<PAGE>
The Bear Stearns Funds
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
SUPPLEMENT TO PROSPECTUS DATED
SEPTEMBER 1, 1995
THE FOLLOWING INFORMATION SUPERSEDES ANY CONTRARY INFORMATION CONTAINED IN THE
PROSPECTUS IN THE SECTION ENTITLED "MANAGEMENT OF THE FUND."
Effective November 10, 1995, the Total Return Bond Portfolio's primary
portfolio manager is Peter E. Mahoney. Mr. Mahoney rejoined Bear, Stearns & Co.
Inc. ("Bear Stearns") in November 1995 as a Managing Director of Bear Stearns
and Director of Fixed Income Investments of Bear Stearns Asset Management,
positions he held during his employment with Bear Stearns from June 1987
through November 1994. From November 1994 to November 1995 he was a financial
consultant.
<PAGE>
The Bear Stearns Funds
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
Class Y Shares
SUPPLEMENT TO PROSPECTUS DATED
SEPTEMBER 1, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGE 4 OF
THE PROSPECTUS.
CONDENSED FINANCIAL INFORMATION
The table below sets forth certain information covering the Large Cap Value
and Total Return Bond Portfolios' investment results for the periods indicat-
ed. Further financial data and related notes are included in the Statement of
Additional Information which is available upon request.
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data, total investment re-
turn, ratios to average net assets and other supplemental data for a Class Y
Share of the Large Cap Value Portfolio and Total Return Bond Portfolio for the
period from commencement of initial public offering through September 30,
1995. This information has been derived from information provided in each
Portfolio's financial statements (unaudited).
<TABLE>
<CAPTION>
LARGE CAP TOTAL
VALUE RETURN BOND
PORTFOLIO(1) PORTFOLIO(2)
- -------------------------------------------------------------------------------
CLASS Y CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value, beginning of period................ $13.98 $12.35
------ ------
Net investment income (3)........................... 0.01 0.04
Net realized and unrealized gain on investments (4). 0.25 0.03
------ ------
Net increase in net assets from operations.......... 0.26 0.07
------ ------
Dividends to shareholders from net investment
income.............................................. -- (0.04)
------ ------
Net asset value, end of period...................... $14.24 $12.38
====== ======
Total investment return (5)......................... 1.86% 0.54%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LARGE CAP TOTAL
VALUE RETURN BOND
PORTFOLIO(1) PORTFOLIO(2)
- -------------------------------------------------------------------------------
CLASS Y CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........... $ 535 $9,861
Ratio of expenses to average net assets(3)(6)....... 1.00% 0.45%
Ratio of net investment income to average net
assets(3)(6)........................................ 1.22% 5.95%
Decrease reflected in above expense ratios and net
investment income due to waivers and
reimbursements(6).................................. 3.66% 2.13%
Portfolio turnover rate(7).......................... 9.78% 46.46%
Average commission rate per share................... $0.06 --
</TABLE>
- ------
* Calculated based upon weighted average shares outstanding during the peri-
od, except for the Total Return Bond Portfolio which was based on the first
and last day of the period.
(1) Commenced initial public offering on August 11, 1995.
(2) Commenced initial public offering on September 8, 1995.
(3) Reflects waivers and reimbursements.
(4) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of Port-
folio shares in relation to fluctuating net asset value during the period.
(5) Total return is calculated assuming a purchase of shares on the first day
and a sale of shares on the last day of each period reported and includes
reinvestment of dividends and distributions, if any. Total returns are not
annualized.
(6) Annualized.
(7) Not annualized.
THE FOLLOWING INFORMATION SUPERSEDES ANY CONTRARY INFORMATION CONTAINED IN THE
PROSPECTUS IN THE SECTION ENTITLED "MANAGEMENT OF THE FUND."
Effective November 10, 1995, the Total Return Bond Portfolio's primary
portfolio manager is Peter E. Mahoney. Mr. Mahoney rejoined Bear, Stearns &
Co. Inc. ("Bear Stearns") in November 1995 as a Managing Director of Bear
Stearns and Director of Fixed Income Investments of Bear Stearns Asset
Management, positions he held during his employment with Bear Stearns from
June 1987 through November 1994. From November 1994 to November 1995 he was a
financial consultant.
2
<PAGE>
The Bear Stearns Funds
S&P STARS Portfolio
Class Y Shares
SUPPLEMENT TO PROSPECTUS DATED
SEPTEMBER 1, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED IN THE PRO-
SPECTUS.
CONDENSED FINANCIAL INFORMATION
The table below sets forth certain information covering the STARS Portfolio's
investment results for the period indicated. Further financial data and re-
lated notes are included in the Statement of Additional Information which is
available upon request.
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data, total investment re-
turn, ratios to average net assets and other supplemental data for a Class Y
share of the STARS Portfolio for the period August 7, 1995 (commencement of
initial public offering) to September 30, 1995. This information has been de-
rived from information in the STARS Portfolio's financial statements (unau-
dited).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS Y
- --------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value, beginning of period................................. $14.13
------
Net investment loss (1).............................................. (0.01)
Net realized and unrealized gain on investments (2).................. 0.35
------
Net increase in net assets from operations........................... 0.34
------
Net asset value, end of period....................................... $14.47
======
Total investment return (3).......................................... 2.41%
======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)............................ $85
Ratio of expenses to average net assets (1)(4)....................... 1.00%
Ratio of net investment loss to average net assets (1)(4)............ (0.95%)
Decrease reflected in above expense ratios and net investment loss
due to waivers and reimbursements (5)............................... 0.67%
</TABLE>
- ------
* Calculated based upon weighted average shares outstanding during the peri-
od.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of STARS
Portfolio shares in relation to fluctuating net asset value during the pe-
riod.
<PAGE>
(3) Total return is calculated assuming a purchase of shares on the first day
and a sale of shares on the last day of each period reported and includes
reinvestment of dividends and distributions, if any. Total return is not
annualized.
(4) Annualized.
(5) Includes the STARS Portfolio's share of Master Series' expenses.
Contained below are ratios to average net assets and other supplemental data
for the Master Series for the period April 5, 1995 ( commencement of invest-
ment operations) to September 30, 1995. This information has been derived from
information provided in the Master Series' financial statements (unaudited).
<TABLE>
<S> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)............................ $56,240
Ratio of expenses to average net assets (1)(2)....................... 0.33%
Ratio of net investment income to average net assets (1)(2).......... 0.80%
Decrease reflected in above expense ratios and net investment loss
due to waivers and reimbursements (2)............................... 0.81%
Portfolio turnover rate (3).......................................... 105.58%
Average commission rate per share.................................... $0.06
</TABLE>
- ------
(1) Reflects waivers and reimbursements.
(2) Annualized.
(3) Not annualized.
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SEPTEMBER 1, 1995
AS REVISED DECEMBER 1, 1995
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated September 1, 1995 of The Bear Stearns Funds (the "Fund"), as
each may be revised from time to time, offering shares of three diversified
portfolios (each, a "Portfolio"): the Large Cap Value Portfolio and the Small
Cap Value Portfolio (together, the "Equity Portfolios") and the Total Return
Bond Portfolio (the "Bond Portfolio"). To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc., Attention: [Name of Portfolio], P.O. Box
8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 (in Delaware call
collect 302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at
1-800-766-4111.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., serves as each Portfolio's investment
adviser.
Bear Stearns, an affiliate of BSFM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Management Policies........ B-2
Management of the Fund.............................. B-14
Management Arrangements............................. B-18
Purchase and Redemption of Shares................... B-20
Determination of Net Asset Value.................... B-21
Dividends, Distributions and Taxes.................. B-23
Portfolio Transactions.............................. B-25
Performance Information............................. B-27
Information About the Fund.......................... B-28
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................. B-32
Appendix............................................ B-34
Financial Statements................................ B-39, B-42
Report of Independent Auditors...................... B-41
</TABLE>
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Description of the
Fund."
Portfolio Securities
- --------------------
Bank Obligations. (All Portfolios) 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").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by each Portfolio are insured by the FDIC (although such
insurance may not be of material benefit to a Portfolio, depending on the
principal amount of the CDs of each bank held by such Portfolio) 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 whose CDs may be purchased by each Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation 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 than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, 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
B-2
<PAGE>
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 to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; 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, BSFM carefully evaluates such investments on a case-by-case
basis.
Mortgage-Related Securities
- ---------------------------
Government Agency Securities. (Bond Portfolio) Mortgage-related
securities issued by the Government National Mortgage Association ("GNMA")
include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes")
which are guaranteed as to the timely payment of principal and interest by GNMA
and such guarantee is 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.
Government Related Securities. (Bond Portfolio) 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. The 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" or
B-3
<PAGE>
"PCs"). The FHLMC is a corporate instrumentality of the United States created
pursuant to an Act of Congress, which is owned entirely by 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. The FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When the 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.
Repurchase Agreements. (All Portfolios) Each Portfolio's custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by the Portfolio under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Portfolio. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, each Portfolio will enter into repurchase
agreements only with domestic banks 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. BSFM will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
Municipal Obligations. (Bond Portfolio) 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
B-4
<PAGE>
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 Bond Portfolio will
invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Bond Portfolio investments.
Commercial Paper and Other Short-Term Corporate Obligations. (All
Portfolios) Variable rate demand notes include variable amount master demand
notes, which are obligations that permit each Portfolio to invest fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
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 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, BSFM 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 an Equity Portfolio may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the Equity Portfolios' Prospectus for other commercial
paper issuers.
Illiquid Securities. (All Portfolios) When purchasing securities that
have not been registered under the Securities Act of 1933, as amended, and are
not readily marketable, each Portfolio will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between a Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops pursuant to Rule
144A under the Securities Act of 1933, as amended, for certain unregistered
securities held by a Portfolio, such Portfolio intends to treat them as liquid
securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees has directed BSFM to monitor carefully
B-5
<PAGE>
each Portfolio's investments in such securities with particular regard to
trading activity, availability of reliable price information and other relevant
information. To the extent that, for a period of time, qualified institutional
buyers cease purchasing restricted securities pursuant to Rule 144A, a
Portfolio's investing in such securities may have the effect of increasing the
level of illiquidity in such Portfolio during such period.
Ratings of Debt. (Bond Portfolio) Subsequent to its purchase by the
Bond Portfolio, a debt issue may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Bond Portfolio. Neither event
will require the sale of such securities by the Bond Portfolio, but BSFM will
consider such event in determining whether the Bond Portfolio should continue to
hold the securities. To the extent that the ratings given by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff") may change as
a result of changes in such organizations or their rating systems, the Bond
Portfolio will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Portfolio's Prospectus and this Statement of Additional Information.
Management Policies
- -------------------
Each Portfolio engages in the following practices in furtherance of its
objective.
Options Transactions. (All Portfolios) Each Portfolio may engage in
options transactions, such as purchasing or writing covered call or put options.
The principal reason for writing covered call options, which are call options
with respect to which a Portfolio owns the underlying security or securities, is
to realize, through the receipt of premiums, a greater return than would be
realized on a Portfolio's securities alone. In return for a premium, the writer
of a covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option (or
until a closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that a Portfolio may receive may be adversely affected as new or
existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise
B-6
<PAGE>
price of the options may be below, equal to or above the market values of the
underlying securities at the time the options are written. In the case of call
options, these exercise prices are referred to as "in-the-money," "at-the-money"
and "out-of-the-money," respectively. Each Portfolio may write (a) in-the-money
call options when BSFM expects that the price of the underlying security will
remain stable or decline moderately during the option period, (b) at-the-money
call options when BSFM expects that the price of the underlying security will
remain stable or advance moderately during the option period and (c) out-of-the-
money call options when BSFM expects that the premiums received from writing the
call option plus the appreciation in 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. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as a Portfolio's obligation as the writer of an option
continues, such Portfolio may be assigned an exercise notice by the broker-
dealer through which the option was sold, requiring the Portfolio to deliver, in
the case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or a Portfolio effects a closing purchase transaction. A
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
While it may choose to do otherwise, each Portfolio generally will
purchase or write only those options for which BSFM believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer a Portfolio is unable to
B-7
<PAGE>
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise or it otherwise covers its position.
Stock Index Options. (Equity Portfolios) Each Equity Portfolio may
purchase and write put and call options on stock indexes listed on U.S. or
foreign securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. The amount
of cash received will be equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts. (All Portfolios)
Each Portfolio may trade futures contracts and options on futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange, or, to the extent permitted
under applicable law, on exchanges located outside the United States, such as
the London International Financial Futures Exchange and the Sydney Futures
Exchange Limited. Foreign markets may offer advantages such as trading in
commodities that are not currently traded in the United States or arbitrage
possibilities not available in the United States.
Initially, when purchasing or selling futures contracts a Portfolio
will be required to deposit with the Fund's custodian in the broker's name an
amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of trade may
B-8
<PAGE>
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Portfolio may elect to close the position
by taking an opposite position, at the then prevailing price, which will operate
to terminate the Portfolio's existing position in the contract.
Although each Portfolio intends to purchase or sell futures contracts
only if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting a Portfolio
to substantial losses. If it is not possible, or the Portfolio determines not,
to close a futures position in anticipation of adverse price movements, the
Portfolio will be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
In addition, to the extent a Portfolio is engaging in a futures
transaction as a hedging device, due to the risk of an imperfect correlation
between securities owned by the Portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on the
portfolio securities may be in excess of gains on the futures contract or losses
on the futures contract may be in excess of gains on the portfolio securities
that were the subject of the hedge. In futures contracts based on indexes, the
risk of imperfect correlation increases as the composition of an Equity
Portfolio's investments varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and
B-9
<PAGE>
movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect a Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.
Upon exercise of an option, the writer of the option will deliver to
the holder of the option the futures position and the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract 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.
The potential loss related to the purchase of options on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the time of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset value of each Portfolio.
Foreign Currency Transactions. (Equity Portfolios) If an Equity
Portfolio enters into a currency transaction, it will deposit, if so required by
applicable regulations, with its custodian cash, U.S. government securities or
other high grade debt obligations, in a segregated account of the Equity
Portfolio in an amount at least equal to the value of the Equity Portfolio's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Equity Portfolio's commitment with respect to the
contract.
At or before the maturity of a forward contract, the Equity Portfolio
either may sell a security and 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 Equity Portfolio will obtain,
on the same maturity date, the same amount of the currency which it is obligated
to deliver. If the Equity Portfolio retains the portfolio security and engages
in an offsetting transaction, such Equity Portfolio, at the time of execution of
the offsetting transaction, will incur a gain or loss to the extent movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Equity Portfolio's entering into a forward contract for the
sale of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Equity Portfolio will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price
B-10
<PAGE>
of the currency it has agreed to purchase. Should forward prices increase, the
Equity Portfolio will suffer a loss to the extent the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to each Equity Portfolio of engaging in currency transactions
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because transactions in
currency exchange usually are conducted on a principal basis, no fees or
commissions are involved. The use of forward currency exchange contracts does
not eliminate fluctuations in the underlying prices of the securities, but it
does establish a rate of exchange that can be achieved in the future. If a
devaluation generally is anticipated, an Equity Portfolio may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The requirements for qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), may
cause the Fund to restrict the degree to which each Equity Portfolio engages in
currency transactions. See "Dividends, Distributions and Taxes."
Lending Portfolio Securities. (All Portfolios) To a limited extent,
each 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 standards for investment by such Portfolio to be the equivalent of
cash. From time to time, a Portfolio may return to the borrower or a third
party which is unaffiliated with such Portfolio, and which is acting as a
"placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
each Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) each Portfolio must be
able to terminate the loan at any time; (4) each Portfolio 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) each Portfolio 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 Fund's Board of Trustees must terminate the loan and regain
the right to vote the
B-11
<PAGE>
securities if a material event adversely affecting the investment occurs. These
conditions may be subject to future modification.
Investment Restrictions. Each Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to a Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of such Portfolio's outstanding voting shares. Investment
restrictions numbered 11 through 16 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. No Portfolio may:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. 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 instrumentalities may be purchased, without regard to any such
limitation.
3. 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.
4. Invest in commodities, except that each Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
5. 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 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. 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. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an
B-12
<PAGE>
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
Securities and Exchange Commission and the Fund's Board of Trustees.
8. Act as an underwriter of securities of other issuers, except to the
extent each Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
9. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
10. Purchase securities on margin, but each 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. 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.
12. Purchase, sell or write puts, calls or combinations thereof,
except as described in the Portfolio's Prospectus and Statement of Additional
Information.
13. 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.
14. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 15 and 16, which are not
a fundamental policy, apply only to the Equity Portfolios. Neither of these
Portfolios may:
15. 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 Equity Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
16. Invest in the securities of a company for the purpose of
exercising management or control, but each Equity
B-13
<PAGE>
Portfolio will vote the securities it owns in its portfolio as a shareholder in
accordance with its views.
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.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of a Portfolio's shares in certain states.
Should the Fund determine that a commitment is no longer in the best interest of
the Portfolio and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of Fund shares in the state involved.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- -------------------------------
<S> <C> <C>
Peter M. Bren (62) Trustee President of The Bren Co.;
2 East 70th Street President of Cole, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United
Belleville, IL 62223 States Senator of Illinois from
1981 to 1993.
John R. McKernan, Jr. (47) Trustee Chairman and Chief Executive
114 Nottingham Road Officer of McKernan
Auburn, ME 04210 Enterprises since January 1995;
Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (53) Trustee Senior Vice President of RJR
5300 Albemarle Street Nabisco, Inc. since April
Bethesda, MD 20816 1989; Former Deputy Chief of
Staff-White House from 1988 to
January 1989.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- -------------------------------
<S> <C> <C>
Robert S. Reitzes* (50) Chairman Director of Mutual Funds-
245 Park Avenue of the Board Bear Stearns Asset
New York, NY 10167 Management and Senior Managing
Director of Bear Stearns since
March 1994; Co-Director of
Research and Senior Chemical
Analyst of C.J. Lawrence/
Deutsche Bank Securities Corp.
from January 1991 to March
1994; Chief Investment Officer
and Chemical Analyst of Mabon,
Nugent & Co. prior thereto.
Neil T. Eigen (52) President Chief Investment Officer
245 Park Avenue and Director of Equity
New York, NY 10167 Investments--Bear Stearns
Asset Management and Senior
Managing Director of Bear
Stearns since 1990.
Peter B. Fox (43) Executive Vice Senior Managing Director,
Three First National President Bear Stearns, Public
Plaza Finance.
Chicago, IL 60602
William J. Montgoris (48) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (52) Vice President Managing Director, Legal
245 Park Avenue and Secretary Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (37) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Associate Director of
Bear Stearns from September
1993 to September 1994;
Executive Vice President of
BSFM since March 1992; Vice
President of Bear Stearns from
March 1992 to September 1993;
First Vice President of
Mitchell Hutchins Asset
Management Inc. ("Mitchell
Hutchins") from June 1988 to
March 1992; Director of Funds
Administration Division of
Mitchell Hutchins from November
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- -------------------------------
<S> <C> <C>
1991 to March 1992; and Chief
Financial Officer of the
Mitchell Hutchins Fund Group
(holding the position of Vice
President and Treasurer of
PaineWebber Mutual Funds) from
June 1988 to November 1990.
Raymond D. DeAngelo (34) Vice President Associate Director of Bear
245 Park Avenue Stearns since October 1994;
New York, NY 10167 Vice President and Manager--
Mutual Fund Sales Support Group
of Kidder, Peabody & Co.
Incorporated ("Kidder Peabody")
from August 1994 to October
1994; Vice President and
Manager--Unit Investment Trust
Department of Kidder Peabody
from August 1992 to August
1994; Vice President and
Wholesaler of Nike Securities,
L.P. (formerly Clayton Brown &
Associates) from September 1991
to August 1992; Assistant Vice
President and Wholesaler of
Clayton Brown & Associates
prior thereto.
Vincent L. Pereira (30) Assistant Vice President of Bear
245 Park Avenue Treasurer Stearns and Vice President
New York, NY 10167 of BSFM since May 1993;
Assistant Vice President of
Mitchell Hutchins from October
1992 to May 1993; Senior
Relationship Manager of
Mitchell Hutchins from June
1988 to October 1992.
Eileen M. Coyle (29) Assistant Senior Fund Administrator
245 Park Avenue Secretary for BSFM since January
New York, NY 10167 1994; Accounting Supervisor and Senior
Accountant for Bear Stearns since 1990;
Senior Accountant for Deloitte & Touche
from 1988 to 1990.
</TABLE>
The Fund intends to pay its non-interested Board members an annual
retainer of $5,000 and a per meeting fee of $500 and to reimburse them for their
expenses. The Fund does not compensate
B-16
<PAGE>
its officers. For its first fiscal year following commencement of operations
(the period ending March 31, 1996), the aggregate compensation expected to be
paid to each Board member by the Fund and all other funds in the Bear Stearns
Family of Funds for which such person is a Board member (the number of which is
set forth in parenthesis next to each Board member's total compensation) is
expected to be:
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund * Fund's Expenses Retirement Board Members
----- ----------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $12,000 (2)
Alan J. Dixon $7,000 None None $ 7,000 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None (2)
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which are estimated to be $8,000 for Board members of the Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1%
of each Portfolio's shares outstanding on October 31, 1995.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution and Shareholder Servicing Plan" remains in effect,
the Fund's Trustees who are not "interested persons" of the Fund, as defined in
the 1940 Act, will be selected and nominated by the Trustees who are not
"interested persons" of the Fund.
No meetings of shareholders of the Fund will be held for the 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 Fund 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 Fund'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 Fund's outstanding
shares.
B-17
<PAGE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Management of the
Fund."
Investment Advisory Agreement. BSFM provides investment advisory
services to each Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 22, 1995, with the Fund. As to each Portfolio, the
Agreement is subject to annual approval by (i) the Fund's Board of Trustees or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Portfolio, provided that in either event the continuance also
is approved by a majority of the Board of Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in
person at a meeting called for the purpose of voting on such approval. The Board
of Trustees, including a majority of the Trustees who are not "interested
persons" of any party to the Agreement, last approved the Agreement at a meeting
held on February 22, 1995. The Agreement is terminable, as to each Portfolio,
without penalty, on 60 days' notice, by the Fund's Board of Trustees or by vote
of the holders of a majority of the Portfolio's shares, or, on not less than 90
days' notice, by BSFM. As to the relevant Portfolio, the Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc.
The following persons are directors and/or senior officers of BSFM: Mark A.
Kurland, Chief Executive Officer, President, Chairman of the Board and Director;
Robert S. Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice
Chairman of the Board and Director; Frank J. Maresca, Executive Vice President;
Neil T. Eigen, Executive Vice President; Vincent L. Pereira, Treasurer and
Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg,
Directors.
BSFM provides investment advisory services to each Portfolio in
accordance with its stated policies, subject to the approval of the Fund's Board
of Trustees. BSFM provides each Portfolio with portfolio managers who are
authorized by the Board of Trustees to execute purchases and sales of
securities. The portfolio managers of the Equity Portfolios are Neil T. Eigen
and Richard S. Rosen. The portfolio managers of the Bond Portfolio are John D.
Knox and Mark R. Valkenburgh. All purchases and sales are reported for the
Board's review at the meeting subsequent to such transactions.
As compensation for BSFM's services, each Equity Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of .75 of 1% of the value of such
Equity Portfolio's average daily net assets. The Bond Portfolio has agreed to
pay BSFM a
B-18
<PAGE>
monthly fee at the annual rate of .45% of 1% of the value of the Bond
Portfolio's average daily net assets.
Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule")
adopted by the Securities and Exchange Commission under the 1940 Act provides,
among other things, that an investment company may bear expenses of distributing
its shares only pursuant to a plan adopted in accordance with the Rule. The
Fund's Trustees have adopted such a plan with respect to Class A and Class C
shares (the "Plan"). The Fund's Trustees believe that there is a reasonable
likelihood that the Plan will benefit each Portfolio and the holders of its
Class A and Class C shares. In some states, banks or other institutions
effecting transactions in Portfolio shares may be required to register as
dealers pursuant to state law.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the Trustees
for their review. In addition, the Plan provides that it may not be amended to
increase materially the costs which holders of a Class of shares may bear
pursuant to the Plan without approval of such shareholders and that other
material amendments of the Plan must be approved by the Board of Trustees, and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund 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. The Plan and
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan was so approved
on February 22, 1995. The Plan is terminable at any time, as to each Class of
each Portfolio, 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 is terminable, as to each Class of each
Portfolio, 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, as to the relevant Class of a Portfolio, in the event
of its assignment (as defined in the 1940 Act).
Expense Limitation. BSFM agreed that if, in any fiscal year, the
aggregate expenses of a Portfolio, exclusive of taxes, brokerage, interest on
borrowings and (with the prior written consent of the necessary state securities
commissions) extraordinary expenses, exceed the expense limitation of any state
having jurisdiction over the Portfolio, the Fund may deduct from the payment to
be made to BSFM, such excess expense to the extent required by state law. Such
deduction or payment, if any,
B-19
<PAGE>
will be estimated daily, and reconciled and effected or paid, as the case may
be, on a monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolios' Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of the Equity Portfolios. 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 net asset value of the Class A shares.
<TABLE>
<S> <C>
Net Asset Value per Share $12.00
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.60
Per Share Offering Price to
the Public $12.60
</TABLE>
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 Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets each Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of a Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and
B-20
<PAGE>
Exchange Commission by order may permit to protect Portfolio shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Equity Portfolio securities,
including covered call options written by an Equity Portfolio, are valued at the
last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. 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 net asset value. 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 net asset value 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 Fund's Board of Trustees. Expenses and fees, including the
management fee and distribution and service fees, are accrued daily and taken
into account for the purpose of determining the net asset value of an Equity
Portfolio's shares. Because of the differences in operating expenses incurred by
each Class, the per share net asset value of each Class will differ.
Substantially all of the Bond Portfolio's investments (including short-
term investments) are valued each business day by one or more independent
pricing services (the "Service") approved by the Fund's Board of Trustees.
Securities valued by the Service for which quoted bid prices in the judgment of
the Service are readily available and are representative of the bid side of the
market are valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the
Service based upon its evaluation of the market for such securities). 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 net asset value. 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 net asset value does not take
B-21
<PAGE>
place contemporaneously with the determination of prices of such securities.
Other investments valued by the Service are carried at fair value as determined
by the 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 are not valued by the Service and are carried at amortized cost,
which approximate value. Other investments that are not valued by the 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 are accrued daily and taken into account for the purpose of determining the
net asset value of the Bond Portfolio's shares. Because of the differences in
operating expenses incurred by each Class, the per share net asset value of each
Class will differ.
Each Portfolio's 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 of Trustees, are valued at fair value
as determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Trustees generally will take the
following factors into consideration: 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. This discount will be revised periodically by the
Board of Trustees if the Trustees believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Trustees.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
B-22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Dividends,
Distributions and Taxes."
It is expected that each Portfolio will qualify as a "regulated
investment company" under the Code, as long as such qualification is in the best
interests of its shareholders. Qualification as a regulated investment company
relieves the Portfolio from any liability for Federal income taxes on net
investment income and net realized securities gains to the extent that such
income and gains are distributed to shareholders in accordance with applicable
provisions of the Code. The term "regulated investment company" does not imply
the supervision of management or investment practices or policies by any
government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of the shares below the cost
of the investment. Such a dividend or distribution would be a return of
investment in an economic sense, although taxable as stated above. In addition,
the Code provides that if a shareholder holds shares of a regulated investment
company for six months or less and has received a capital gain distribution with
respect to such shares, any loss incurred on the sale of such shares will be
treated as long-term capital loss to the extent of the capital gain distribution
received.
Depending on the composition of a regulated investment company's
income, dividends paid by the regulated investment company from net investment
income may qualify for the dividends received deduction allowable to certain
U.S. corporate shareholders ("dividends received deduction"). In general,
dividend income of the regulated investment company distributed to qualifying
corporate shareholders will be eligible for the dividends received deduction
only to the extent that (i) the regulated investment company's income consists
of dividends paid by U.S. corporations and (ii) the regulated investment company
would have been entitled to the dividends received deduction with respect to
such dividend income if the regulated investment company were not a regulated
investment company under the Code. The dividends received deduction for
qualifying corporate shareholders may be further reduced if the shares of the
regulated investment company held by such shareholders with respect to which
dividends are received are treated as debt-financed or deemed to have been held
for less than 46 days. In addition, the Code provides other limitations with
respect to the ability of a qualifying corporate shareholder to claim the
dividends received deduction in connection with holding shares of a regulated
investment company.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain and loss. However,
B-23
<PAGE>
a portion of the gain or loss from the disposition of non-U.S. dollar
denominated securities (including debt instruments, certain financial forward
futures and option contracts and certain preferred stock) may be treated as
ordinary income or loss under Section 988 of the Code. In addition, all or a
portion of any gain realized from the sale or other disposition of certain
market discount bonds will be treated as ordinary income under Section 1276.
Finally, all or a portion of the gain realized from engaging in "conversion
transactions" may be treated as ordinary income under Section 1258. "Conversion
transactions" are defined to include certain forward, futures, option and
straddle transactions, transactions marketed or sold to produce capital gains,
or transactions described in Treasury regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by a
regulated investment company from certain futures and forward contracts and
options transactions will be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. Gain or loss will arise upon exercise or
lapse of such contracts and options as well as from closing transactions. In
addition, any such contracts or options remaining unexercised at the end of a
regulated investment company's taxable year will be treated as sold for their
then fair market value, resulting in additional gain or loss to such regulated
investment company characterized in the manner described above.
Offsetting positions held by a regulated investment company involving
certain contracts or options may constitute "straddles." "Straddles" are defined
to include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code,
which, in certain circumstances, overrides or modifies the provisions of Section
1256 and 988. If a regulated investment company were treated as entering into
"straddles" by reason of its engaging in certain contracts or options
transactions, such "straddles" would be characterized as "mixed straddles" if
the contracts or options transactions comprising a part of such "straddles" were
governed by Section 1256 of the Code. A regulated investment company may make
one or more elections with respect to "mixed straddles." Depending on which
election is made, if any, the results to a regulated investment company may
differ. If no election is made to the extent the "straddle" and conversion
transactions rules apply to positions established by a regulated investment
company, losses realized by the regulated investment company will be deferred to
the extent of unrealized gain in the offsetting position. Moreover, as a result
of the "straddle" rules, short-term capital loss on "straddle" positions may be
recharacterized as long-term capital loss, and long-term capital gains may be
treated as short-term capital gains or ordinary income.
Investment by a regulated investment company in securities issued or
acquired at a discount, or providing for deferred interest or for payment of
interest in the form of
B-24
<PAGE>
additional obligations could under special tax rules affect the amount, timing
and character of distributions to shareholders by causing a regulated investment
company to recognize income prior to the receipt of cash payments. For example,
a regulated investment company could be required to accrue a portion of the
discount (or deemed discount) at which the securities were issued and to
distribute such income in order to maintain its qualification as a regulated
investment company. In such case, a regulated investment company may have to
dispose of securities which it might otherwise have continued to hold in order
to generate cash to satisfy these distribution requirements.
If a regulated investment company invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the regulated
investment company. Under Proposed Treasury Regulation Section 1.1291-8(a), the
Fund can elect to mark-to-market gains (but not losses) from PFIC securities in
lieu of paying taxes on gain or distributions therefrom. Such gains will be
treated as ordinary income under Proposed Treasury Regulation Section 1.1291-
8(b)(2).
PORTFOLIO TRANSACTIONS
BSFM 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 BSFM'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 BSFM'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 BSFM and BSFM's fees
are not reduced as a consequence of the receipt of such supplemental
information.
BSFM assumes general supervision over placing orders on behalf of the
Bond Portfolio for the purchase or sale of investment securities. Purchases and
sales of portfolio securities usually are principal transactions. Bond 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 Fund 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. Bond
Portfolio transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment.
B-25
<PAGE>
Such information may be useful to BSFM in serving each Portfolio and
other funds which it advises and, conversely, supplemental information obtained
by the placement of business of other clients may be useful to BSFM in carrying
out its obligations to the Portfolios. 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 BSFM being engaged simultaneously in the purchase or sale of the
same security. Certain of BSFM's transactions in securities of foreign issuers
may not benefit from the negotiated commission rates available to an Equity
Portfolio for transactions in securities of domestic issuers. When transactions
are executed in the over-the-counter market, each Portfolio will deal with the
primary market makers unless a more favorable price or execution otherwise is
obtainable. Foreign exchange transactions of each Equity Portfolio are made
with banks or institutions in the interbank market at prices reflecting a mark-
up or mark-down and/or commission.
Portfolio turnover may vary from year to year as well as within a year.
It is anticipated that in any fiscal year the turnover rate may approach the
100% level for a Portfolio; however, in periods in which extraordinary market
conditions prevail, BSFM will not be deterred from changing investment strategy
as rapidly as needed, in which case higher turnover rates can be anticipated
which would result in greater brokerage expenses. The overall reasonableness of
brokerage commissions paid is evaluated by BSFM 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 Securities and Exchange Commission
thereunder, the Board of Trustees has determined that transactions for each
Portfolio may be executed through Bear Stearns if, in the judgment of BSFM, 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, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for each
Portfolio on the floor of any national securities exchange, provided (i) the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees 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.
B-26
<PAGE>
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Performance
Information."
Current yield for the 30-day period ended September 30, 1995 for Class
A, Class C and Class Y of the Bond Portfolio was 5.84%, 5.44% and 6.05%,
respectively. The current yield for each Class reflects the waiver or
reimbursement of certain fees and expenses by the investment adviser, without
which the Portfolio's current yield for such period would have been 3.69% for
Class A, 3.29% for Class C and 3.88% for Class Y. Current yield of the Bond
Portfolio is computed pursuant to a formula which operates as follows: The
amount of the Bond Portfolio's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Bond Portfolio during the period. That result is then divided by
the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Average annual total return of each Portfolio is calculated by
determining the ending redeemable value of an investment purchased at net asset
value (maximum offering price in the case of Class A) per share with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result. 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 C 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 net asset value (maximum offering price in the case of Class
A) per share at the beginning of a stated period from the net asset value per
share 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 net asset value (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 net asset value per share 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-27
<PAGE>
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 C shares, which, if reflected would reduce the performance quoted.
The total return for each Portfolio for the period from commencement of
operations of the Portfolio or Class thereof through September 30, 1995 for the
indicated Class was as follows:
<TABLE>
<CAPTION>
Class A Class C Class Y
--------------------------------- ----------------------------- --------
Based on Maximum Based on Net Based on Net Based on
Name of Portfolio Offering Price Asset Value Asset Value Maximum CDSC
- ----------------- ---------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Large Cap Value 12.94% 18.58% 18.25% 17.08% 1.86%
Portfolio(1)
Small Cap Value 20.56% 26.58% 26.25% 25.00% 16.20%
Portfolio(2)
Total Return Bond 2.24% 6.22% 6.03% 5.01% 0.54%
Portfolio(3)
</TABLE>
- ----------------
(1) From April 4, 1995 for Class A and Class C, and from August 11, 1995 for
Class Y, to September 30, 1995.
(2) From April 3, 1995 for Class A and Class C, and from June 22, 1995 for Class
Y, to September 30, 1995.
(3) From April 5, 1995 for Class A and Class C, and from September 8, 1995 for
Class Y, to September 30, 1995.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "General Information."
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.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of October 31, 1995, the following shareholders owned, directly or
indirectly, 5% or more of each Portfolio's shares.
B-28
<PAGE>
Percent of Large Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 29.2%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 7.6%
FBO 086-15297-17
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 19.0%
FBO 050-32583-11
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 36.4%
FBO 001-00268-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 8.0%
FBO 220-43187-11
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 8.7%
FBO 049-40741-15
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 10.9%
FBO 049-40740-16
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 8.7%
FBO 049-40737-11
1 Metrotech Center North
Brooklyn, New York 11201-3859
B-29
<PAGE>
Bear Stearns Securities Corp. 8.7%
FBO 049-40736-12
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 13.1%
FBO 049-40735-13
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 14.4%
FBO 054-01340-12
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 5.6%
FBO 048-77400-11
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 30.0%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 5.4%
FBO 197-95923-16
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 25.3%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
B-30
<PAGE>
Percent of Small Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 6.4%
FBO 049-40274-10
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 11.2%
FBO 049-40620-16
1 Metrotech Center North
Brooklyn, New York 11201-3859
Custodial Trust Company 20.7%
101 Carnegie Center
Princeton, New Jersey 08540
Percent of Total
Return Bond Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 18.0%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 17.0%
FBO 001-29339-12
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 6.9%
FBO 220-33820-11
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 46.2%
FBO 001-00265-20
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 15.5%
FBO 498-00001-13
1 Metrotech Center North
Brooklyn, New York 11201-3859
B-31
<PAGE>
Bear Stearns Securities Corp. 7.4%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 7.4%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, New York 11201-3859
Bear Stearns Securities Corp. 5.9%
FBO 027-43204-15
1 Metrotech Center North
Brooklyn, New York 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 92.8%
FBO 049-41095-15
1 Metrotech Center North
Brooklyn, New York 11201-3859
A shareholder who beneficially owns, directly or indirectly more than
25% of a Portfolio's voting Securities may be deemed a "control person" (as
defined in the 1940 Act) of a Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian.
Under a custody agreement with each Portfolio, CTC holds each Portfolio's
securities and keeps all necessary accounts and records. For its services, CTC
receives from each Portfolio an annual fee of the greater of .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 which are payable monthly. PFPC Inc., Bellevue Corporate
Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's
transfer agent, dividend disbursing agent and registrar. Neither of them has
any part in determining the investment policies of any Portfolio or which
securities are to be purchased or sold by any Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-
2696, as counsel for the Fund, has rendered its opinion as to certain legal
matters regarding the due authoriza-
B-32
<PAGE>
tion and valid issuance of the shares of beneficial interest being sold pursuant
to the Portfolios' Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.
B-33
<PAGE>
APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch and
Duff:
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.
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.
Commercial Paper Rating
- -----------------------
The designation A-1 by S&P 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. 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.
B-34
<PAGE>
Moody's
Bond Ratings
- ------------
Aaa
Bonds which are 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 which are 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 which are 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 which are 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.
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.
B-35
<PAGE>
Commercial Paper Rating
- -----------------------
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.
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
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
B-36
<PAGE>
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Short-Term Ratings
- ------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
B-37
<PAGE>
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.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
- -----------------------
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. 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.
BSF-S-002-04
B-38
<PAGE>
FINANCIAL STATEMENTS
Large Cap Value Portfolio, Small Cap Value Portfolio
and Total Return Bond Portfolio
of The Bear Stearns Funds
STATEMENT OF ASSETS AND LIABILITIES
February 22, 1995
<TABLE>
<CAPTION>
Large Small Total
Cap Cap Return
Value Value Bond
Portfolio Portfolio Portfolio
---------- ---------- ---------
<S> <C> <C> <C>
Assets:
Cash in Bank............................. $ 25,008 $ 25,008 $24,984
Deferred organization
expenses (Note 3)...................... $112,500 $150,000 $75,000
Assets....................................... $137,508 $175,008 $99,984
Liabilities -- deferred organization
expenses payable........................... $112,500 $150,000 $75,000
-------- -------- -------
Net Assets (equivalent to $12.00
per share on 1,042 Class A shares
of beneficial interest of the Large
Cap Value Portfolio and the Small
Cap Value Portfolio and 1,041 Class A
shares of the Total Return Bond Portfolio
and 1,042 Class C shares of beneficial
interest of the Large Cap Value
Portfolio and the Small Cap Value
Portfolio and 1,041 Class C shares of
the Total Return Bond Portfolio
(par value $0.001) outstanding with
an indefinite number of authorized shares
of beneficial interest)
(Notes 1 and 2)............................ $ 25,008 $ 25,008 $24,984
-------- -------- -------
Calculation of Offering Price
Class A Shares
Net Asset Value and Redemption Price....... $ 12.00 $ 12.00 $ 12.00
Maximum Sales Charge Percentage............ 4.75% 4.75% 3.75%
Maximum Sales Charge....................... $ .60 $ .60 $ .45
-------- -------- -------
Offering Price to Public..................... $ 12.60 $ 12.60 $ 12.45
======== ======== =======
Class C Shares
Net Asset Value and Redemption Price....... $ 12.00 $ 12.00 $ 12.00
</TABLE>
__________________________
(1) The Bear Stearns Funds (the "Fund") was organized as a Massachusetts
business trust on September 29, 1994. To date, the Fund has not had any
transactions other than those
B-39
<PAGE>
relating to organizational matters and the sale of 5,209 Class A shares and
5,209 Class C shares of beneficial interest of the S&P STARS Portfolio,
1,042 Class A shares and 1,042 Class C shares of beneficial interest of each
of the Large Cap Value Portfolio and Small Cap Value Portfolio and 1,041
Class A shares and 1,041 Class C shares of beneficial interest of the Total
Return Bond Portfolio to Bear Stearns Funds Management Inc. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
(2) The Fund has entered into a Distribution Agreement with Bear, Stearns & Co.
Inc. (the "Distributor") on behalf of the Large Cap Value Portfolio, Small
Cap Value Portfolio and Total Return Bond Portfolio. Certain officers
and/or Trustees of the Fund are officers and/or directors of the
Distributor.
(3) Deferred organization expenses will be amortized over a period from the date
the Fund commences operations not exceeding five years. In the event that
the Fund's initial shareholder or any transferee of the Fund's initial
shareholder redeems any of its original shares prior to the end of the five-
year period, the proceeds of the redemption payable in respect of such
shares shall be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that
the Fund is liquidated prior to the end of the five-year period, the Fund's
initial shareholder or the transferee of the Fund's initial shareholder
shall bear the unamortized deferred organization expenses.
B-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of
The Bear Stearns Funds
We have audited the statement of assets and liabilities of the Large
Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio
of The Bear Stearns Funds as of February 22, 1995. This financial statement is
the responsibility of The Bear Stearns Funds' management. Our responsibility is
to express an opinion on the financial statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities presents
fairly, in all material respects, the financial position of each of the Large
Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio
of The Bear Stearns Funds at February 22, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 28, 1995
B-41
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Portfolio of Investments
SEPTEMBER 30, 1995
(unaudited)
- -------------------------------------------------------------------------------
MARKET
SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS 96.88%
Aerospace - 3.47%
2,500 United Technologies Corp.................................. $ 220,938
----------
Automobiles - 6.74%
6,700 Ford Motor Co............................................. 208,537
4,700 General Motors Corp....................................... 220,313
----------
428,850
----------
Banks - 6.11%
4,500 Bank of New York Co., Inc................................. 209,250
3,000 BankAmerica Corp.......................................... 179,625
----------
388,875
----------
Building & Housing - 3.51%
5,000 Owens-Corning Fiberglas Corp.*............................ 223,125
----------
Chemicals & Fertilizers - 2.83%
2,700 Grace (W.R.) & Co......................................... 180,225
----------
Computers & Office Equipment - 7.62%
22,000 Tandem Computers Inc.*.................................... 269,500
1,600 Xerox Corp................................................ 215,000
----------
484,500
----------
Credit & Finance - 8.84%
12,500 Great Western Financial Corp.............................. 296,875
5,000 Travelers Group, Inc...................................... 265,625
----------
562,500
----------
Drug & Hospital Supplies - 8.08%
7,000 Baxter International, Inc................................. 287,875
4,200 Medtronic, Inc............................................ 225,750
----------
513,625
----------
Electrical Equipment - 11.26%
4,000 General Electric Co....................................... 255,000
3,800 Raychem Corp.............................................. 171,000
9,000 Stewart & Stevenson Services, Inc......................... 290,250
----------
716,250
----------
Electronics - 2.28%
1,900 Motorola, Inc............................................. 145,112
----------
Food & Beverages - 3.94%
3,000 Philip Morris Cos. Inc.................................... 250,500
----------
Furnishings & Appliances - 2.62%
3,000 Armstrong World Industries, Inc........................... 166,500
----------
Insurance - 7.40%
11,300 Equitable Cos., Inc....................................... 276,850
10,000 USF&G Corp................................................ 193,750
----------
470,600
----------
Miscellaneous Industrials - 3.89%
10,000 Dial Corp................................................. 247,500
----------
Publishing & Broadcasting - 1.00%
800 CBS, Inc.................................................. 63,900
----------
Railroads - 2.08%
2,000 Union Pacific Corp........................................ 132,500
----------
Retailing - 7.92%
5,000 May Department Stores Co.................................. 218,750
15,000 The Limited, Inc.......................................... 285,000
----------
503,750
----------
Services - 4.11%
13,000 Humana Inc.*.............................................. 261,625
----------
Textiles & Shoes - 3.18%
8,000 Liz Claiborne, Inc........................................ 202,000
----------
Total Common Stocks
(cost - $5,455,536)..................................... 6,162,875
----------
PRINCIPAL
AMOUNT
(000's)
- ---------
SHORT-TERM INVESTMENT - 0.79%
Investment Company - 0.79%
$ 50 Federated Trust for Short-term
U.S. Government Securities**
(cost - $50,202).......................................... 50,202
----------
Total Investments
(cost - $5,505,738) - 97.67%.............................. 6,213,077
Other assets in excess of
liabilities - 2.33%....................................... 148,402
----------
Net Assets - 100.00%...................................... $6,361,479
==========
- ---------
* Non-income producing security.
** Money market fund.
The accompanying notes are an integral part of the financial statements.
B-42
<PAGE>
THE BEAR STEARNS FUNDS
Small Cap Value Portfolio
Portfolio of Investments
SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS--98.11%
Banks - 9.34%
11,000 Bay View Capital Corp................................... $ 297,000
19,750 California Financial Holding Co. ....................... 377,719
19,640 Summit Bancorp Inc. .................................... 547,465
-----------
1,222,184
-----------
Building & Housing - 5.35%
8,000 Engle Homes, Inc. ...................................... 70,000
51,520 Fedders Corp. Class A................................... 249,844
37,000 M/I Schottenstein Homes, Inc.*.......................... 379,250
-----------
699,094
-----------
Computers & Office Equipment - 4.92%
26,000 Dialogic Corp.*......................................... 643,500
-----------
Cosmetics & Soaps - 3.31%
14,000 Guest Supply, Inc.*..................................... 432,250
-----------
Credit & Finance - 6.36%
16,000 RenaissanceRe Holdings Ltd. ............................ 390,000
16,000 Security-Connecticut Corp. ............................. 442,000
-----------
832,000
-----------
Drug & Hospital Supplies - 2.12%
60,000 International Murex Technologies Corp.*................. 277,500
-----------
Electrical Equipment - 3.58%
30,200 Davel Communications Group, Inc.*....................... 468,100
-----------
Electronics - 8.73%
11,100 Cubic Corp. Designs..................................... 265,012
49,000 Griffon Corp.*.......................................... 422,625
48,000 Syntellect, Inc.*....................................... 180,000
5,000 Watkins-Johnson Co. .................................... 273,750
-----------
1,141,387
-----------
Entertainment & Leisure - 4.59%
25,000 Avondale Industries, Inc.*.............................. 390,625
25,000 Graff Pay-Per-View Inc.*................................ 209,375
-----------
600,000
-----------
Furnishings & Appliances - 2.60%
80,000 QSound Labs, Inc.*...................................... 340,000
-----------
Grocery Products - 3.98%
22,650 ERLY Industries, Inc.*.................................. 198,187
22,400 FoodBrands America, Inc.*............................... 322,000
-----------
520,187
-----------
Insurance - 3.68%
14,000 Ace, Ltd. .............................................. 481,250
-----------
Investment Companies - 2.92%
36,000 The Argentina Fund, Inc. ............................... 382,500
-----------
Lodging & Catering - 1.94%
19,700 John Q. Hammons Hotels, Inc.*........................... 253,638
-----------
Machinery - 1.38%
4,000 JLG Industries, Inc. ................................... 180,000
-----------
Miscellaneous Industrials - 10.09%
8,000 Blount, Inc. Class A.................................... 381,000
24,000 Furon Co. .............................................. 450,000
23,000 Ornda Healthcorp*....................................... 488,750
-----------
1,319,750
-----------
Non-Ferrous Metals - 4.56%
11,500 Mueller Industries, Inc.*............................... 596,563
-----------
Retailing - 2.94%
19,700 American Eagle Outfitters, Inc.*........................ 275,492
1,600 Treadco, Inc. .......................................... 17,600
15,000 Wet Seal, Inc. Class A*................................. 91,875
-----------
384,967
-----------
Services - 3.78%
18,000 Cephalon Inc.*.......................................... 495,000
-----------
Steel - 0.29%
3,600 Laclede Steel Co.*...................................... 37,350
-----------
Textiles & Shoes - 10.81%
38,000 Cone Mills Corp.*....................................... 508,250
12,800 Cygne Designs, Inc.*.................................... 42,400
12,000 Donnkenny Apparel, Inc.*................................ 337,500
24,000 Fieldcrest Cannon, Inc.*................................ 525,000
-----------
1,413,150
-----------
Toys - 0.84%
13,000 Tandycrafts, Inc.*...................................... 110,500
-----------
Total Common Stocks
(cost - $11,366,133).................................. 12,830,870
-----------
PRINCIPAL
AMOUNT
(000's)
- ---------
SHORT-TERM INVESTMENT--1.29%
Investment Company - 1.29%
$ 169 Federated Trust for Short-term
U.S. Government Securities**
(cost - $168,710)....................................... 168,710
-----------
Total Investments
(cost - $11,534,843) - 99.40%........................... 12,999,580
Other assets in excess of
liabilities - 0.60%..................................... 79,034
-----------
Net Assets - 100.00%.................................... $13,078,614
===========
- -------
* Non-income producing security.
** Money market fund.
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-43
<PAGE>
THE BEAR STEARNS FUNDS
Total Return Bond Portfolio
Portfolio of Investments
SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
(000'S) VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--90.28%
CORPORATE BONDS--22.20%
Associates Corp. N.A., 7.50%, 05/15/99................ $ 150 $ 155,438
Caterpillar, Inc., 6.56%, 11/03/97.................... 150 150,830
CIT Group Holdings, Inc., 6.75%, 04/30/98............. 150 151,500
Eastman Chemical Co., 7.25%, 01/15/24................. 650 640,250
Ford Credit 1995-B Grantor Trust,
Asset Backed Certificates, 5.90%, 10/15/00.......... 653 651,400
General Motors Acceptance Corp., 6.13%, 09/08/97...... 300 299,250
J.C. Penney & Co., 6.38%, 09/15/00.................... 600 598,500
Kroger Secured Finance Inc., 9.05%, 12/15/04.......... 200 231,000
Salomon Inc, 5.34%, 12/17/96.......................... 500 492,100
Standard Credit Card Trust, 9.38%, 07/10/97........... 190 200,887
----------
Total Corporate Bonds (cost--$3,555,237)............... 3,571,155
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION--14.86%
9.00%, 04/01/25....................................... 442 462,770
9.50%, 04/01/25....................................... 454 480,456
6.50%, 07/15/25 TBA................................... 1,500 1,446,563
----------
Total Federal Home Loan Mortgage Corporation
(cost--$2,381,043)................................... 2,389,789
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--11.28%
9.00%, 04/01/25....................................... 268 280,658
8.00%, 06/15/25 TBA................................... 1,500 1,534,687
----------
Total Federal National Mortgage Association
(cost--$1,811,939)................................... 1,815,345
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--9.95%
6.50%, 11/15/23....................................... 494 477,065
6.50%, 03/15/24....................................... 480 463,686
9.00%, 05/15/25....................................... 444 467,473
6.50%, 04/15/25 TBA................................... 200 192,750
----------
Total Government National Mortgage Association
(cost--$1,541,954)................................... 1,600,974
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-44
<PAGE>
THE BEAR STEARNS FUNDS
TOTAL RETURN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
DESCRIPTION (000'S) VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS (continued)
U.S. Government Securities--31.99%
U.S. Treasury Bonds
7.63%, 02/15/25................................. $1,600 $ 1,811,376
U.S. Treasury Notes
6.25%, 05/31/00................................. 1,000 1,009,930
6.25%, 08/31/00................................. 650 656,234
7.88%, 11/15/04................................. 1,500 1,669,545
-----------
Total U.S. Government Securities
(cost--$5,154,330).............................. 5,147,085
-----------
Total Long-Term Investments (cost--$14,444,503)... 14,524,348
-----------
SHORT-TERM INVESTMENTS--27.95%
Federal Home Loan Bank, 6.30%, 10/02/95+........ 1,320 1,319,769
Federal National Mortgage Association,
5.63%, 10/16/95+.............................. 3,075 3,067,786
Federated Trust for Short-term
U.S. Government Securities*................... 110 110,058
-----------
Total Short-Term Investments (cost--$4,497,613)... 4,497,613
-----------
Total Investments (cost--$18,942,116)--118.23%.... 19,021,961
Liabilities in excess of other assets--(18.23%)... (2,933,580)
-----------
Net Assets--100%.................................. $16,088,381
===========
</TABLE>
____
TBA To be Announced. TBA securities are purchased on a firm commitment basis
with an approximate principal and maturity. The actual principal amount and
maturity date is determined upon settlement.
*Money market fund.
+Segregated as collateral for TBA securities.
The accompanying notes are an integral part of the financial statements.
B-45
<PAGE>
THE BEAR STEARNS FUNDS
Statement of Assets and Liabilities
September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE PORTFOLIO VALUE PORTFOLIO BOND PORTFOLIO
--------------- --------------- --------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost - $5,505,738, $11,534,843,
$18,942,116, respectively)................................. $6,213,077 $12,999,580 $19,021,961
Receivable for Portfolio shares sold........................ 19,058 178,431 56,688
Receivable for investment securities sold................... 135,672 130,565 --
Receivable from investment adviser.......................... 68,402 56,263 72,208
Dividends and interest receivable........................... 9,797 3,917 140,445
Deferred organization expenses and other assets............. 132,206 127,699 123,190
---------- ----------- -----------
Total assets.............................................. 6,578,212 13,496,455 19,414,492
---------- ----------- -----------
LIABILITIES
Payable for Portfolio securities purchased.................. -- 197,431 3,178,734
Payable for Portfolio shares repurchased.................... 40,120 30,060 --
Dividends payable........................................... -- -- 23,806
Distribution fee payable (class A and C shares)............. 8,453 14,724 6,785
Custodian fee payable....................................... 5,468 4,010 3,956
Administration fee payable.................................. 2,893 5,455 3,862
Organization expenses payable............................... 111,134 118,281 60,318
Accrued expenses............................................ 48,665 47,880 48,650
----------- ----------- -----------
Total liabilities......................................... 216,733 417,841 3,326,111
----------- ----------- -----------
NET ASSETS
Capital stock, $0.001 par value (unlimited shares of
beneficial interest authorized)........................... 447 861 1,299
Paid-in capital............................................. 5,654,231 11,330,786 15,957,662
Undistributed net investment income/(loss).................. 9,294 (34,656) --
Accumulated net realized gain/(loss) from investments....... (9,832) 316,886 49,575
Net unrealized appreciation on investments.................. 707,339 1,464,737 79,845
---------- ----------- -----------
Total net assets.......................................... $6,361,479 $13,078,614 $16,088,381
========== =========== ===========
CLASS A
Net assets.................................................. $3,426,804 $ 6,981,128 $ 4,557,275
---------- ----------- -----------
Shares of beneficial interest outstanding................... 240,803 459,451 368,047
---------- ----------- -----------
Net asset value per share................................... $14.23 $15.19 $12.38
------ ------ ------
Maximum offering price per share (net asset value plus sales
charge of 4.75%,* 4.75%* and 3.75%*, respectively,
of the offering price)....................................... $14.94 $15.95 $12.86
====== ====== ======
CLASS C
Net assets.................................................. $2,399,526 $4,090,074 $1,670,025
---------- ---------- ----------
Shares of beneficial interest outstanding................... 169,050 269,976 134,874
---------- ---------- ----------
Net asset value and offering price per share**.............. $14.19 $15.15 $12.38
====== ====== ======
CLASS Y
Net assets.................................................. $ 535,149 $ 2,007,412 $ 9,861,081
---------- ----------- -----------
Shares of beneficial interest outstanding................... 37,585 131,997 796,396
---------- ----------- -----------
Net asset value, offering and redemption price per share.... $14.24 $15.21 $12.38
====== ====== ======
</TABLE>
- -------------------
* On investments of $50,000 or more, the offering price is reduced.
** Redemption price per share is equal to the net asset value per share
less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
B-46
<PAGE>
THE BEAR STEARNS FUNDS
Statement of Operations
FOR THE PERIOD APRIL 3, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE PORTFOLIO VALUE PORTFOLIO BOND PORTFOLIO
--------------- --------------- --------------
<S> <C> <C> <C>
Investment income
Dividends................................................. $ 40,811 $ 21,668 --
Interest.................................................. 1,564 2,501 $191,508
-------- ---------- --------
42,375 24,169 191,508
-------- ---------- --------
Expenses
Advisory fees............................................. 14,463 27,276 11,587
Distribution fees - Class A............................... 5,217 10,620 6,320
Distribution fees - Class C............................... 8,563 11,777 5,063
Accounting fees........................................... 16,694 17,756 14,457
Amortization of organization expenses..................... 14,449 13,955 13,464
Reports and notices to shareholders....................... 9,836 9,836 9,836
Custodian fees and expenses............................... 9,088 9,088 9,088
Insurance expenses........................................ 8,872 8,872 8,872
Legal and auditing fees................................... 8,852 8,852 8,852
Transfer agent fees and expenses.......................... 7,420 7,420 6,335
Trustees' fees and expenses............................... 4,590 4,590 4,590
Administration fees....................................... 2,893 5,455 3,862
Federal and state registration fees....................... 2,040 3,855 5,580
Other..................................................... 2,969 3,012 2,951
-------- ---------- --------
Total expenses before waivers and reimbursements.... 115,946 142,364 110,857
Less: Waivers and reimbursements.................... (82,865) (83,539) (83,795)
-------- ---------- --------
Total expenses after waivers and reimbursements..... 33,081 58,825 27,062
-------- ---------- --------
Net investment income/(loss).............................. 9,294 (34,656) 164,446
-------- ---------- --------
Net realized and unrealized gain/(loss) on investments
Net realized gain/(loss) from investments................. (9,832) 316,886 49,575
Net change in unrealized appreciation on investments...... 707,339 1,464,737 79,845
-------- ---------- --------
Net realized and unrealized gain on investments........... 697,507 1,781,623 129,420
-------- ---------- --------
Net increase in net assets resulting from operations........ $706,801 $1,746,967 $293,866
======== ========== ========
</TABLE>
- --------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
B-47
<PAGE>
THE BEAR STEARNS FUNDS
Statement of Changes in Net Assets
FOR THE PERIOD APRIL 3, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE PORTFOLIO VALUE PORTFOLIO BOND PORTFOLIO
--------------- --------------- --------------
<S> <C> <C> <C>
Increase/(decrease) in net assets from
Operations
Net investment income/(loss)........................................... $ 9,294 $ (34,656) $ 164,446
Net realized gain/(loss) from investments.............................. (9,832) 316,886 49,575
Net change in unrealized appreciation on investments................... 707,339 1,464,737 79,845
---------- ----------- -----------
Net increase in net assets resulting from operations................... 706,801 1,746,967 293,866
---------- ----------- -----------
Dividends to shareholders from
Net investment income
Class A shares....................................................... -- -- (109,665)
Class C shares....................................................... -- -- (38,146)
Class Y shares....................................................... -- -- (16,635)
---------- ----------- -----------
-- -- (164,446)
---------- ----------- -----------
Shares of beneficial interest
Net proceeds from the sale of shares................................... 5,644,799 11,357,094 15,890,907
Cost of shares repurchased............................................. (15,129) (50,455) (33,535)
Shares issued in reinvestment of dividends............................. -- -- 76,605
---------- ----------- -----------
Net increase in net assets derived from shares of beneficial interest
transactions......................................................... 5,629,670 11,306,639 15,933,977
---------- ----------- -----------
Total increase in net assets........................................... 6,336,471 13,053,606 16,063,397
Net assets
Beginning of period.................................................... 25,008 25,008 24,984
---------- ----------- -----------
End of period.......................................................... $6,361,479 $13,078,614 $16,088,381
========== =========== ===========
</TABLE>
- --------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
B-48
<PAGE>
THE BEAR STEARNS FUNDS
Financial Highlights
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 3, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to
average net assets and other supplemental data for the period. This information has been derived from information provided in the
financial statements.
- ----------------------------------------------------------------------------------------------------------------------------------
LARGE CAP VALUE SMALL CAP VALUE TOTAL RETURN BOND
PORTFOLIO (1) PORTFOLIO (2) PORTFOLIO (3)
--------------------------- --------------------------- -----------------------------
CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance**
Net asset value, beginning
of period...................... $12.00 $12.00 $13.98 $12.00 $12.00 $13.09 $12.00 $12.00 $12.35
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income/(loss)(4). 0.05 0.01 0.01 (0.06) (0.09) (0.01) 0.36 0.40 0.04
Net realized and unrealized
gain on investments(5)......... 2.18 2.18 0.25 3.25 3.24 2.13 0.38 0.38 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase in net assets
resulting from operations...... 2.23 2.19 0.26 3.19 3.15 2.12 0.74 0.78 0.07
------ ------ ------ ------ ------ ------ ------ ------ ------
Dividends to shareholders from:
Net investment income........... -- -- -- -- -- -- (0.36) (0.40) (0.04)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period.. $14.23 $14.19 $14.24 $15.19 $15.15 $15.21 $12.38 $12.38 $12.38
====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return(6)(9)... 18.58% 18.25% 1.86% 26.58% 26.25% 16.20% 6.22% 6.03% 0.54%
====== ====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000's
omitted)....................... $3,427 $2,399 $ 535 $6,981 $4,090 $2,008 $4,557 $1,670 $9,861
Ratio of expenses to average net
assets(4)(7)................... 1.50% 2.00% 1.00% 1.50% 2.00% 1.00% 0.93% 1.33% 0.45%
Ratio of net investment
income/(loss) to average net
assets(4)(7)(9)................ 0.71% 0.19% 1.22% (0.83)% (1.33)% (0.38)% 6.07% 5.65% 5.95%
Decrease reflected in above
expense ratios and net
investment income/(loss) due
to waivers and
reimbursements(7)(9)........... 4.31% 4.31% 3.66% 2.34% 2.33% 1.96% 3.10% 3.24% 2.13%
Portfolio turnover rate(8)...... 9.78% 9.78% 9.78% 26.97% 26.97% 26.97% 46.46% 46.46% 46.46%
Average commission rate
per share...................... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 -- -- --
</TABLE>
- ---------
* Commencement of operations.
** Calculated based upon weighted average shares outstanding during the period,
except for Total Return Bond Portfolio which was based on the first and last
day of the period.
(1) Commenced investment operations on April 4, 1995. Class Y shares commenced
initial public offering on August 11, 1995.
(2) Commenced investment operations on April 3, 1995. Class Y shares commenced
initial public offering on June 22, 1995.
(3) Commenced investment operations on April 5, 1995. Class Y shares commenced
initial public offering on September 8, 1995.
(4) Reflects waivers and reimbursements.
(5) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of
Portfolio shares in relation to fluctuating net asset value during the
period.
(6) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(7) Annualized.
(8) Not annualized.
(9) The total investment return and ratios for class Y shares are not
necessarily comparable to those of class A and C shares, due to timing
differences in the commencement of the initial public offering of class Y
shares.
The accompanying notes are an integral part of the financial statements.
B-49
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
Notes to Financial Statements--(unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business
trust on September 29, 1994 and is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), as an open-end management investment
company. The Fund currently has five separate portfolios in operation: three
diversified portfolios, Large Cap Value Portfolio ("Large Cap"), Small Cap Value
Portfolio ("Small Cap") and Total Return Bond Portfolio ("Bond Portfolio")
(collectively, the "Portfolios") and two non-diversified portfolios, The
Insiders Select Portfolio and S&P STARS Portfolio. Each portfolio is treated as
a separate entity for certain matters under the Investment Company Act, and for
other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. As of the date hereof, the Portfolios offer
three classes of shares, which have been designated as class A, C and Y shares.
ORGANIZATIONAL MATTERS--Prior to commencing operations on April 3, 1995, the
Portfolios did not have any transactions other than those relating to
organizational matters and the sale of 1,042, 1,042 and 1,041 class A shares and
1,042, 1,042 and 1,041 class C shares of beneficial interest of Large Cap, Small
Cap and Bond Portfolio, respectively, to Bear, Stearns & Co. Inc., ("Bear
Stearns" or the "Distributor"). Costs of approximately $147,000, $142,000 and
$137,000 which were incurred by the Large Cap, Small Cap and Bond Portfolio,
respectively, in connection with the organization, registration with the
Commission and with various states, and initial public offering of its shares,
have been deferred and are being amortized using the straight-line method over
the period of benefit not exceeding sixty months, beginning with the
commencement of investment operations of each Portfolio. The Portfolios
commenced investment operations on April 3, 1995, April 4, 1995 and April 5,
1995 for Small Cap, Large Cap and Bond Portfolio, respectively. In the event
that the Distributor or any transferee of the Distributor redeems any of its
original shares in any of the Portfolios prior to the end of the sixty month
period, the proceeds of the redemption payable in respect of such shares shall
be reduced by the pro rata share (based on the proportionate share of the
original shares redeemed to the total number of original shares outstanding at
the time of the redemption) of the unamortized deferred organization expenses as
of the date of such redemption. In the event that any of the Portfolios are
liquidated prior to the end of the sixty month period, the Distributor or the
transferee of the Distributor shall bear the unamortized deferred organization
expenses.
PORTFOLIO VALUATION--Each Portfolio calculates the net asset value of and
completes orders to purchase or repurchase its shares of beneficial interest on
each business day, with the exception of those days on which the New York Stock
Exchange is closed.
The Equity Portfolios' (consisting of Large Cap and Small Cap) securities,
including covered call options written by the Equity Portfolios, are valued at
the last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an
exchange or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. For
the Bond Portfolio, substantially all of the investments (including short-term
investments) are valued at each business day by one or more independent pricing
services (the "Service") approved by the Trust's Board of Trustees. Securities
valued by the Service for
B-50
<PAGE>
which quoted bid prices in the judgment of the Service are readily available and
are representative of the bid side of the market, are valued at the mean between
the quoted bid prices (as obtained by the Service from dealers in such
securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Securities which mature in 60
days or less are valued at amortized cost, which approximates market value,
unless this method does not represent fair value. Expenses and fees, including
the investment advisory, administration fees and distribution fees, are accrued
daily and taken into account for the purpose of determining the net asset value
of a Portfolio's shares. Because of the differences in operating expenses
incurred by each class, the per share net asset value of each class will differ.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from securities are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on an accrual basis. Discounts are treated as
adjustments to interest income and identified costs of investments over the
lives of respective investments.
The Equity Portfolios' net investment income (other than distribution fees) and
unrealized and realized gains or losses are allocated daily to each class of
shares based upon the relative proportion of net assets of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). The Bond Portfolio's net investment income (other than
distribution fees) and unrealized and realized gains or losses are allocated
daily to each class of shares based upon the relative proportion of the settled
shares value of each class at the beginning of the day.
U.S. FEDERAL TAX STATUS--Each Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, each Portfolio intends not to be
subject to a U.S. federal excise tax.
DIVIDENDS AND DISTRIBUTIONS--Each Equity Portfolio intends to distribute at
least annually to shareholders substantially all of its net investment income.
The Bond Portfolio declares dividends from net investment income on each day the
New York Stock Exchange is open for business. These dividends on the Bond
Portfolio are paid usually on or about the twentieth day of each month.
Distribution of net realized gains, if any, will be declared and paid at least
annually for all Portfolios. Dividends and distributions to shareholders are
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
During the period ended September 30, 1995, Bear Stearns Funds Management Inc.
("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies
Inc., served as the investment adviser pursuant to an Investment Advisory
Agreement with each Portfolio. The Adviser is entitled to receive from the
Portfolio a monthly fee equal to an annual rate of 0.75% of each Equity
Portfolio's average daily net assets and 0.45% of the Bond Portfolio's average
daily net assets.
During the period ended September 30, 1995, BSFM (or the "Administrator") served
as administrator to each Portfolio pursuant to an Administration Agreement. The
Administrator is entitled to receive from each Portfolio a monthly fee equal to
an annual rate of 0.15% of each Portfolio's average daily net assets. Under the
terms of an Administrative Services Agreement with each Portfolio, PFPC Inc.
provides certain administrative services to each Portfolio. For providing these
services, PFPC Inc. is entitled to receive from each Portfolio an annual fee
equal to an annual rate of 0.10% of the Portfolio's average daily net assets up
to $200 million, 0.075% of the next $200 million, 0.05% of the next $200 million
and 0.03% of net assets above $600 million, subject to a minimum annual fee of
$8,000 for each Portfolio, payable monthly.
These fees are computed daily and paid monthly, and are subject to reduction in
any year to the extent that a Portfolio's expenses (exclusive of brokerage
commissions, distribution fees, taxes, interest and extraordinary items) exceed
the most stringent limits prescribed by the laws or regulations of any state in
which the Portfolio's shares are offered for sale based on the average total net
asset value of the Portfolio. The Portfolios will not pay BSFM at a later time
for any amounts it may waive, nor will the Portfolios reimburse BSFM for any
amounts it may assume.
B-51
<PAGE>
During the period ended September 30, 1995, the Adviser has voluntarily
undertaken to limit each Equity Portfolio's total operating expenses (exclusive
of brokerage commissions, taxes and extraordinary items) to a maximum annual
level of 1.50% of the average daily net assets of its class A shares, 2.00% of
the average daily net assets of its class C shares and 1.00% of the average
daily net assets of its class Y shares. During the period April 3, 1995 through
August 31, 1995, the Adviser had voluntarily undertaken to limit the total
operating expenses (exclusive of brokerage commissions, taxes and extraordinary
items) of the Bond Portfolio, to a maximum annual level of 1.00%, 1.40%, and
0.65% of such Portfolio's average daily net assets for class A, C and Y shares,
respectively. Effective September 1, 1995 through September 30, 1995, the total
operating expenses (exclusive of brokerage commissions, taxes and extraordinary
items) were further reduced by the Adviser with respect to the Bond Portfolio
only, to a maximum annual level of 0.80%, 1.20% and 0.45% of the Bond
Portfolio's average daily net assets for class A, C and Y shares, respectively.
As necessary, this limitation is effected by waivers by the Adviser of its
advisory fees and reimbursements of expenses exceeding the advisory fee. For
the period ended September 30, 1995, the Adviser waived advisory fees of
$14,463, $27,276 and $11,587 for the Large Cap, Small Cap and Bond Portfolio,
respectively. In addition, the Adviser reimbursed $68,402, $56,263 and $72,208
for the Large Cap, Small Cap and Bond Portfolio, respectively, in order to
maintain the voluntary expense limitation.
For the period ended September 30, 1995, Bear Stearns, an affiliate of the
Adviser and the Administrator, earned approximately $1,200 and $1,700 in
brokerage commissions from portfolio transactions executed on behalf of Large
Cap and Small Cap, respectively.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Adviser and the Administrator, serves as custodian
to the Portfolios.
DISTRIBUTION PLAN
The Fund, on behalf of each Portfolio, has entered into a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan
in effect for the period ended September 30, 1995, the Equity Portfolios each
paid Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00%
for class C shares and the Bond Portfolio paid Bear Stearns a fee at an annual
rate of 0.35% for class A shares and 0.75% for class C shares. Such fees are
based on the average daily net assets in each class of the respective Portfolios
and are paid monthly. For the period April 3, 1995 (commencement of operations)
through September 30, 1995, Bear Stearns earned $13,780, $22,397 and $11,383 for
Large Cap, Small Cap and Bond Portfolio, respectively, in distribution fees.
Bear Stearns uses these fees to pay its dealers whose clients hold Portfolio
shares and for other distribution-related activities.
In addition, as distributor of the Fund, Bear Stearns collects the sales
charges imposed on sales of each Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. For the
period April 3, 1995 (commencement of operations) through September 26, 1995, as
a result of an undertaking by the Distributor, it reallowed all of the sales
charges to its dealers selling Portfolio shares. In addition, Bear Stearns
advanced 1.00% in sales commissions on the sale of class C shares to dealers at
the time of such sales.
For the period ended September 30, 1995, Bear Stearns has advised each Portfolio
that it received approximately $34,000, $53,000 and $37,000 in front-end sales
charges resulting from sales of class A shares of the Large Cap, Small Cap and
Bond Portfolio, respectively. From these fees, Bear Stearns paid such sales
charges to dealers which in turn paid commissions to sales persons. In
addition, Bear Stearns has advised Large Cap, Small Cap and Bond Portfolio that
during the period, it received $0, $118, and $81 from the Portfolios,
respectively, in contingent deferred sales charges upon certain redemptions by
class C shareholders.
B-52
<PAGE>
Investments in Securities
For U.S. federal income tax purposes, the costs of securities owned at September
30, 1995 were $5,505,738, $11,534,843 and $18,942,116 for the Large Cap, Small
Cap and Bond Portfolio, respectively. Accordingly, the net unrealized
appreciation/(depreciation) of investments are as follows:
<TABLE>
<CAPTION>
PORTFOLIO APPRECIATION DEPRECIATION NET APPRECIATION
- --------- ------------ ------------ ----------------
<S> <C> <C> <C>
Large Cap................ $ 754,087 $ (46,748) $ 707,339
Small Cap................ 1,776,305 (311,568) 1,464,737
Bond Portfolio........... 96,282 (16,437) 79,845
</TABLE>
For the period April 3, 1995 (commencement of operations) through September 30,
1995, aggregate purchases and sales of investment securities (excluding short-
term securities) for each Portfolio were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- --------- ----------- ----------
<S> <C> <C>
Large Cap....................................... $ 5,872,835 $ 407,467
Small Cap....................................... 13,217,831 2,168,584
Bond Portfolio.................................. 17,556,868 2,988,020
</TABLE>
Shares of Beneficial Interest
Each Portfolio offers class A, C and Y shares. Class A shares are sold with a
front-end sales charge of up to 4.75% (3.75% in the case of the Bond Portfolio).
Class C shares are sold with a contingent deferred sales charge of 1.00% during
the first year. There is no sales charge on class Y shares, which are offered
primarily to institutional investors.
At September 30, 1995, there was an unlimited amount of $0.001 par value shares
of beneficial interest authorized for each Portfolio, of which Bear Stearns
owned 1,042, 1,042 and 1,041 of class A shares and 1,042, 1,042 and 1,041 of
class C shares of Large Cap, Small Cap and Bond Portfolio, respectively.
Transactions in the classes of shares of beneficial interest for the period
April 3, 1995 (commencement of operations) through September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
SHARES
SHARES SOLD SHARES REINVESTED REPURCHASED
------------------- ----------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Large Cap
Class A Shares........ 240,683 $3,038,333 -- -- 922 $12,093
Class C Shares........ 168,008 2,077,996 -- -- -- --
Class Y Shares (1).... 37,812 528,470 -- -- 227 3,036
Small Cap
Class A Shares........ 461,080 5,994,964 -- -- 2,671 38,746
Class C Shares........ 269,746 3,516,558 -- -- 812 11,709
Class Y Shares (2).... 131,997 1,845,572 -- -- -- --
Bond Portfolio
Class A Shares........ 364,144 4,399,546 4,921 $60,452 2,059 25,454
Class C Shares........ 133,181 1,610,889 1,315 16,153 663 8,081
Class Y Shares (3).... 796,396 9,880,472 -- -- -- --
</TABLE>
- ----------
(1) Class Y Shares commenced initial public offering on August 11, 1995.
(2) Class Y Shares commenced initial public offering on June 22, 1995.
(3) Class Y Shares commenced initial public offering on September 8, 1995.
Credit Agreement
The Fund, on behalf of the Portfolios, has entered into a credit agreement with
The First National Bank of Boston. S&P STARS Fund, The Insiders Select
Portfolio, S&P STARS Portfolio and Bear Stearns Investment Trust, which consists
of the Emerging
B-53
<PAGE>
Markets Debt Portfolio, are also parties to the credit agreement. The agreement
provides that each portfolio as a party to the credit agreement is permitted to
borrow in an amount up to 15% of the value of its total assets. Subject to Board
approval and upon making necessary disclosure in its prospectus, each portfolio
may, in accordance with the provisions of the credit agreement, borrow up to 25%
of the value of its total assets, less all liabilities other than liabilities
for borrowed money outstanding at the time. However, at no time is the aggregate
outstanding principal amount of all loans to any of the Portfolios to exceed
$25,000,000. The line of credit will bear interest at the greater of: (i) the
annual rate of interest announced from time to time from the bank at its head
office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or
at the borrower's option, the rate quoted by The First National Bank of Boston.
The Portfolios use the facility to borrow money only for temporary or emergency
(not leveraging) purposes. The Portfolios have no amounts outstanding under the
line of credit agreement at September 30, 1995.
Each loan is payable on demand or upon termination on this credit agreement on
January 23, 1996 or, for money market loans, on the last day of the interest
period and, in any event, not later than 14 days from the date the loan was
advanced.
B-54
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SEPTEMBER 1, 1995
AS REVISED DECEMBER 1, 1995
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated September 1, 1995 of S&P STARS Portfolio (the "STARS
Portfolio"), a portfolio of The Bear Stearns Funds (the "Fund"), as each may be
revised from time to time. To obtain a free copy of such Prospectus, please
write to the Fund at PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960,
Wilmington, Delaware 19899-8960, call 1-800-447-1139 (in Delaware call collect
302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-
4111.
As described in the Prospectus, the STARS Portfolio invests all of its
assets in the S&P STARS Master Series (the "Master Series") of S&P STARS Fund
(the "Master Fund").
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., serves as the Master Series' investment
adviser.
Bear Stearns, an affiliate of BSFM, serves as distributor of the STARS
Portfolio's shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Management Policies........ B-2
Management of the STARS Portfolio................... B-10
Management Arrangements............................. B-15
Purchase and Redemption of Shares................... B-17
Determination of Net Asset Value.................... B-18
Dividends, Distributions and Taxes.................. B-18
Portfolio Transactions.............................. B-21
Performance Information............................. B-22
Information About the STARS Portfolio............... B-23
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................. B-24
Financial Statements for S&P STARS Portfolio........ B-26, B-32
Report of Independent Auditors...................... B-28
Financial Statements for S&P STARS Master Series.... B-29, B-39
Report of Independent Auditors...................... B-31
</TABLE>
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "Description of
STARS Portfolio."
General
- -------
The STARS Portfolio seeks to achieve its investment objective by
investing all of its assets in the Master Series. The STARS Portfolio may
withdraw its investment from the Master Series at any time if the Fund's Board
of Trustees determines that it is in the best interests of the STARS Portfolio
to do so. Since the investment characteristics of the STARS Portfolio will
correspond directly to those of the Master Series, the following is a discussion
of the various investment policies and techniques employed by the Master Series.
Portfolio Securities
- --------------------
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"). Domestic banks
organized under state law are supervised and examined by state banking
authorities but are members of the Federal Reserve System only if they elect to
join. In addition, state banks whose certificates of deposit ("CDs") may be
purchased by the Master Series are insured by the FDIC (although such insurance
may not be of material benefit to the Master Series, depending on the principal
amount of the CDs of each bank held by the Master Series) 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 whose CDs may be purchased by the Master Series generally are required,
among other things, to maintain specified levels of reserves, are limited in the
amounts which they can loan to a single borrower and are subject to other
regulation 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 than are those of domestic banks. These risks include foreign
economic and political developments,
B-2
<PAGE>
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 to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; 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, BSFM carefully evaluates such investments on a case-by-case
basis.
Repurchase Agreements. The Master Series' custodian or sub-custodian
will have custody of, and will hold in a segregated account, securities acquired
by the Master Series under a repurchase agreement. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission to be loans by
the Master Series. In an attempt to reduce the risk of incurring a loss on a
repurchase agreement, the Master Series will enter into repurchase agreements
only with domestic banks 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
B-3
<PAGE>
the Master Series 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. BSFM will monitor on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price. The
Master Series will consider on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Master Series to invest fluctuating amounts at
varying rates of interest pursuant to direct arrangements between the Master
Series, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. As mutually agreed between the parties, the Master Series 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 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, the Master Series' 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, BSFM 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 the Master Series may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the STARS Portfolio's Prospectus for other commercial
paper issuers.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Master Series will endeavor to obtain the right to registration
at the expense of the issuer. Generally, there will be a lapse of time between
the Master Series' decision to sell any such security and the registration of
the security permitting sale. During any such period, the price of the
securities will be subject to market fluctuations. However, if a substantial
market of qualified institutional buyers develops pursuant to Rule 144A under
the Securities Act of 1933, as amended, for certain unregistered securities held
by the Master Series, it intends to treat them as liquid securities in
accordance with procedures approved by the Master Fund's Board of Trustees.
Because it is not possible to
B-4
<PAGE>
predict with assurance how the market for restricted securities pursuant to Rule
144A will develop, the Master Fund's Board of Trustees has directed BSFM to
monitor carefully the Master Series' investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a period of
time, qualified institutional buyers cease purchasing restricted securities
pursuant to Rule 144A, the Master Series' investing in such securities may have
the effect of increasing the level of illiquidity in the Master Series during
such period.
Management Policies
- -------------------
Options Transactions. The Master Series may engage in options
transactions of the type described in the STARS Portfolio's Prospectus.
The principal reason for writing covered call options, which are call
options with respect to which the Master Series owns the underlying security or
securities, is to realize, through the receipt of premiums, a greater return
than would be realized on the Master Series' securities alone. In return for a
premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. The size of the premiums that the Master
Series may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their option-writing
activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Master Series may write (a) in-the-money call options when
BSFM expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
BSFM expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when BSFM expects that the premiums received from writing the call
option plus the appreciation in 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. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received.
B-5
<PAGE>
So long as the Master Series' obligation as the writer of an option
continues, it may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring the Master Series to deliver the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Master Series effects a closing purchase transaction.
The Master Series can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, the Master Series generally will
purchase or write only those options for which BSFM believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer the Master Series is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. The Master Series may engage in stock index option
transactions of the type described in the STARS Portfolio's Prospectus. A stock
index fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the
B-6
<PAGE>
option is based being greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. The amount of cash received
will be equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
Lending Portfolio Securities. To a limited extent, the Master Series
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, the Master Series
can increase its income through the investment of the cash collateral. For
purposes of this policy, the Master Series considers collateral consisting of
U.S. Government securities or irrevocable letters of credit issued by banks
whose securities meet the standards for investment by the Master Series to be
the equivalent of cash. From time to time, the Master Series may return to the
borrower or a third party which is unaffiliated with the Master Series, and
which is acting as a "placing broker," a part of the interest earned from the
investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Master Series must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Master Series must
be able to terminate the loan at any time; (4) the Master Series 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 Master Series 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 Master Fund's Board of Trustees must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification.
Investments in Warrants. The Master Series does not presently intend to
invest in warrants. However, any future investment in warrants will be limited
to 5% of its net assets, except that this limitation does not apply to warrants
acquired in units or attached to securities. Included in such amount, but not to
exceed 2% of the value of its net assets, may be warrants
B-7
<PAGE>
which are not listed on the New York or American Stock Exchange.
Investment Restrictions. The STARS Portfolio and the Master Series have
adopted investment restrictions numbered 1 through 10 as fundamental policies.
These restrictions cannot be changed, as to the STARS Portfolio or Master
Series, without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the outstanding
voting securities of the STARS Portfolio or Master Series, as the case may be.
Investment restrictions numbered 11 through 14 are not fundamental policies and
may be changed by vote of a majority of the Trustees of the Fund or Master Fund
at any time. Neither the STARS Portfolio nor the Master Series may:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Invest in commodities, except that each may purchase and sell
options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
3. 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 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.
4. 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.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each 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 Securities and Exchange Commission and the Board
of Trustees of the Fund and Master Fund, as the case may be.
6. Act as an underwriter of securities of other issuers, except to the
extent each may be deemed an underwriter
B-8
<PAGE>
under the Securities Act of 1933, as amended, by virtue of disposing of
portfolio securities.
7. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
8. Purchase securities on margin, but each 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.
9. 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 STARS Portfolio's or the Master Series'
investments, as the case may be, in all such companies to exceed 5% of the value
of its total assets.
10. Invest in the securities of a company for the purpose of
exercising management or control, but each will vote the securities it owns in
its portfolio as a shareholder in accordance with its views.
11. 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.
12. Purchase, sell or write puts, calls or combinations thereof,
except as described in the STARS Portfolio's Prospectus and Statement of
Additional Information.
13. 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.
14. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
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.
B-9
<PAGE>
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of STARS Portfolio's shares in certain
states. Should the Fund determine that a commitment is no longer in the best
interest of the STARS Portfolio and its shareholders, the Fund reserves the
right to revoke the commitment by terminating the sale of STARS Portfolio shares
in the state involved.
MANAGEMENT OF THE STARS PORTFOLIO
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
<S> <C> <C>
Peter M. Bren (62) Trustee President of The Bren Co.;
2 East 70th Street President of Cole, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United
Belleville, IL 62223 States Senator of
Illinois from 1981 to 1993.
John R. McKernan, Jr. (47) Trustee Chairman and Chief Executive
114 Nottingham Road Officer of McKernan
Auburn, ME 04210 Enterprises since
January 1995; Governor of
Maine prior thereto.
M.B. Oglesby, Jr. (53) Trustee Senior Vice President of RJR
5300 Albemarle Street Nabisco, Inc. since April
Bethesda, MD 20816 1989; Former Deputy Chief of
Staff-White House from 1988
to January 1989.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
<S> <C> <C>
Robert S. Reitzes* (50) Chairman Director of Mutual Funds-
245 Park Avenue of the Board Bear Stearns Asset
New York, NY 10167 Management and Senior
Managing Director of Bear
Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from January
1991 to March 1994; Chief
Investment Officer and
Chemical Analyst of Mabon,
Nugent & Co. prior thereto.
Neil T. Eigen (52) President Chief Investment Officer and
245 Park Avenue Director of Equity
New York, NY 10167 Investments--Bear Stearns
Asset Management and Senior
Managing Director of Bear
Stearns since 1990.
Peter B. Fox (43) Executive Vice Senior Managing Director,
Three First National President Bear Stearns, Public
Plaza Finance.
Chicago, IL 60602
William J. Montgoris (48) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (52) Vice President Managing Director, Legal
245 Park Avenue and Secretary Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (37) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Associate Director
of Bear Stearns from September 1993 to
September 1994; Executive Vice President
of BSFM since March 1992; Vice President
of Bear Stearns from March 1992 to
September 1993; First Vice President of
Mitchell Hutchins Asset Management Inc.
("Mitchell
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
<S> <C> <C>
Hutchins") from June 1988 to
March 1992; Director of Funds
Administration Division of Mitchell
Hutchins from November 1991 to March
1992; and Chief Financial Officer of the
Mitchell Hutchins Fund Group (holding
the position of Vice President and
Treasurer of PaineWebber Mutual Funds)
from June 1988 to November 1990.
Raymond D. DeAngelo (34) Vice President Associate Director of Bear
245 Park Avenue Stearns since October 1994;
New York, NY 10167 Vice President and Manager--Mutual Fund
Sales Support Group of Kidder, Peabody &
Co. Incorporated ("Kidder Peabody") from
August 1994 to October 1994; Vice
President and Manager--Unit Investment
Trust Department of Kidder Peabody from
August 1992 to August 1994; Vice
President and Wholesaler of Nike
Securities, L.P. (formerly Clayton Brown
& Associates) from September 1991 to
August 1992; Assistant Vice President
and Wholesaler of Clayton Brown &
Associates prior thereto.
Vincent L. Pereira (30) Assistant Vice President of Bear
245 Park Avenue Treasurer Stearns and Vice
New York, NY 10167 President of BSFM since
May 1993; Assistant Vice President of
Mitchell Hutchins from October 1992 to
May 1993; Senior Relationship Manager of
Mitchell Hutchins from June 1988 to
October 1992.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
<S> <C> <C>
Eileen M. Coyle (29) Assistant Senior Fund Administrator
245 Park Avenue Secretary for BSFM since January
New York, NY 10167 1994; Accounting
Supervisor and Senior Accountant for
Bear Stearns since 1990; Senior
Accountant for Deloitte & Touche from
1988 to 1990.
</TABLE>
Information pertaining to the Trustees and officers of the Master Fund
is set forth below together with their respective positions and a brief
statement of their principal occupations during the past five years. Trustees
deemed to be "interested persons" of the Master Fund for purposes of the 1940
Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
<S> <C> <C>
John J. Danilovich (45) Trustee Chairman and Principal of
32 Blomfield Road Danilovich & Company,
London, W9 1AA merchants bankers.
England
Robert S. Reitzes* (50) Chairman of Described above.
245 Park Avenue the Board
New York, NY 10167
Vincent Anthony Walsh (68) Trustee Consultant of Arthur Cox,
41-45 St. Stephen's a law firm in Dublin,
Green since 1993, Senior Partner
Dublin 2 of Arthur Cox prior thereto.
Ireland
Barry Nix (35) President Senior Managing Director of
1 Canada Square Fixed Income Sales of
London E14 58D Bear, Stearns
England International Limited since
1991; Managing Director of
Bear, Stearns International
Limited prior thereto.
James Fergus McKeon (35) Treasurer General Manager of PFPC
Jordanstown and Secretary International Ltd. since
Oldtown September 1993; Chief
Dublin Accountant of Swiss
Ireland Bank Corporation from
1990 to 1993.
</TABLE>
B-13
<PAGE>
The Fund intends to pay its non-interested Board members an annual
retainer of $5,000 and a per meeting fee of $500 and to reimburse them for their
expenses. The Fund does not compensate its officers. For its first fiscal year
following commencement of operations (the period ending March 31, 1996), the
aggregate compensation expected to be paid to each Board member by the Fund and
all other funds in the Bear Stearns Family of Funds for which such person is a
Board member (the number of which is set forth in parenthesis next to each Board
member's total compensation) is expected to be:
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund * Fund's Expenses Retirement Board Members
----- ----------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $12,000(2)
Alan J. Dixon $7,000 None None $ 7,000(1)
John R. McKernan, Jr. $7,000 None None $12,000(2)
M.B. Oglesby, Jr. $7,000 None None $12,000(2)
Robert S. Reitzes None None None None(2)
</TABLE>
The Master Fund intends to pay its non-interested Board members an
annual retainer of $5,000 and a per meeting fee of $500 and to reimburse them
for their expenses. The Master Fund does not compensate its officers. For its
first fiscal year following commencement of operations (the period ending March
31, 1996), the aggregate compensation expected to be paid to each Board member
by the Master Fund and all other funds in the Bear Stearns Family of Funds for
which such person is a Board member (the number of which is set forth in
parenthesis next to each Board member's total compensation) is expected to be:
<TABLE>
<CAPTION>
(5)
(2) (3) Total
Aggregate Pension or (4) Compensation from
(1) Compensation Retirement Benefits Estimated Annual Master Fund and Fund
Name of Board from Master Accrued as Part of Benefits Upon Complex Paid to
Member Fund** Master Fund's Expenses Retirement Board Members
----- ------ ---------------------- ---------- -------------
<S> <C> <C> <C> <C>
John J. Danilovich $7,000 None None $7,000(1)
Vincent Anthony Walsh $7,000 None None $7,000(1)
Robert S. Reitzes None None None None(2)
</TABLE>
- -----------------
* Amount does not include reimbursed expenses for attending Board meetings,
which are estimated to be $8,000 for Board members of the Fund and $1,600 for
Board members of the Master Fund, as a group.
B-14
<PAGE>
Board members and officers of the Fund, as a group, owned less than 1%
of S&P STARS Portfolio's shares outstanding on October 31, 1995.
No Board member or officer of the Master Fund owned any of the Master
Series' shares outstanding on October 31, 1995.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution and Shareholder Servicing Plan" remains in effect,
the Fund's Trustees who are not "interested persons" of the Fund, as defined in
the 1940 Act, will be selected and nominated by the Trustees who are not
"interested persons" of the Fund.
No meetings of shareholders of the STARS Portfolio will be held for the
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 Fund 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 Fund'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
Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the STARS Portfolios' Prospectus entitled "Management of
STARS Portfolio."
Investment Advisory Agreement. BSFM provides investment advisory
services to the Master Series pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 23, 1995, with the Fund. The Agreement is subject
to annual approval by (i) the Master Fund's Board of Trustees or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Master Series, provided that in either event the continuance also is
approved by a majority of the Master Fund's Board of Trustees who are not
["interested persons" (as defined in the 1940 Act) of the Master Fund or BSFM,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Master Fund's Board of Trustees, including a majority of the
Trustees who are not "interested persons" of any party to the Agreement, last
approved the Agreement at a meeting held on February 23, 1995. The Agreement is
terminable, on 60 days' notice, by the Master
B-15
<PAGE>
Fund's Board of Trustees or by vote of the holders of a majority of the Master
Series' shares, or, on not less than 90 days' notice, by BSFM. The Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc.
The following persons are directors and/or senior officers of BSFM: Mark A.
Kurland, Chief Executive Officer, President, Chairman of the Board and Director;
Robert S. Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice
Chairman of the Board and Director; Frank J. Maresca, Executive Vice President;
Neil T. Eigen, Executive Vice President; Vincent L. Pereira, Treasurer and
Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg,
Directors.
BSFM provides investment advisory services to the Master Series in
accordance with its stated policies, subject to the approval of the Master
Fund's Board of Trustees. BSFM provides the Master Series with portfolio
managers who are authorized by the Master Fund's Board of Trustees to execute
purchases and sales of securities. The portfolio managers are Robert S. Reitzes
and Gayle M. Sprute. All purchases and sales are reported for the Board's
review at the meeting subsequent to such transactions.
As compensation for BSFM's services, the Master Series has agreed to
pay BSFM a monthly fee at the annual rate of .75 of 1% of the value of the
Master Series' average daily net assets.
Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule")
adopted by the Securities and Exchange Commission under the 1940 Act provides,
among other things, that an investment company may bear expenses of distributing
its shares only pursuant to a plan adopted in accordance with the Rule. The
Fund's Trustees have adopted such a plan with respect to Class A and Class C
Shares (the "Plan"). The Fund's Trustees believe that there is a reasonable
likelihood that the Plan will benefit the STARS Portfolio and the holders of its
Class A and Class C shares. In some states, banks or other institutions
effecting transactions in STARS Portfolio shares may be required to register as
dealers pursuant to state law.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the Trustees
for their review. In addition, the Plan provides that it may not be amended to
increase materially the costs which holders of a Class of shares may bear
pursuant to the Plan without approval of such shareholders and that other
material amendments of the Plan must be approved by the Board of Trustees, and
by the Trustees who
B-16
<PAGE>
are neither "interested persons" (as defined in the 1940 Act) of the Fund 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. The Plan and related agreements are
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on the Plan. The Plan was so approved on February 22,
1995. The Plan is terminable at any time, as to the STARS Portfolio, without
penalty, 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 STARS
Portfolio's relevant Class of shares. A Plan agreement is terminable 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 STARS Portfolio's shares. A Plan agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
Expense Limitation. BSFM agreed that if, in any fiscal year, the
aggregate expenses of the STARS Portfolio, exclusive of taxes, brokerage,
interest on borrowings and (with the prior written consent of the necessary
state securities commissions) extraordinary expenses, exceed the expense
limitation of any state having jurisdiction over the STARS Portfolio, the Fund
may deduct from the payment to be made to BSFM, such excess expense to the
extent required by state law. Such deduction or payment, if any, will be
estimated daily, and reconciled and effected or paid, as the case may be, on a
monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the STARS Portfolio's Prospectus entitled "How
to Buy Shares" and "How to Redeem Shares."
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of the STARS 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 net asset value of the Class A shares.
<TABLE>
<S> <C>
Net Asset Value per Share $12.00
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.60
</TABLE>
B-17
<PAGE>
<TABLE>
<S> <C>
Per Share Offering Price to
the Public $12.60
</TABLE>
Suspension of Redemptions. The right of redemption may be suspended
or the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Master Series ordinarily utilizes is restricted, or
when an emergency exists as determined by the Securities and Exchange Commission
so that disposal of the Master Series' investments or determination of its net
asset value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect the STARS
Portfolio's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "How to Buy
Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Master Series, are valued at the last sale
price on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. 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 Fund's
Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of STARS Portfolio's and Master
Series' shares. Because of the differences in operating expenses incurred by
each Class, the per share net asset value of each Class will differ.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
It is expected that the STARS Portfolio will qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interests of its
shareholders.
B-18
<PAGE>
Qualification as a regulated investment company relieves the STARS Portfolio
from any liability for Federal income taxes on net investment income and net
realized securities gains to the extent that such income and gains are
distributed to shareholders in accordance with applicable provisions of the
Code. The term "regulated investment company" does not imply the supervision of
management or investment practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
of shares in a regulated investment company may have the effect of reducing the
aggregate net asset value of his shares below the cost of his investment. Such
a distribution would be a return on investment in an economic sense although
taxable as stated in "Dividends, Distributions and Taxes" in the Prospectus. In
addition, the Code provides that if a shareholder holds shares of a regulated
investment company for six months or less and has received a capital gain
dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Depending on the composition of a regulated investment company's
income, dividends paid by the regulated investment company from net investment
income may qualify for the dividends received deduction allowable to certain
U.S. corporate shareholders ("dividends received deduction"). In general,
dividend income of the regulated investment company distributed to qualifying
corporate shareholders will be eligible for the dividends received deduction
only to the extent that (i) the regulated investment company's income consists
of dividends paid by U.S. corporations and (ii) the regulated investment company
would have been entitled to the dividends received deduction with respect to
such dividend income if the regulated investment company were not a regulated
investment company under the Code. The dividends received deduction for
qualifying corporate shareholders may be further reduced if the shares of the
regulated investment company held by such shareholders with respect to which
dividends are received are treated as debt-financed or deemed to have been held
for less than 46 days. In addition, the Code provides other limitations with
respect to the ability of a qualifying corporate shareholder to claim the
dividends received deduction in connection with holding shares of a regulated
investment company.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, all or a portion of the gain or
loss from the disposition of non-U.S. dollar denominated securities (including
debt instruments, certain financial forward, futures and option contracts, and
certain preferred stock) may be treated as ordinary income or loss under Section
988 of the Code (relating to the taxation of foreign currency transactions). In
addition, all or a portion of the gain realized from the disposition of
B-19
<PAGE>
certain market discount bonds will be treated as ordinary income under Section
1276. Finally, all or a portion of the gain realized from engaging in
"conversion transactions" may be treated as ordinary income under Section 1258.
"Conversion transactions" are defined to include certain forward, futures,
option and straddle transactions, transactions marketed or sold to produce
capital gains, or transactions described in Treasury regulations to be issued in
the future.
Under Section 1256 of the Code, gain or loss realized by the regulated
investment company from certain financial forward, futures and options
transactions (other than those taxed under Section 988 of the Code) will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Gain or loss will arise upon the exercise or lapse of such forward
contracts, futures and options as well as from closing transactions. In
addition, any such forward contracts, futures or options remaining unexercised
at the end of the regulated investment company's taxable year will be treated as
sold for their then fair market value, resulting in additional gain or loss to
the regulated investment company characterized in the manner described above.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or option contracts may be considered, for
tax purposes to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Sections 1092 and 1258 of the Code which, in
certain circumstances, overrides or modifies the provisions of Sections 988 or
1256.
If a regulated investment company were treated as entering into
"straddles" by reason of its engaging in certain financial forward, futures or
option contracts, such straddles will be characterized as "mixed straddles" if
the futures, forwards, or options comprising a part of such straddles were
governed by Section 1256 of the Code. The regulated investment company may make
one or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, results with respect to the regulated investment
company may differ. If no election is made, to the extent the straddle rules
apply to positions established by the regulated investment company, losses
realized by the regulated investment company will be deferred to the extent of
unrealized gain in any offsetting positions. Moreover, as a result of the
straddle and the conversion transaction rules, short-term capital loss on
straddle positions may be recharacterized as long-term capital loss and long-
term capital gain may be characterized as short-term capital gain or ordinary
income.
Investment by a regulated investment company in securities issued or
acquired at a discount, or providing for deferred interest or for payment of
interest in the form of
B-20
<PAGE>
additional obligations could under special tax rules affect the amount, timing
and character of distributions to shareholders by causing the regulated
investment company to recognize income prior to the receipt of cash payments.
For example, the regulated investment company could be required to accrue a
portion of the discount (or deemed discount) at which the securities were issued
each year and to distribute such income in order to maintain its qualification
as a regulated investment company. In such case, the regulated investment
company may have to dispose of securities which it might otherwise have
continued to hold in order to generate cash to satisfy these distribution
requirements.
PORTFOLIO TRANSACTIONS
BSFM assumes general supervision over placing orders on behalf of the
Master Series for the purchase or sale of investment securities. Allocation of
brokerage transactions, including their frequency, is made in BSFM'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 BSFM'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 BSFM and
BSFM's fees are not reduced as a consequence of the receipt of such supplemental
information.
Such information may be useful to BSFM in serving both the Master
Series and other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to BSFM in carrying out their obligations to the Master Series. Sales of STARS
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 BSFM being engaged simultaneously in
the purchase or sale of the same security. When transactions are executed in
the over-the-counter market, the Master Series will deal with the primary market
makers unless a more favorable price or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
It is anticipated that in any fiscal year the turnover rate may approach the
150% level; however, in periods in which extraordinary market conditions
prevail, BSFM will not be deterred from changing investment strategy as rapidly
as needed, in which case higher turnover rates can be anticipated which would
result in greater brokerage expenses. The overall
B-21
<PAGE>
reasonableness of brokerage commissions paid is evaluated by BSFM 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 Securities and Exchange Commission
thereunder, the Board of Trustees has determined that transactions for the
Master Series may be executed through Bear Stearns if, in the judgment of BSFM,
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 Master Series a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for the Master
Series on the floor of any national securities exchange, provided (i) the Board
of Trustees has expressly authorized Bear Stearns to effect such transactions,
and (ii) Bear Stearns annually advises the Board of Trustees 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.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "Performance
Information."
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased at net asset value (maximum offering
price in the case of Class A) per share with a hypothetical $1,000 payment made
at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. 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 C the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The total return for Class A for the period April 5, 1995 (commencement
of investment operations of the Master Series) to September 30, 1995 was 14.44%.
Based on net asset value per share, the total return for Class A was 20.17% for
this period. The total return for Class C for the same period was 18.58%.
Without giving effect to the applicable CDSC, the
B-22
<PAGE>
total return for Class C was 19.75% for this period. The total return for Class
Y for the period August 7, 1995 (commencement of initial public offering) to
September 30, 1995 was 2.41%.
Total return is calculated by subtracting the amount of the STARS
Portfolio's net asset value (maximum offering price in the case of Class A) per
share at the beginning of a stated period from the net asset value per share 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 net asset value (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 net asset value per share 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 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 C shares, which, if reflected would reduce the
performance quoted.
INFORMATION ABOUT THE STARS PORTFOLIO
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "General
Information."
Bear Stearns and S&P entered into a License Agreement dated October 1,
1994 that provides for, among other matters: (i) the grant by S&P to Bear
Stearns of the exclusive right until March 31, 2001, and the non-exclusive right
thereafter, 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) such
right to become non-exclusive at an earlier date, if the STARS Portfolio and
certain other investment companies which, in the future, may be sponsored by
Bear Stearns fail to reach certain aggregate asset sizes, measured annually
commencing on April 1, 1996, (iii) such right to terminate at S&P's option upon
certain events, such as breach by Bear Stearns of the material terms of the
License Agreement, S&P ceasing to publish STARS, the adoption of adverse
legislation or regulation (none of which currently is foreseen) affecting S&P's
ability to license its trade names or trademarks as contemplated by the License
Agreement, or the existence of certain litigation (none of which is known to
exist or to be threatened), (iv) the payment by Bear Stearns of annual license
fees in amounts equal to a range of .30% to .375% of the net assets of the STARS
Portfolio and other investment companies subject to the License Agreement and
(v) a partial reduction of the license fees to offset certain marketing expenses
incurred by Bear Stearns in connection with the STARS Portfolio.
B-23
<PAGE>
STARS is the centerpiece of the OUTLOOK, S&P's flagship investment
newsletter that has a high net worth readership of 25,000 weekly subscribers.
STARS reaches more than 65,000 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. These factors include company operations and
industry and macroeconomic conditions. Among the fundamental factors are the
company's balance sheet, ability to finance growth, competitive market
advantages, earnings per share growth and strength of management.
Each STARS 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.
STARS Portfolio shares have no preemptive, subscription or conversion rights and
are freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of October 31, 1995, the following shareholders owned, directly or
indirectly, 5% or more of the STARS Portfolio's outstanding shares.
Percent of Class Y
Name and Address Shares Outstanding
- ---------------- ------------------
Bear Stearns Securities Corp. 15.6%
FBO 048-93408-13
1 Metrotech Center North
Brooklyn, New York 11201-3859
Custodial Trust Company 27.6%
101 Carnegie Center
Princeton, New Jersey 08540
A shareholder who beneficially owns, directly or indirectly, more than
25% of the STARS Portfolio's voting securities may be deemed a "control person"
(as defined in the 1940 Act) of the STARS Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540, an affiliate of Bear Stearns, is
B-24
<PAGE>
the STARS Portfolio's custodian. Under the custody agreement with the STARS
Portfolio, CTC holds the STARS Portfolio's securities and keeps all necessary
accounts and records. For its services, CTC receives an annual fee of the
greater of .01% 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 which are payable monthly. PFPC Inc.,
Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is
the STARS Portfolio's transfer agent, dividend disbursing agent and registrar.
Neither of them has any part in determining the investment policies of the
Master Series or which securities are to be purchased or sold by the Master
Series.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-
2696, as counsel for the Fund, has rendered its opinion as to certain legal
matters regarding the due authorization and valid issuance of the shares of
beneficial interest being sold pursuant to the STARS Portfolio's Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.
BSF-S-001-05
B-25
<PAGE>
FINANCIAL STATEMENTS FOR S&P STARS PORTFOLIO
S&P STARS Portfolio
of The Bear Stearns Funds
STATEMENT OF ASSETS AND LIABILITIES
February 22, 1995
Assets:
Investment in S&P STARS Fund......................... $125,016
Deferred organization expenses (Note 4).............. $162,500
--------
Total Assets............................................. $287,516
Liabilities -- deferred organization expenses payable.... $162,500
--------
Net Assets (equivalent to $12.00 per share on 5,209
Class A shares of beneficial interest and
5,209 Class C shares of beneficial interest
(par value $0.001) outstanding with an indefinite
number of authorized shares of beneficial interest)
(Notes 1 and 2)..................................... $125,016
--------
Calculation of Offering Price
Class A Shares
Net Asset Value and Redemption Price................... $ 12.00
Maximum Sales Charge - 4.75% Offering Price............ $ .60
--------
Offering Price to Public................................. $ 12.60
========
Class C
Net Asset Value and Redemption Price................... $ 12.00
__________________________
(1) The Bear Stearns Funds (the "Fund") was organized as a Massachusetts
business trust on September 29, 1994. To date, the Fund has not had any
transactions other than those relating to organizational matters and the
sale of 5,209 Class A shares and 5,209 Class C shares of beneficial interest
of the S&P STARS Portfolio (the "STARS Portfolio"), 1,042 Class A shares and
1,042 Class C shares of beneficial interest of each of the Large Cap Value
Portfolio and Small Cap Value Portfolio and 1,041 Class A shares and 1,041
Class C shares of beneficial interest of the Total Return Bond Portfolio to
Bear Stearns Funds Management Inc. The Fund is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company.
(2) The Fund has entered into a Distribution Agreement with Bear, Stearns & Co.
Inc. (the "Distributor") on behalf of the STARS Portfolio. Certain officers
and/or Trustees of the Fund are officers and/or directors of the
Distributor.
B-26
<PAGE>
(3) The STARS Portfolio invests all of its assets in the S&P STARS Master Series
(the "Master Series") of S&P STARS Fund, an open-end, management investment
company which presently has one authorized series of shares. The Master
Series has the same investment objective as the STARS Portfolio. Shares of
the Master Series may be purchased only by other investment companies or
similar accredited investors.
(4) Deferred organization expenses will be amortized over a period from the date
the Fund commences operations not exceeding five years. In the event that
the Fund's initial shareholder or any transferee of the Fund's initial
shareholder redeems any of its original shares prior to the end of the five-
year period, the proceeds of the redemption payable in respect of such
shares shall be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that
the Fund is liquidated prior to the end of the five-year period, the Fund's
initial shareholder or the transferee of the Fund's initial shareholder
shall bear the unamortized deferred organization expenses.
B-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of
The Bear Stearns Funds
We have audited the statement of assets and liabilities of the S&P
STARS Portfolio of The Bear Stearns Funds as of February 22, 1995. This
financial statement is the responsibility of The Bear Stearns Funds' management.
Our responsibility is to express an opinion on the financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities presents
fairly, in all material respects, the financial position of the S&P STARS
Portfolio of The Bear Stearns Funds at February 22, 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 28, 1995
B-28
<PAGE>
FINANCIAL STATEMENTS FOR S&P STARS MASTER SERIES
S&P STARS Master Series
of S&P STARS Fund
STATEMENT OF ASSETS AND LIABILITIES
February 22, 1995
Assets:
Cash in Bank....................................... $125,016
Deferred organization expenses (Note 3)............ $100,000
--------
Total Assets........................................... $225,016
Liabilities -- deferred organization expenses payable.. $100,000
--------
Net Assets (equivalent to $12.00 per share on 10,418
shares of beneficial interest (par value $0.001)
outstanding with an indefinite number of
authorized shares of beneficial interest)
(Notes 1 and 2).................................... $125,016
--------
Net Asset Value and Redemption Price................... $ 12.00
========
__________________________
(1) S&P STARS Fund (the "Master Fund") was organized as a Delaware business
trust on October 5, 1994. To date, the Master Fund has not had any
transactions other than those relating to organizational matters and the
sale of 10,418 shares of beneficial interest of S&P STARS Master Series (the
"Master Series") to S&P STARS Portfolio of The Bear Stearns Funds. The
Master Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) The Master Fund has entered into an Investment Advisory Agreement with Bear
Stearns Funds Management Inc. (the "Investment Adviser") and a Placement
Agreement with Bear, Stearns International Limited (the "Placement Agent")
on behalf of the Master Series. Certain officers and/or Trustees of the
Master Fund are officers and/or directors of the Investment Adviser and the
Placement Agent.
B-29
<PAGE>
(3) Deferred organization expenses will be amortized over a period from the
date the Master Fund commences operations not exceeding five years. In the
event that the Master Fund's initial shareholder or any transferee of the
Master Fund's initial shareholder redeems any of its original shares prior
to the end of the five-year period, the proceeds of the redemption payable
in respect of such shares shall be reduce by the pro rata share (based on
the proportionate share of the original shares redeemed to the total number
of original shares outstanding at the time of redemption) of the
unamortized deferred organization expenses as of the date of such
redemption. In the event that the Master Fund is liquidated prior to the
end of the five-year period, the Master Fund's initial shareholder or the
transferee of the Master Fund's initial shareholder shall bear the
unamortized deferred organization expenses.
B-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholder of
S&P STARS Fund
We have audited the statement of assets and liabilities of the S&P
STARS Master Series of S&P STARS Fund as of February 22, 1995. This financial
statement is the responsibility of S&P STARS Fund's management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities presents
fairly, in all material respects, the financial position of the S&P STARS Master
Series of S&P STARS Fund at February 22, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 28, 1995
B-31
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Statement of Assets and Liabilities
September 30, 1995
(unaudited)
<TABLE>
<S> <C>
Assets
Investment in S&P STARS Master Series
("Master Series"), at value................................... $56,239,077
Receivable for Portfolio shares sold............................ 1,429,723
Receivable for investment sold in Master Series................. 227,906
Prepaid expenses................................................ 27,756
Receivable from Master Series' investment adviser............... 4,424
Deferred organization expenses and other assets................. 239,490
-----------
Total assets................................................ 58,168,376
-----------
Liabilities
Payable for investment purchased in Master Series............... 1,429,723
Payable for Portfolio shares repurchased........................ 227,906
Distribution fee payable (class A and C shares)................. 79,852
Administration fee payable...................................... 24,888
Custodian fee payable........................................... 417
Accrued expenses................................................ 22,864
Organization expenses payable................................... 247,484
-----------
Total liabilities........................................... 2,033,134
-----------
Net Assets
Capital stock, $0.001 par value (unlimited shares
of beneficial interest authorized)............................ 3,897
Paid-in capital................................................. 50,746,076
Net investment loss............................................. (89,940)
Accumulated net realized gain from Master Series................ 845,818
Net unrealized appreciation from Master Series.................. 4,629,391
-----------
Net assets.................................................. $56,135,242
-----------
Class A
Net assets...................................................... $37,433,829
-----------
Shares of beneficial interest outstanding....................... 2,595,908
-----------
Net asset value per share....................................... $14.42
------
Maximum offering price per share (net asset value plus
sales charge of 4.75%* of the offering price)................. $15.14
======
Class C
Net assets...................................................... $18,615,838
-----------
Shares of beneficial interest outstanding....................... 1,295,219
-----------
Net asset value and offering price per share**.................. $14.37
======
Class Y
Net assets...................................................... $ 85,575
-----------
Shares of beneficial interest outstanding....................... 5,914
-----------
Net asset value, offering and redemption price per share........ $14.47
======
</TABLE>
______
* On investments of $50,000 or more the offering price is reduced.
** Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
B-32
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Statement of Operations
For the period April 5, 1995* through September 30, 1995
(unaudited)
<TABLE>
<S> <C>
Investment income
Allocated net investment income from Master Series............... $ 133,349
----------
Expenses
Distribution fees - Class A...................................... 55,661
Distribution fees - Class C...................................... 57,848
Amortization of organization expenses............................ 26,215
Administration fees.............................................. 24,888
Transfer agent fees and expenses................................. 23,630
Reports and notices to shareholders.............................. 9,845
Insurance expenses............................................... 7,630
Federal and state registration fees.............................. 7,352
Accounting fees.................................................. 6,769
Trustees' fees and expenses...................................... 4,431
Legal and auditing fees.......................................... 1,969
Custodian fees................................................... 491
Other............................................................ 984
----------
Total expenses before reimbursements....................... 227,713
Less: Reimbursements....................................... (4,424)
----------
Total expenses after reimbursements........................ 223,289
----------
Net investment loss.............................................. (89,940)
----------
Net realized and unrealized gain from Master Series
Net realized gain................................................ 845,818
Net change in unrealized appreciation............................ 4,629,391
----------
Net realized and unrealized gain................................. 5,475,209
----------
Net increase in net assets resulting from operations............... $5,385,269
==========
</TABLE>
______
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
B-33
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Statement of Changes in Net Assets
For the period April 5, 1995* through September 30, 1995
(unaudited)
<TABLE>
<S> <C>
Increase/(decrease) in net assets from
Operations
Net investment loss................................................................... $ (89,940)
Net realized gain from Master Series.................................................. 845,818
Net change in unrealized appreciation from Master Series.............................. 4,629,391
-----------
Net increase in net assets resulting from operations.................................. 5,385,269
-----------
Shares of beneficial interest
Net proceeds from the sale of shares.................................................. 56,445,631
Cost of shares repurchased............................................................ (5,820,674)
-----------
Net increase in net assets derived from shares of beneficial interest transactions.... 50,624,957
-----------
Total increase in net assets.......................................................... 56,010,226
Net assets
Beginning of period................................................................... 125,016
-----------
End of period......................................................................... $56,135,242
===========
- --------
* Commencement of investment operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-34
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Financial Highlights
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 5, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
- -------------------------------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares outstanding,
total investment return, ratios to average net assets and other supplemental data for the period.
This information has been derived from information provided in the financial statements.
- --------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS Y
------- ------- -------
<S> <C> <C> <C>
Per Share Operating Performance**
Net asset value, beginning of period......................... $ 12.00 $ 12.00 $ 14.13
------- ------- -------
Net investment loss(1)....................................... (0.02) (0.04) (0.01)
Net realized and unrealized gain on investments(2)........... 2.44 2.41 0.35
------- ------- -------
Net increase in net assets resulting from operations......... 2.42 2.37 0.34
------- ------- -------
Net asset value, end of period............................... $ 14.42 $ 14.37 $ 14.47
======= ======= =======
Total investment return(3)(6)................................ 20.17% 19.75% 2.41%
======= ======= =======
Ratios/Supplemental Data
Net assets, end of period (000's omitted).................... $37,434 $18,616 $ 85
Ratio of expenses to average net assets(1)(4)................ 1.50% 2.00% 1.00%
Ratio of net investment loss to average net assets(1)(4)(6).. (0.37)% (0.87)% (0.95)%
Decrease reflected in above expense ratios and net investment
loss due to waivers and reimbursements(4)(5)(6)............. 0.82% 0.84% 0.67%
</TABLE>
- ------
* Commencement of investment operations. Class Y shares commenced initial
public offering on August 7, 1995.
** Calculated based upon weighted average shares outstanding during the period.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of
Portfolio shares in relation to fluctuating net asset value during the
period.
(3) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(4) Annualized.
(5) Includes Portfolio's share of Master Series' expenses.
(6) The total investment return and ratios for class Y shares are not
necessarily comparable to those of class A or C shares, due to timing
differences in the commencement of the initial public offering of class Y
shares.
The accompanying notes are an integral part of the financial statements.
B-35
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Notes to Financial Statements -- (unaudited)
Organization and Significant Accounting Policies
The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business
trust on September 29, 1994 and is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), as an open-end management investment
company. The Fund currently has five portfolios in operation: three diversified
portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and Total
Return Bond Portfolio, and two non-diversified portfolios, The Insiders Select
Portfolio and S&P STARS Portfolio. As of the date hereof, S&P STARS Portfolio
(the "Portfolio") offers three classes of shares which have been designated as
class A, C and Y shares.
The Portfolio invests all of its assets in S&P STARS Master Series (the "Master
Series"), a separate series of S&P STARS Fund (the "Master Fund"), which has the
same objective as the Portfolio. The Master Fund was organized as a Delaware
business trust on October 5, 1994 and is registered under the Investment Company
Act as an open-end management investment company. The Master Fund currently has
one fund in operation, the Master Series, a non-diversified fund. The value of
the Portfolio's investment in the Master Series reflects the Portfolio's
proportionate beneficial interest in the net assets of the Master Series (99.9%
at September 30, 1995). The performance of the Portfolio is directly affected by
the performance of the Master Series. The financial statements of the Master
Series, including the portfolio of investments, should be read in conjunction
with the Portfolio's financial statements.
Organizational Matters--Prior to commencing investment operations on April 5,
1995, the Portfolio had not had any transactions other than those relating to
organizational matters and the sale of 5,209 class A shares and 5,209 class C
shares of beneficial interest of S&P STARS Portfolio to Bear, Stearns & Co. Inc.
("Bear Stearns" or the "Distributor"). Costs of approximately $262,500 incurred
by the Fund in connection with the organization, its registration with the
Commission and with various states and the initial public offering of its shares
have been deferred and are being amortized, using the straight-line method over
the period of benefit not exceeding sixty months, beginning with the
commencement of investment operations of the Portfolio. In the event that the
Distributor or any transferee of the Distributor redeems any of its original
shares prior to the end of the sixty month period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro rata
share (based on the proportionate share of the original shares redeemed to the
total number of original shares outstanding at the time of the redemption) of
the unamortized deferred organization expenses as of the date of such
redemption. In the event that the Portfolio is liquidated prior to the end of
the sixty month period, the Distributor or the transferee of the Distributor
shall bear the unamortized deferred organization expenses.
Investment Valuation--The Portfolio invests all of its assets in the Master
Series, rather than in a portfolio of securities. Valuation of securities by the
Master Series is discussed in the Master Series' Notes to Financial Statements
which are included elsewhere in this report. Expenses and fees, including
administrative and distribution fees are accrued daily and taken into account
for the purposes of determining the net asset value of the Portfolio's shares.
Because of the differences in operating expenses incurred by each class the per
share net asset value of each class will differ.
Investment Income--The Portfolio earns income, net of Master Series' expenses,
daily on its investment in the Master Series.
The Portfolio's allocated net investment income from the Master Series is
further allocated each day to each class of shares based upon the relative
proportion of net assets of each class at the beginning of the day (after
adjusting for current capital share activity of the respective classes).
B-36
<PAGE>
U.S. Federal Tax Status--The Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, the Portfolio intends not to be
subject to a U.S. federal excise tax.
Dividends and Distributions--The Portfolio intends to distribute at least
annually to shareholders substantially all of its net investment income.
Distribution of net realized gains, if any, will be declared and paid at least
annually. Dividends and distributions to shareholders are recorded on the ex-
dividend date. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Transactions with Affiliates and Related Parties
During the period ended September 30, 1995, Bear Stearns Funds Management Inc.
("BSFM" or the "Administrator") served as administrator to the Portfolio
pursuant to an Administration Agreement. The Administrator is entitled to
receive from the Portfolio a monthly fee equal to an annual rate of 0.15% of the
Portfolio's average daily net assets. Under the terms of an Administrative
Services Agreement with the Portfolio, PFPC International Ltd. provides certain
administrative services to the Portfolio. For providing these services, PFPC
International Ltd. is entitled to receive from the Portfolio a monthly fee of
$4,000.
These fees are computed daily and paid monthly, and are subject to reduction in
any year to the extent that the Portfolio's expenses (exclusive of brokerage
commissions, distribution fees, taxes, interest and extraordinary items) exceed
the most stringent limits prescribed by the laws or regulations of any state in
which the Portfolio's shares are offered for sale based on the average total net
asset value of the Portfolio.
During the period ended September 30, 1995, BSFM as the Master Series' Adviser
(the "Adviser") has voluntarily undertaken to limit the Portfolio's total
operating expenses (other than brokerage commissions, taxes and extraordinary
items) to the extent that total Portfolio operating expenses exceeded 1.50% of
the average daily net assets of the Portfolio's class A shares, 2.00% of the
average daily net assets of the Portfolio's class C shares and 1.00% of the
average daily net assets of the Portfolio's class Y shares. As necessary, this
limitation is effected by waivers by the Adviser of its advisory fees (Master
Series only) and reimbursements of expenses exceeding the advisory fee (Master
Series and Portfolio). For the period ended September 30, 1995, the Adviser
reimbursed $4,424 of the Portfolio's expenses in order to maintain the voluntary
expense limitation. The Portfolio will not pay the Adviser at a later time for
any amounts it may waive, nor will the Portfolio reimburse the Adviser for any
amounts it may assume.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Administrator, serves as custodian to the
Portfolio.
Distribution Plan
The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan
in effect for the period ended September 30, 1995, the Portfolio paid Bear
Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for class
C shares based on such class' average daily net assets. For the period April 5,
1995 (commencement of investment operations) through September 30, 1995, Bear
Stearns earned $113,509 in distribution fees. Bear Stearns uses these fees
primarily to pay dealers whose clients hold Portfolio shares and other
distribution-related activities.
In addition, as distributor of the Portfolio, Bear Stearns collects sales
charges imposed on sales of the Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. For the
period ended September 26, 1995, as a result of an undertaking by the
Distributor, it reallowed all of the sales charges to dealers selling shares in
the Portfolio. In addition, Bear Stearns pays 1.00% in sales commissions on the
sale of class C shares to dealers at the time of such sales.
B-37
<PAGE>
For the period ended September 30, 1995, Bear Stearns has advised the Portfolio
that it received approximately $561,000 in front-end sales charges resulting
from sales of class A shares of the Portfolio. From these fees, Bear Stearns
paid such sales charges to dealers which in turn paid commissions to sales
persons. Bear Stearns has advised the Portfolio that for the period ended
September 30, 1995, it received approximately $5,000 in contingent deferred
sales charges paid upon certain redemptions by class C shareholders of the
Portfolio.
Investment Transactions
Additions and reductions to the Portfolio's investment in the Master Series
amounted to $56,432,307 and $5,926,804, respectively.
Shares of Beneficial Interest
The Portfolio offers class A, C and Y shares. Class A shares are sold with a
front-end sales charge of up to 4.75%. Class C shares are sold with a contingent
deferred sales charge of 1.00% during the first year. There are no sales charges
on class Y shares which are offered primarily to institutional investors.
At September 30, 1995, there was an unlimited amount of $0.001 par value shares
of beneficial interest authorized of which Bear Stearns owned 5,209 class A
shares and 5,209 class C shares. Transactions in shares of beneficial interest
for the period April 5, 1995 (commencement of investment operations) through
September 30, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS Y*
--------------------- --------------------- ---------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
--------- ----------- --------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Sales......... 2,818,374 $37,045,589 1,473,302 $19,314,311 5,979 $85,731
Repurchases... 227,675 3,236,721 183,292 2,583,007 65 946
--------- ----------- --------- ----------- ----- -------
Net increase
in shares
outstanding. 2,590,699 $33,808,868 1,290,010 $16,731,304 5,914 $84,785
========= =========== ========= =========== ===== =======
</TABLE>
______
* Class Y shares commenced initial public offering on August 7, 1995.
Credit Agreement
The Fund, on behalf of the Portfolio, has entered into a credit agreement with
The First National Bank of Boston. S&P STARS Fund, Large Cap Value Portfolio,
Small Cap Value Portfolio, Total Return Bond Portfolio, The Insiders Select
Portfolio and Bear Stearns Investment Trust, which consists of the Emerging
Markets Debt Portfolio, are also parties to the credit agreement. The agreement
provides that each Portfolio as a party to the credit agreement is permitted to
borrow in an amount up to 15% of the value of its total assets. Subject to Board
approval and upon making necessary disclosure in its prospectus, each Portfolio
may, in accordance with the provisions of the credit agreement, borrow up to 25%
of the value of its total assets, less all liabilities other than liabilities
for borrowed money outstanding at the time. However, at no time shall the
aggregate outstanding principal amount of all loans to any of the portfolios
exceed $25,000,000. The line of credit will bear interest at the greater of: (i)
the annual rate of interest announced from time to time from the bank at its
head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus
0.50%, or, at the borrower's option, the rate quoted by The First National Bank
of Boston.
The Portfolio uses this facility to borrow money only for temporary or emergency
(not leveraging) purposes. The Portfolio had no amount outstanding under the
line of credit agreement at September 30, 1995.
Each loan is payable on demand or upon termination of this credit agreement on
January 23, 1996 or, for money market loans, on the last day of the interest
period and, in any event, not later than 14 days from the date the loan was
advanced.
B-38
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Portfolio of Investments
SEPTEMBER 30, 1995
(unaudited)
- ------------------------------------------------------------
MARKET
SHARES* VALUE
- ------------------------------------------------------------
COMMON STOCKS-94.62%
Automotive Equipment - 1.75%
25,000 Goodyear Tire & Rubber Co...........$ 984,375
----------
Banks - 11.51%
67,500 Citicorp............................ 4,775,625
15,000 Northern Trust Corp.**.............. 690,000
16,500 Green Tree Financial Corp.+......... 1,006,500
----------
6,472,125
----------
Chemicals & Fertilizers - 6.17%
52,000 Grace (W.R.) & Co................... 3,471,000
----------
Computers & Office Equipment - 13.19%
7,000 Atmel Corp.+........................ 236,250
13,000 Compaq Computer Corp.+.............. 628,875
14,500 Cisco Systems, Inc.**+.............. 1,000,500
15,000 International Business Machines
Corp............................... 1,415,625
25,000 Oracle Systems Corp.+............... 959,375
36,000 Seagate Technology Inc.+............ 1,516,500
52,000 Sequent Computer Systems, Inc.**+... 1,033,500
10,000 Sun Microsystems, Inc.+............. 630,000
----------
7,420,625
----------
Credit & Finance - 3.16%
40,000 American Express Co................. 1,775,000
----------
Drug & Hospital Supplies - 10.71%
40,000 Foundation Health Corp.+............ 1,525,000
16,000 Medtronic, Inc...................... 860,000
43,500 Merck & Co., Inc.................... 2,436,000
22,500 Pfizer Inc.......................... 1,200,938
----------
6,021,938
----------
Electrical Equipment - 3.00%
26,500 General Electric Co................. 1,689,375
----------
Electronics - 9.42%
32,000 Adaptec Inc.+....................... 1,320,000
32,500 Intel Corp.......................... 1,954,063
26,500 Motorola, Inc....................... 2,023,938
----------
5,298,001
----------
Food & Beverages - 7.99%
27,000 The Coca-Cola Co.................... 1,863,000
31,500 Philip Morris Cos. Inc.............. 2,630,250
----------
4,493,250
----------
Grocery Products - 2.44%
32,500 American Brands, Inc................ 1,373,125
----------
Insurance - 6.09%
22,500 St. Paul Cos., Inc.................. 1,313,437
22,000 Chubb Corp.......................... 2,112,000
----------
3,425,437
----------
Miscellaneous Industrials - 4.51%
47,500 IBP Inc............................. 2,535,312
----------
Oil-Offshore Drilling - 0.63%
50,000 Global Marine, Inc.+................ 356,250
----------
Oil Well Equipment & Services - 0.50%
30,000 Nabors Industries, Inc.+............ 283,125
----------
Publishing and Broadcasting - 1.84%
47,000 News Corp. Ltd. ADR................. 1,034,000
----------
Retailing - 6.43%
33,000 Dollar General Corp................. 969,375
35,000 Eckerd Corp.+....................... 1,400,000
20,500 Tandy Corp.......................... 1,245,375
----------
3,614,750
----------
The accompanying notes are an integral part of the financial statements.
B-39
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Portfolio of Investments
SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
SHARES* VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Services - 5.28%
42,000 Sterling Software, Inc.+ ................................ $ 1,911,000
15,500 Automatic Data Processing, Inc.** ....................... 1,055,937
-----------
2,966,937
-----------
Total Common Stocks (cost - $48,572,568) ................ 53,214,625
===========
PRINCIPAL
AMOUNT
(000's)
- ---------
SHORT-TERM INVESTMENT - 4.06%
Investment Company - 4.06%
$2,285 Federated Trust for Short-term U.S. Government
Securities++ (cost - $2,285,191) ........................ 2,285,191
-----------
Total Investments (cost - $50,857,759) - 98.68% ......... 55,499,816
Other assets in excess of liabilities - 1.32% ........... 740,480
-----------
Net Assets - 100.00% .................................... $56,240,296
===========
NUMBER OF
CONTRACTS
- ---------
WRITTEN CALL OPTION
Computers & Office Equipment
145 Cisco Systems, Inc.**+ 10/21/95 @ $75.00
(premiums received - $34,001) ........................... $ (7,250)
SHORT SALE OF COMMON STOCK
Shipping & Freight
10,000 Roadway Services, Inc. (proceeds received - $458,250) ... $ (497,500)
- ------------
</TABLE>
* Unless otherwise indicated all common stocks, including those underlying
written options, are ranked five stars and all common stocks sold short
are ranked one star.
** Currently ranked four stars; ranked five stars when purchased.
+ Non-income producing security.
++ Money market fund.
ADR American Depositary Receipt.
S&P STARS RANKINGS:
Five stars - Buy - Expected to be among the best performers over the next
twelve months and to rise in price.
Four stars - Accumulate - Expected to be an above-average performer.
Three stars - Hold - Expected to be an average performer.
Two stars - Avoid - Expected to be a below-average performer.
One star - Sell - Expected to be a well-below-average performer and to fall in
price.
The accompanying notes are an integral part of the financial statements.
B-40
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Statement of Assets and Liabilities
SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $50,857,759) ...................... $55,499,816
Receivable for investments sold ................................. 3,157,931
Receivable for beneficial interests sold ........................ 1,429,723
Deposit with broker for security sold short (including
margin requirement of $229,250) ............................... 687,500
Amount segregated at custodian for security sold short .......... 280,000
Dividends receivable ............................................ 54,614
Receivable from investment adviser .............................. 10,891
Deferred organization expenses and other assets ................. 92,822
-----------
Total assets ................................................ 61,213,297
-----------
LIABILITIES
Payable for investments purchased ............................... 4,112,880
Security sold short, at value (proceeds received - $458,250) .... 497,500
Payable for beneficial interests repurchased .................... 227,906
Written call options, at value (premiums received - $34,001) .... 7,250
Custodian fee payable ........................................... 824
Accrued expenses ................................................ 29,307
Organization expenses payable ................................... 97,334
-----------
Total liabilities ........................................... 4,973,001
-----------
NET ASSETS
Net proceeds from capital contributions and withdrawals ......... 51,610,738
Net unrealized appreciation on investments, security sold
short and option transactions ................................. 4,629,558
-----------
Net assets applicable to investors' beneficial interests .... $56,240,296
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-41
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Statement of Operations
FOR THE PERIOD APRIL 5, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
Investment Income
Dividends.................................................. $ 175,628
Interest................................................... 12,957
----------
188,585
----------
Expenses
Advisory fees.............................................. 124,342
Administration and accounting fees......................... 19,950
Amortization of organization expenses...................... 9,845
Custodian fees and expenses................................ 9,845
Legal and auditing fees.................................... 8,861
Trustees' fees and expenses................................ 8,369
Insurance expenses......................................... 7,630
Other...................................................... 1,621
----------
Total expenses before waivers and reimbursements....... 190,463
Less: Waivers and reimbursements...................... (135,233)
----------
Total expenses after waivers and reimbursements........ 55,230
----------
Net investment income...................................... 133,355
----------
Net realized and unrealized gain/(loss) on investments,
security sold short and option transactions
Net realized gain/(loss) from:
Investments............................................ 949,190
Option transactions.................................... (103,334)
Net change in unrealized appreciation/(depreciation) on:
Investments............................................ 4,642,057
Security sold short.................................... (39,250)
Option transactions.................................... 26,751
----------
Net realized and unrealized gain from investments, security
sold short and option transactions......................... 5,475,414
----------
Net increase in net assets resulting from operations........ $5,608,769
==========
- -----------
*Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
B-42
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Statement of Changes in Net Assets
FOR THE PERIOD APRIL 5, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
<TABLE>
<S> <C>
Increase in net assets from Operations
Net investment income........................................... $ 133,355
Net realized gain from investments and option transactions...... 845,856
Net change in unrealized appreciation on investments, security
sold short and option transactions............................ 4,629,558
-----------
Net increase in net assets resulting from operations............ 5,608,769
-----------
Capital transactions
Contributions................................................... 56,433,315
Withdrawals..................................................... (5,926,804)
-----------
Net increase in net assets derived from capital transactions.... 50,506,511
-----------
Total increase in net assets.................................... 56,115,280
Net assets
Beginning of period............................................. 125,016
-----------
End of period................................................... $56,240,296
===========
</TABLE>
______
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
B-43
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
Financial Highlights
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 5, 1995* THROUGH SEPTEMBER 30, 1995
(unaudited)
- --------------------------------------------------------------------------------
Contained below are ratios to average net assets and other supplemental data for
the period. This information has been derived from information provided in the
financial statements.
- --------------------------------------------------------------------------------
<S> <C>
Ratios/Supplemental Data
Net assets, end of period (000's omitted).................... $56,240
Ratio of expenses to average net assets(1)(2)................ 0.33%
Ratio of net investment income to average net assets(1)(2)... 0.80%
Decrease reflected in above expense ratios and net investment
income due to waivers and reimbursements(2)................. 0.81%
Portfolio turnover rate(3)................................... 105.58%
Average commission rate per share............................ $ 0.06
</TABLE>
- ------
* Commencement of investment operations.
(1) Reflects waivers and reimbursements.
(2) Annualized.
(3) Not annualized.
The accompanying notes are an integral part of the financial statements.
B-44
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Fund
S&P STARS Master Series
Notes to Financial Statements -- (unaudited)
Organization and Significant Accounting Policies
S&P STARS Fund (the "Master Fund") was organized as a Delaware business trust on
October 5, 1994 and is registered with the Securities and Exchange Commission
(the "Commission") under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), as an open- end management investment company. The
Master Fund is a "series fund" which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain matters
under the Investment Company Act, and for other purposes, and a shareholder of
one portfolio is not deemed to be a shareholder of any other portfolio. The
Master Fund currently has one portfolio in operation, S&P STARS Master Series
(the "Master Series"), a non-diversified portfolio.
Organizational Matters -- Prior to commencing investment operations on April 5,
1995, the Master Fund had not had any transactions other than those relating to
organizational matters and the sale of 10,418 shares of beneficial interest of
the Master Series to S&P STARS Portfolio (the "Portfolio") of The Bear Stearns
Funds. Costs of approximately $100,000 incurred by the Master Fund in connection
with the organization and its registration with the Commission have been
deferred and are being amortized, using the straight-line method over the period
of benefit not exceeding sixty months, beginning with the commencement of
investment operations of the Master Series. The Master Series commenced
investment operations on April 5, 1995. In the event that the Portfolio or any
transferee of the Portfolio redeems any of its original shares prior to the end
of the sixty month period, the proceeds of the redemption payable in respect of
such shares shall be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of the redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that the
Master Series is liquidated prior to the end of the sixty month period, the
Portfolio or the transferee of the Portfolio shall bear the unamortized deferred
organization expenses.
Portfolio Valuation -- Securities, including covered call options written by the
Master Series, are valued at the last sale price on the securities exchange or
national securities market on which such securities primarily are traded.
Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Securities which mature in 60 days or less are valued
at amortized cost which approximates market value, unless this method does not
represent fair value. Expenses and fees, including the investment advisory,
administration fees and distribution fees, are accrued daily and taken into
account for the purposes of determining the net asset value of the Master Series
shares.
Investment Transactions and Investment Income -- Master Series' investment
transactions are recorded on the trade date (the date on which the order to buy
or sell is executed). Realized gains and losses from securities are calculated
on the identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on an accrual basis.
Options Writing -- When the Master Series writes an option, an amount equal to
the premium received by the Master Series is recorded as a liability and is
subsequently adjusted to the current market value of the option written.
Premiums received from writing options which expire unexercised are recorded by
the Master Series on the expiration date as realized gains from
B-45
<PAGE>
option transactions. The difference between the premium and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also treated as a realized gain, or if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
securities in determining whether the Master Series has a realized gain or loss.
If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Master Series. The Master Series' use of written
options involves, to varying degrees, elements of market risk in excess of the
amount recognized in the statement of assets and liabilities. The contract or
notional amounts reflect the extent of the Master Series' involvement in these
financial instruments. In writing an option, the Master Series bears the market
risk of an unfavorable change in the price of the security underlying the
written option. Exercise of an option written by the Master Series could result
in the Master Series selling or buying a security at a price different from the
current market value. The Master Series' activities in written options are
conducted through regulated exchanges which do not result in counterparty credit
risks.
Written call option open at September 30, 1995:
<TABLE>
<CAPTION>
PREMIUMS MARKET UNREALIZED
WRITTEN CALL OPTION EXPIRATION DATE RECEIVED VALUE GAIN
---------------- -------- ------ ----------
<S> <C> <C> <C> <C>
Cisco Systems, Inc.... October 21, 1995 $34,001 $7,250 $26,751
</TABLE>
Short Selling--When the Master Series makes a short sale, an amount equal to the
proceeds received by the Master Series is recorded as a liability and is
subsequently adjusted to the current market value of the short sale. Short sales
represent obligations of the Master Series to make future delivery of specific
securities and, correspondingly, create an obligation to purchase the security
at market prices prevailing at the later delivery date (or to deliver the
security if already owned by the Master Series). Upon the termination of a short
sale, the Master Series will recognize a gain, limited to the price at which the
Master Series sold the security short, if the market price is less than the
proceeds originally received. The Master Series will recognize a loss, unlimited
in magnitude, if the market price at termination is greater than the proceeds
originally received. As a result, short sales create the risk that the Master
Series' ultimate obligation to satisfy the delivery requirements may exceed the
amount of the proceeds initially received or the liability recorded in the
financial statements. The Master Series has segregated $509,250 in separate
accounts as collateral for open short sales.
Security sold short at September 30, 1995:
<TABLE>
<CAPTION>
MARKET UNREALIZED
WRITTEN CALL OPTION PROCEEDS VALUE LOSS
------------------- -------- -------- ----------
<S> <C> <C> <C>
Roadway Services, Inc................. $458,250 $497,500 $39,250
</TABLE>
U.S. Federal Tax Status--The Master Series intends to distribute substantially
all of its taxable income and to comply with the other requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies. Accordingly, no provision for U.S. federal income taxes is required.
In addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, the Master Series intends not to be
subject to a U.S. federal excise tax.
Transactions with Affiliates and Related Parties
During the period ended September 30, 1995, Bear Stearns Funds Management Inc.
("BSFM" or the "Adviser"), a wholly-owned subsidiary of The Bear Stearns
Companies Inc., served as the investment adviser of the Master Series pursuant
to an Investment Advisory Agreement. The Adviser is entitled to receive from the
Master Series a monthly fee equal to an annual rate of 0.75% of the Master
Series' average daily net assets.
Under the terms of an Administrative Services Agreement with the Portfolio, PFPC
International Ltd. provides certain administrative services to the Master
Series. For providing these services, PFPC International Ltd. is entitled to
receive from the Master Series a monthly fee equal to an annual rate of 0.12% of
the Master Series' net assets up to $200 million, 0.09% of the next $200
million, 0.075% of the next $200 million, and 0.05% of net assets above $600
million, subject to a minimum annual fee of $8,500 for the Master Series,
payable monthly.
B-46
<PAGE>
During the period ended September 30, 1995, the Adviser has voluntarily
undertaken to limit the Portfolio's total operating expenses (other than
brokerage commissions, taxes and extraordinary items) to the extent that total
Portfolio operating expenses exceeded 1.50% of the average daily net assets of
the Portfolio's class A shares, 2.00% of the average daily net assets of the
Portfolio's class C shares and 1.00% of the average daily net assets of the
Portfolio's class Y shares. As necessary, this limitation is effected by waivers
by the Adviser of its advisory fees and reimbursements of expenses exceeding the
advisory fee. For the period ended September 30, 1995, the Adviser waived
$124,342 of its advisory fee and reimbursed $10,891 of the Master Series
expenses in order to maintain the voluntary expense limitation. The Master
Series will not pay the Adviser at a later time for any amounts it may waive,
nor will the Master Series reimburse the Adviser for any amounts it may assume.
For the period ended September 30, 1995, Bear, Stearns & Co. Inc., an affiliate
of the Adviser, earned $166,578 in brokerage commissions from portfolio
transactions executed on behalf of the Master Series.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Adviser, serves as custodian to the Master Series.
Investments in Securities
For U.S. federal income tax purposes, the cost of securities owned at September
30, 1995 was $51,357,941. Accordingly, the net unrealized appreciation of
investments of $4,141,875 was composed of gross appreciation of $5,058,159 for
those investments having an excess of value over cost; and gross depreciation of
$916,284 for those investments having an excess of cost over value.
For the period April 5, 1995 (commencement of investment operations) through
September 30, 1995, aggregate purchases and sales of investment securities
(excluding short-term securities) were $85,761,464 and $38,138,086,
respectively.
Credit Agreement
The S&P STARS Fund, on behalf of the Master Series, has entered into a credit
agreement with The First National Bank of Boston. Bear Stearns Investment Trust,
which consists of the Emerging Markets Debt Portfolio and The Bear Stearns Funds
consisting of S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value
Portfolio, Total Return Bond Portfolio and The Insiders Select Portfolio are
also parties to the credit agreement. The agreement provides that each fund as a
party to the credit agreement is permitted to borrow in an amount up to 15% of
the value of its total assets. Subject to Board approval and upon making
necessary disclosure in its prospectus, each fund may, in accordance with the
provisions of the credit agreement, borrow up to 25% of the value of its total
assets, less all liabilities other than liabilities for borrowed money
outstanding at the time. However, at no time shall the aggregate outstanding
principal amount of all loans to any of the funds exceed $25,000,000. The line
of credit will bear interest at the greater of: (i) the annual rate of interest
announced from time to time from the bank at its head office as its Base Rate,
or (ii) the Federal Funds Effective Rate plus 0.50%, or, at the borrower's
option, the rate quoted by The First National Bank of Boston.
The Master Series uses this facility to borrow money only for temporary or
emergency (not leveraging) purposes. The Master Series had no amount outstanding
under the line of credit agreement at September 30, 1995.
Each loan is payable on demand or upon termination of this credit agreement on
January 23, 1996 or, for money market loans, on the last day of the interest
period and, in any event, not later than 14 days from the date the loan was
advanced.
B-47
