known that the information was confidential; and . disclosure by a tippee of material non-public information to others, where there is an expectation that such others may trade on the basis of the information. A. Who is an Insider? The concept of "insider" is broad. It includes all officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he/she enters into a confidential relationship with the company relating to the conduct of its affairs and as a result is given access to confidential information or learns of such information in the course of his or her work for or representation of the company. A temporary insider can include, among others, a company's attorneys, -1- investment bankers, accountants, consultants, commercial bankers and the employees of such organizations. In addition, an employee of BSAM may become a temporary insider of a company it advises or for which it performs other services. The company must have a reasonable expectation that the temporary insider will keep any non-public information he or she learns of in the course of his or her employment confidential and the relationship must at least imply such a duty before the outsider will be considered a temporary insider. B. What is Material Information? Trading on inside information is not a basis for liability unless the information is material. "Material information" is generally defined as information regarding which there is a substantial likelihood that a reasonable investor would consider it important in making his/her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that employees should consider material includes but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant contracts, significant merger or acquisition proposals or agreements, a sale of a division, major litigation, accounting irregularities, product recalls, liquidity problems, bankruptcy filings, important inventions or discoveries and extraordinary management developments (e.g. resignation of a prominent officer or a shake-up in management that would affect the company's prospects). Material information does not necessarily have to relate to a company's business. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the United States Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a reporter for The Wall Street Journal was found criminally liable for ------------------------ disclosing 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. It was found that the information belonged to the newspaper and was therefore misappropriated by the reporter and his tippees. -2- C. What is Non-Public Information? Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally available to the public. For example, information found in a report filed with the Securities and Exchange Commission, or appearing in Dow Jones, Reuters Economic ---------------- Services, The Wall Street Journal or other publications of general -------- ----------------------- circulation would be considered public. A company report must be given an opportunity to circulate - it does not become public the instant the press release is issued. D. Penalties Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he/she does not personally benefit from the violation. Penalties include: . civil injunctions; . treble damages; . disgorgement of profits; . jail sentences; . fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and . fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the profit gained or loss avoided. In addition, any violations of this Policy Statement on Insider Trading will be deemed violations of the Code of Ethics and will be subject to the sanctions imposed thereby. -3- II. Identifying Inside Information Before a portfolio manager enters into a transaction in the securities of a company about which he/she may have potential inside information, the following questions must be resolved: A. 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? B. Is the information non-public? To whom has this information been provided? 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 the above, the portfolio manager believes that the information is material and non-public, or if he/she has any questions as to whether the information is material and non-public, the portfolio manager must take the following steps: . report the matter immediately to the Compliance Officer (or designee); . refrain from purchasing or selling the securities in a personal securities transaction or on behalf of others, including BSAM's Managed Accounts; . refrain from communicating the information inside or outside BSAM, other than to the Compliance Officer (or designee); and . after the Compliance Officer (or designee) has reviewed the issue, the portfolio manager 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. -4- III. Restricting Access to Material Non-Public Information Information in the possession of any employee that may be considered as material and non-public may not be communicated to anyone, including persons within BSAM, except as provided in Section II.B. above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be sealed and access to computer files containing material non-public information should be restricted. IV. Resolving Issues Concerning Insider Trading If, after consideration of the items set forth in Section II.B. above, doubt remains 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, it must be discussed with the Compliance Officer (or designee) before trading on or communicating the information to anyone. V. 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: . provide orientation to new BSAM employees regarding policies and procedures with respect to "insider trading"; . answer questions regarding BSAM's policies and procedures; . resolve issues of whether information received by an employee of BSAM is material and non-public; . review on a regular basis and update as necessary the Code of Ethics and related procedures of BSAM; . 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 . when it has been determined that an employee of BSAM has material non- public information: . implement measures to prevent dissemination of such information; and . restrict employees from trading the securities. -5- VI. 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. -6- EXHIBIT B BEAR STEARNS ASSET MANAGEMENT INC. SECURITY TRANSACTION REPORT For The Calendar Quarter Ended __________ Instructions 1. List all transactions in Reportable Securities in any account in which you have a Beneficial Ownership. Use additional sheets if necessary. 2. Write "none" if you have no transactions in Reportable Securities during the quarter. 3. 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 Reportable Securities in which you have Beneficial Ownership, you may write "see brokerage statements" instead of listing the information below.
============================================================================================================ No. of Shares Broker, Dealer or Other Party Name of Date of or Principal Through Whom Transaction Security Transaction Purchase/Sale Amount Price Was Made - -------- ----------- ------------- ------ ----- -------- - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ ============================================================================================================
I certify that the information provided above is correct. Date:_________ Signature:_______________________________________ Name:____________________________________________ EXHIBIT C BEAR STEARNS ASSET MANAGEMENT INC. ANNUAL ASSET CERTIFICATION OF INVESTMENT PERSONS For the Year Ended __________ Instructions 1. You must list each Reportable Security in which you have Beneficial Ownership, that you hold at the end of the year indicated above. Use additional sheets if necessary. 2. Write "none" if you have no transactions in Reportable Securities at year end. 3. 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 Reportable Securities in which you have Beneficial Ownership, you may write "see brokerage statements" instead of listing the information below. 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.
================================================================================================== Number of Shares or Registration on Name of Security Principal Amount Security or Account Nature of Interest ---------------- ---------------- ------------------- ------------------ - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- ==================================================================================================
Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Reportable Securities in which I 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. Date:________ Signature:__________________________ Name:_______________________________ EXHIBIT D BEAR STEARNS ASSET MANAGEMENT INC. INITIAL ASSET CERTIFICATION OF INVESTMENT PERSONS AS OF __________ Instructions 1. You must list each Reportable Security in which you have Beneficial Ownership, that you hold at the end of the date indicated above. Use additional sheets if necessary. 2. 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 Reportable Securities in which you have Beneficial Interest as of that date, you may write "see brokerage statements" instead of listing the information below. 3. You must complete and sign this certification whether or not you or your broker sends statements directly to the Compliance Officer.
Name of Security Number of Shares Registration on Nature of Interest Principal Amount or Security of Account - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------ - ---------------- ---------------- --------------- ------------------
Certifications: I hereby certify that: 1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Reportable Securities in which I have Beneficial Ownership as of the date listed above. 2. 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:_________________________ SCHEDULE I EXEMPT PERSONS Warren Spector, Director of BSAM Robert Steinberg, Director of BSAM EX-99.P(3) 22 0022.txt CODE OF ETHICS OF MARVIN & PALMER EXHIBIT P(3) 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 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 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 but 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. "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. 2 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 ------- 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 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 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 3 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 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 shall report to Marvin & Palmer Associates' Clearing Person (i) 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. 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. G. 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. 4 H. 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. I. 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 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. 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. 5 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 personnel 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. 6 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. 7 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. 8 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 ------ ---------------- ----- ----- ------ _____________________ ______________________________ __________ ______________ __________________ _____________________ ______________________________ __________ ______________ __________________ _____________________ ______________________________ __________ ______________ __________________
Name: ________________________________ Signature: ___________________________ Permission Granted: Yes [_] No [_] Date: ________________________________ Date: _________________________________ Trade Authorized by: _______________________________________ C.A. Luft, Vice President - Head Trader _______________________________________ K. Gallagher - Global Trader 9 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. - -------------------------------------------------------------------------------- Account Name Name, Address and Account Can the Phone Number of Number Account Broker, Dealer or Bank Hold Covered Securities? - -------------------------------------------------------------------------------- 1. Yes [_] No [_] - -------------------------------------------------------------------------------- 2. Yes [_] No [_] - -------------------------------------------------------------------------------- 3. Yes [_] No [_] - -------------------------------------------------------------------------------- 4. Yes [_] No [_] - -------------------------------------------------------------------------------- 5. Yes [_] No [_] - -------------------------------------------------------------------------------- 10 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. - ------------------------------------------------------------------------------- Title Number of Shares and Broker, Dealer or Bank Principal Account Where Held (If Any) - ------------------------------------------------------------------------------- 1. - -------------------------------------------------------------------------------- 2. - -------------------------------------------------------------------------------- 3. - -------------------------------------------------------------------------------- 4. - -------------------------------------------------------------------------------- 5. - -------------------------------------------------------------------------------- ____________________________________ _________________________________ Signature Date 11 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, Interest Nature of the Price Name of Transaction Rate, Maturity Transaction Broker, Dealer Date, Number (Purchase, Sale or or Bank of Shares and Other - Describe) 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 12 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 Principal Name of the Broker, Dealer or Bank 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 13 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 14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes and appoints Stephen A. Bornstein and Frank J. Maresca each as my true and lawful attorney-in-fact, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities as a trustee of the Trust, to sign for me and in my name in the appropriate capacity, any and all Registration Statements of the Trust under the Securities Act of 1933 and Investment Company Act of 1940, any and all Pre-Effective Amendments to any Registration Statement of the Trust, any and all Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorneys- in-fact deem necessary or appropriate, and that have been approved by the Board of Trustees of the Trust or by the appropriate officers of the Trust, acting in good faith and in a manner they reasonably believe to be in the best interests of the Trust, upon the advice of counsel, such approval to be conclusively evidenced by their execution thereof, to comply with the provisions of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. DATED this 17th day of April, 2000 /s/ Doni L. Fordyce ------------------------------- Doni L. Fordyce POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as my true and lawful attorney-in-fact, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities as a trustee of the Trust, to sign for me and in my name in the appropriate capacity, any and all Registration Statements of the Trust under the Securities Act of 1933 and Investment Company Act of 1940, any and all Pre- Effective Amendments to any Registration Statement of the Trust, any and all Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorneys-in-fact deem necessary or appropriate, and that have been approved by the Board of Trustees of the Trust or by the appropriate officers of the Trust, acting in good faith and in a manner they reasonably believe to be in the best interests of the Trust, upon the advice of counsel, such approval to be conclusively evidenced by their execution thereof, to comply with the provisions of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. DATED this 17/th/ day of April, 2000 /s/ John S. Levy ------------------------- John S. Levy POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as my true and lawful attorney-in-fact, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities as a trustee of the Trust, to sign for me and in my name in the appropriate capacity, any and all Registration Statements of the Trust under the Securities Act of 1933 and Investment Company Act of 1940, any and all Pre- Effective Amendments to any Registration Statement of the Trust, any and all Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorneys-in-fact deem necessary or appropriate, and that have been approved by the Board of Trustees of the Trust or by the appropriate officers of the Trust, acting in good faith and in a manner they reasonably believe to be in the best interests of the Trust, upon the advice of counsel, such approval to be conclusively evidenced by their execution thereof, to comply with the provisions of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. DATED this 6/th/ day of April 2000 /s/ Robert E. Richardson -------------------------------- Robert E. Richardson POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE BEAR STEARNS FUNDS, a Massachusetts business trust, (the "Trust") constitutes and appoints Doni L. Fordyce, Stephen A. Bornstein and Frank J. Maresca each as my true and lawful attorney-in-fact, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities as a trustee of the Trust, to sign for me and in my name in the appropriate capacity, any and all Registration Statements of the Trust under the Securities Act of 1933 and Investment Company Act of 1940, any and all Pre- Effective Amendments to any Registration Statement of the Trust, any and all Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorneys-in-fact deem necessary or appropriate, and that have been approved by the Board of Trustees of the Trust or by the appropriate officers of the Trust, acting in good faith and in a manner they reasonably believe to be in the best interests of the Trust, upon the advice of counsel, such approval to be conclusively evidenced by their execution thereof, to comply with the provisions of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. DATED this 17/th/ day of April, 2000 /s/ Robert M. Steinberg ----------------------------- Robert M. Steinberg -----END PRIVACY-ENHANCED MESSAGE-----