<PAGE>
The Bear Stearns Funds
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
Class A and Class C Shares
SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 1, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGE 17 OF
THE PROSPECTUS IN THE LAST PARAGRAPH OF THE SECTION ENTITLED "HOW TO BUY
SHARES--CLASS A SHARES."
Class A shares of each Portfolio may be purchased at net asset value, with the
proceeds from the redemption of shares of an investment company sold with a
sales charge or commission and not distributed by Bear Stearns. From April 15,
1996 through June 28, 1996, Bear Stearns will offer to pay Authorized Dealers
an amount up to 1% of the net asset value of shares purchased by the Dealers'
clients or customers with such proceeds. If such shares are redeemed within
one year of purchase, a CDSC of 1% will be imposed.
THE FOLLOWING INFORMATION SUPERSEDES ANY CONTRARY INFORMATION CONTAINED ON THE
COVER PAGE OF THE PROSPECTUS AND ON PAGE 8 OF THE PROSPECTUS IN THE SECTION
ENTITLED "DESCRIPTION OF THE FUND--BOND PORTFOLIO." THESE CHANGES SHALL BE EF-
FECTIVE AS OF MARCH 12, 1996.
Under normal market conditions, the Bond Portfolio will invest in a portfolio
of securities with a duration of not less than 65% of the BIG Index and not
more than 135% of the BIG Index. In addition, the Bond Portfolio will change
its operating policy to require (i) that 70% of the value of the Bond Portfo-
lio's net assets must consist of securities which, in the case of bonds and
other debt instruments, are rated no lower than A by Moody's, S&P, Fitch, or
Duff or, if unrated, deemed to be of comparable quality by BSFM and (ii) that
up to 30% of the value of the Bond Portfolio's net assets may consist of secu-
rities which, in the case of bonds and other debt instruments, are rated no
lower than Baa by Moody's or BBB by S&P, Fitch or Duff or, if unrated, deemed
to be of comparable quality by BSFM.
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 portfo-
lio manager is Peter E. Mahoney. Mr. Mahoney rejoined Bear Stearns in November
1995 as a Managing Director of Bear Stearns and Director of Fixed Income In-
vestments of Bear Stearns Asset Management, positions he held during his em-
ployment with Bear Stearns from June 1987 through November 1994. From November
1994 to November 1995 he was a financial consultant.
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds
LARGE CAP VALUE PORTFOLIO [RIGHT ARROW] SMALL CAP VALUE PORTFOLIO [RIGHT ARROW]
TOTAL RETURN BOND [RIGHT ARROW]
PORTFOLIO
The Bear Stearns Funds (the "Fund") is an open-end management investment com-
pany, known as a mutual fund. The Fund permits you to invest in separate port-
folios. By this Prospectus, shares of three diversified portfolios (each, a
"Portfolio") are offered: the Large Cap Value Portfolio and the Small Cap
Value Portfolio (together, the "Equity Portfolios") and the Total Return Bond
Portfolio (the "Bond Portfolio").
[RIGHT
ARROW] Each Equity Portfolio's investment objective is capital apprecia-
tion.
[RIGHT
ARROW]
The Bond Portfolio's investment objective is to maximize total re-
turn, consistent with preservation of capital. The Bond Portfolio
will invest primarily in investment grade, U.S. dollar denominated
fixed-income securities of domestic and foreign issuers. Under nor-
mal market conditions, the Bond Portfolio will invest in a portfolio
of securities with a dollar-weighted average maturity ranging from
four to thirteen years and a duration of not less than 75% of the
Salomon Brothers Broad Investment-Grade (BIG) Bond Index and not
more than 125% of the BIG Index.
By this Prospectus, each Portfolio is offering two Classes of shares. Class A
shares are subject to a sales charge imposed at the time of purchase and Class
C shares are subject to a 1% contingent deferred sales charge imposed on re-
demptions made within the first year of purchase. Other differences between
the Classes include the services offered to and the expenses borne by each
Class and certain voting rights, as described herein. These alternatives are
offered so an investor may choose the method of purchasing shares that is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances. Each Portfolio issues an-
other Class of shares which has different expenses which would affect perfor-
mance. Investors desiring to obtain information about this Class of shares
should call 1-800-766-4111 or ask their sales representative or the Portfo-
lio's distributor.
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 & CO. INC. ("Bear Stearns"), an affiliate of BSFM, serves as
each Portfolio's distributor.
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated Septem-
ber 1, 1995, which may be revised from time to time, provides a further dis-
cussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. For a free copy, write to
the address or call one of the telephone numbers listed under "General Infor-
mation" in this Prospectus.
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or en-
dorsed by, any bank, and are not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SEPTEMBER 1, 1995
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Condensed Financial Information............................................ 5
Alternative Purchase Methods............................................... 6
Description of the Fund.................................................... 6
Risk Factors.............................................................. 10
Management of the Fund..................................................... 12
How to Buy Shares.......................................................... 14
Shareholder Services....................................................... 19
How to Redeem Shares....................................................... 20
Dividends, Distributions and Taxes......................................... 23
Performance Information.................................................... 24
General Information........................................................ 25
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
SMALL CAP LARGE CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A CLASS A CLASS A
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................. 4.75% 4.75% 3.75%
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)............................ * * *
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Management Fees (after fee waiver)**.......... 0.00% 0.00% 0.00%
12b-1 Fees.................................... 0.50% 0.50% 0.35%
Other Expenses (after expense
reimbursement)**.............................. 1.00% 1.00% 0.45%
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)**........... 1.50% 1.50% 0.80%
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
1 YEAR....................................... $62 $62 $45
3 YEARS...................................... $93 $93 $62
</TABLE>
- ------
*In certain situations, where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed on
redemptions within the first year after purchase. See "How to Buy Shares--
Class A Shares."
**Based on estimated expenses for the current fiscal year. BSFM has undertaken
to waive its investment advisory fee and assume certain expenses of each
Portfolio other than brokerage fees, extraordinary items and taxes to the
extent Total Portfolio Operating Expenses exceed 1.50% and 0.80% for each
Equity Portfolio and the Bond Portfolio, respectively. Without such waiver and
expense reimbursement, Management Fees stated above would be 0.75% and 0.45%,
Other Expenses would be 2.24% and 2.27% and Total Portfolio Operating Expenses
would be 3.49% and 3.07% for each Equity Portfolio and the Bond Portfolio,
respectively.
3
<PAGE>
Fee Table (continued)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
SMALL CAP LARGE CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS C CLASS C CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ -- -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)........................... 1.00% 1.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Management Fees (after fee waiver)*.......... 0.00% 0.00% 0.00%
12b-1 Fees................................... 1.00% 1.00% 0.75%
Other Expenses (after expense
reimbursement)*.............................. 1.00% 1.00% 0.45%
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)*........... 2.00% 2.00% 1.20%
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
1 YEAR...................................... $30 $30 $22
3 YEARS..................................... $63 $63 $38
You would pay the following expenses on the
same investment, assuming no redemption:
1 YEAR...................................... $20 $20 $12
3 YEARS..................................... $63 $63 $38
</TABLE>
- ------
*Based on estimated expenses for the current fiscal year. BSFM has undertaken
to waive its investment advisory fee and assume certain expenses of each
Portfolio other than brokerage fees, extraordinary items and taxes to the
extent Total Portfolio Operating Expenses exceed 2.00% and 1.20% for each
Equity Portfolio and the Bond Portfolio, respectively. Without such waiver and
expense reimbursement, Management Fees stated above would be 0.75% and 0.45%,
Other Expenses would be 2.24% and 2.27% and Total Portfolio Operating Expenses
would be 3.99% and 3.47% for each Equity Portfolio and the Bond Portfolio,
respectively.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDI-
CATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH PORTFO-
LIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER
OR LESS THAN 5%.
The purpose of the foregoing tables is to assist you in understanding the var-
ious costs and expenses that investors will bear, directly or indirectly, the
payment of which will reduce investors' return on an annual basis. Other Ex-
penses and Total Portfolio Operating Expenses are based on estimated amounts
for the current fiscal year. In addition to the expenses noted above, the Fund
will charge $7.50 for each wire redemption. See "How to Redeem Shares." Long-
term investors could pay more in 12b-1 fees than the economic equivalent of
paying a front-end sales charge. For a further description of the various
costs and expenses that are expected to be incurred in the Portfolios' opera-
tion, as well as expense reimbursement or waiver arrangements, see "Management
of the Fund."
4
<PAGE>
Condensed Financial Information
The table below sets forth certain information covering each Portfolio's in-
vestment results for the period indicated. Further financial data and related
notes are included in the Statement of Additional Information which is avail-
able 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 A
and Class C share of each Portfolio for the period from commencement of in-
vestment operations through June 30, 1995. This information has been derived
from information provided in each Portfolio's financial statements (unau-
dited).
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(3)
-------------- ---------------- ---------------
CLASS CLASS CLASS CLASS
A C A CLASS C A CLASS C
------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFOR-
MANCE
Net asset value, beginning
of period................. $12.00 $12.00 $12.00 $12.00 $12.00 $12.00
Net investment
income/(loss)+............ 0.02 0.01 (0.02) (0.03) 0.17 0.16
Net realized and unrealized
gain on investments....... 0.82 0.81 1.05 1.05 0.35 0.35
------ ------ ------ ------ ------ ------
Net increase in net assets
resulting from operations. 0.84 0.82 1.03 1.02 0.52 0.51
------ ------ ------ ------ ------ ------
Dividends to shareholders
from:
Net investment income...... -- -- -- -- (0.17) (0.16)
------ ------ ------ ------ ------ ------
Net asset value, end of pe-
riod...................... $12.84 $12.82 $13.03 $13.02 $12.35 $12.35
====== ====== ====== ====== ====== ======
Total return++............. 7.00% 6.83% 8.58% 8.50% 4.40% 4.32%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)........... $2,148 $1,900 $4,127 $2,194 $4,089 $1,461
Ratio of expenses to aver-
age
net assets+*.............. 1.50% 2.00% 1.50% 2.00% 1.00% 1.40%
Ratio of net investment
income/(loss) to average
net assets+*.............. 0.84% 0.30% (0.82%) (1.35%) 6.18% 5.72%
Decrease reflected in above
expense
ratios and net investment
income/(loss) due to waiv-
ers and reimbursements.... 4.64% 4.70% 2.99% 3.04% 3.52% 3.85%
Portfolio turnover rate**.. 0.00% 0.00% 3.62% 3.62% 16.96% 16.96%
Average commission paid.... $0.06 $0.06 $0.05 $0.05 -- --
</TABLE>
- --------
(1)Commenced investment operations on April 4, 1995.
(2)Commenced investment operations on April 3, 1995.
(3)Commenced investment operations on April 5, 1995.
+Reflects waivers and reimbursements.
++ Total return does not consider the effects of sales loads or contingent de-
ferred 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.
*Annualized.
**Not annualized.
Further information about performance will be contained in each Portfolio's
annual report, which should be available on or about May 30, 1996, and which
may be obtained without charge by writing to the address or calling one of the
telephone numbers listed under "General Information."
5
<PAGE>
Alternative Purchase Methods
BY THIS PROSPECTUS, EACH PORTFOLIO OFFERS YOU TWO METHODS OF PURCHASING ITS
SHARES.
By this Prospectus, each Portfolio offers investors two methods of purchasing
its shares; investors may choose the Class of shares that best suits their
needs, given the amount of purchase, the length of time the investor expects
to hold the shares and any other relevant circumstances. Each Portfolio share
represents an identical pro rata interest in the Portfolio's investment port-
folio.
Class A shares of each Equity Portfolio and the Bond Portfolio are sold at net
asset value per share plus a maximum initial sales charge of 4.75% and 3.75%,
respectively, of the public offering price imposed at the time of purchase.
The initial sales charge may be reduced or waived for certain purchases. See
"How to Buy Shares--Class A Shares." The Class A shares of each Equity Portfo-
lio and the Bond Portfolio are subject to an annual distribution and share-
holder servicing fee at the rate of .50 of 1% and .35 of 1%, respectively, of
the value of the average daily net assets. See "Management of the Fund--Dis-
tribution and Shareholder Servicing Plan."
Class C shares of each Portfolio are subject to a 1% contingent deferred sales
charge ("CDSC") which is assessed only if Class C shares are redeemed within
one year of purchase. See "How to Redeem Shares--Class C Shares." These shares
of each Equity Portfolio and the Bond Portfolio also are subject to an annual
distribution and shareholder servicing fee at the rate of 1% and .75 of 1%,
respectively, of the value of the average daily net assets of Class C. See
"Management of the Fund--Distribution and Shareholder Servicing Plan." The
distribution and shareholder servicing fee paid by Class C will cause such
Class to have a higher expense ratio and to pay lower dividends than Class A.
The decision as to which Class of shares is more beneficial to each investor
depends on the amount and the intended length of the investor's investment.
Each investor should consider whether, during the anticipated life of the in-
vestor's investment in the Fund, the accumulated distribution and shareholder
servicing fee and CDSC, if any, on Class C shares would be less than the ini-
tial sales charge on Class A shares purchased at the same time, and to what
extent, if any, such differential would be offset by the return of Class A.
Additionally, investors qualifying for reduced initial sales charges who ex-
pect to maintain their investment for an extended period of time might con-
sider purchasing Class A shares because the accumulated continuing distribu-
tion and shareholder servicing fees on Class C shares may exceed the initial
sales charge on Class A shares during the life of the investment. Finally,
each investor should consider the effect of the CDSC period in the context of
the investor's own investment time frame. Generally, Class A shares may be
more appropriate for investors who invest $1,000,000 and $500,000 or more in
an Equity Portfolio's or the Bond Portfolio's shares, respectively, but will
not be appropriate for investors who invest less than $50,000 in a Portfolio's
shares, unless they intend to hold those shares for more than ten years.
Description of the Fund
GENERAL
THE FUND IS A "SERIES FUND."
The 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 of 1940, as amended (the "1940 Act"), and for
other purposes, and a shareholder of one Portfolio is not deemed to be a
shareholder of any other Portfolio. As described below, for certain matters
Fund shareholders vote together as a group; as to others they vote separately
by Portfolio. By this Prospectus, shares of the Portfolios are being offered.
From time to time, other portfolios may be established and sold pursuant to
other offering documents. See "General Information."
INVESTMENT OBJECTIVE
EACH EQUITY PORTFOLIO SEEKS TO PROVIDE CAPITAL APPRECIATION. THE BOND PORTFO-
LIO SEEKS TO MAXIMIZE TOTAL RETURN, CONSISTENT WITH PRESERVATION OF CAPITAL.
Each Equity Portfolio's investment objective is capital appreciation. The Bond
Portfolio's investment objective is to maximize total return, consistent with
preservation of capital. See "--Management Policies" below. Each Portfolio's
investment objective cannot be changed without approval by the
6
<PAGE>
holders of a majority (as defined in the 1940 Act) of such Portfolio's out-
standing voting shares. There can be no assurance that a Portfolio's invest-
ment objective will be achieved.
MANAGEMENT POLICIES
EQUITY PORTFOLIOS
EACH EQUITY PORTFOLIO INVESTS PRIMARILY IN EQUITY SECURITIES THAT, AT THE TIME
OF PURCHASE, WERE IDENTIFIED BY BSFM AS VALUE COMPANIES.
The LARGE CAP VALUE PORTFOLIO invests, under normal market conditions, sub-
stantially all of its assets in equity securities of issuers with market capi-
talizations of $1 billion or more and identified by BSFM as value companies.
The SMALL CAP VALUE PORTFOLIO invests, under normal market conditions, sub-
stantially all of its assets in equity securities of issuers with market capi-
talizations of $500 million or less and identified by BSFM as value companies.
To determine whether a company's stock falls within the value classification,
BSFM analyzes it based on fundamental factors such as price to book value ra-
tios, price to earnings ratios, earnings growth, dividend payout ratios, re-
turn on equity, and the company's beta (a measure of stock price volatility
relative to the market generally). In general, BSFM believes that companies
with relatively low price to book ratios, low price to earnings ratios or
higher than average dividend payments in relation to price should be classi-
fied as value companies.
For potential investments, BSFM also, among other matters, may review new man-
agement and upcoming corporate restructuring plans, consider the general busi-
ness cycle and the company's position within the specific industry and con-
sider the responsiveness of the company to identified problems in an effort to
assess the likelihood of future appreciation of the company's securities.
BSFM anticipates that at least 85% of the value of each Equity Portfolio's to-
tal assets (except when maintaining a temporary defensive position) will be
invested in equity securities of domestic and foreign issuers. Each Equity
Portfolio expects, under normal market conditions, to invest less than 10% of
its assets in the equity securities of foreign issuers. Equity securities con-
sist of common stocks, convertible securities and preferred stocks. The con-
vertible securities and preferred stocks in which each Equity Portfolio may
invest will be rated at least investment grade by a nationally recognized sta-
tistical rating organization at the time of purchase. Each Equity Portfolio
may invest, in anticipation of investing cash positions, in money market in-
struments consisting of U.S. Government securities, certificates of deposit,
time deposits, bankers' acceptances, short-term investment grade corporate
bonds and other short-term debt instruments, and repurchase agreements, as set
forth in the Appendix. Under normal market conditions, each Equity Portfolio
expects to have less than 15% of its assets invested in money market instru-
ments. However, when BSFM determines that adverse market conditions exist,
each Equity Portfolio may adopt a temporary defensive posture and invest all
of its assets in money market instruments.
BOND PORTFOLIO
THE BOND PORTFOLIO INVESTS PRIMARILY IN BONDS, DEBENTURES AND OTHER DEBT IN-
STRUMENTS.
The BOND PORTFOLIO invests at least 65% of the value of its total assets (ex-
cept when maintaining a temporary defensive position) in bonds (which it de-
fines as bonds, debentures and other fixed income securities). The Bond Port-
folio is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like characteris-
tics (e.g., bearing interest or having stated principal) of domestic and for-
eign issuers. These debt securities include bonds, debentures, notes, money
market instruments (including foreign bank obligations, such as time deposits,
certificates of deposit and bankers' acceptances, commercial paper and other
short-term corporate debt obligations, and repurchase agreements), mortgage-
related securities (including interest-only and principal-only stripped mort-
gage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include domestic and foreign
corporations, partnerships or trusts, and governments or their political sub-
divisions, agencies or instrumentalities. Under normal market conditions, the
Bond Portfolio seeks to provide performance results that equal or exceed the
Salomon Brothers Broad Investment-Grade (BIG) Bond Index, which is a market-
capitalization weighted index that includes U.S. Treasury, Government-spon-
sored, mortgage and investment grade fixed-rate corporate fixed-income securi-
ties with a maturity of one year or longer and a minimum of $50 million amount
outstanding at the time of inclusion in
7
<PAGE>
the index. As of June 30, 1995, the weighted average maturity of securities
comprising the BIG Index was approximately nine years and their effective du-
ration was approximately five years. Under normal market conditions, the Bond
Portfolio invests in a portfolio of securities with a dollar-weighted average
maturity ranging from four to thirteen years and a duration of not less than
75% of the BIG Index and not more than 125% of the BIG Index.
As a measure of a fixed-income security's cash flow, duration is an alterna-
tive to the concept of "term to maturity" in assessing the price volatility
associated with changes in interest rates. Generally, the longer the duration,
the more volatility an investor should expect. For example, the market price
of a bond with a duration of five years would be expected to decline 5% if in-
terest rates rose 1%. Conversely, the market price of the same bond would be
expected to increase 5% if interest rates fell 1%. The market price of a bond
with a duration of ten years would be expected to increase or decline twice as
much as the market price of a bond with a five-year duration. Duration mea-
sures a security's maturity in terms of the average time required to receive
the present value of all interest and principal payments as opposed to its
term to maturity. The maturity of a security measures only the time until fi-
nal payment is due; it does not take account of the pattern of a security's
cash flows over time, which would include how cash flow is affected by prepay-
ments and by changes in interest rates. Incorporating a security's yield, cou-
pon interest payments, final maturity and option features into one measure,
duration is computed by determining the weighted average maturity of a bond's
cash flows, where the present values of the cash flows serve as weights. In
computing the duration of the Bond Portfolio, BSFM will estimate the duration
of obligations that are subject to prepayment or redemption by the issuer,
taking into account the influence of interest rates on prepayments, coupon
flows and other factors which may affect the maturity of the security. This
method of computing duration is known as effective duration.
BSFM anticipates actively managing the Bond Portfolio's assets in response to
change in the business cycle. BSFM seeks to identify and respond to phases in
the business cycle--simplistically, the expansion, topping out, recession and
trough phases--and to invest the Bond Portfolio's assets by shifting among
market sectors, maturities and relative credit quality in a way which it be-
lieves will achieve the Bond Portfolio's objective in a relatively conserva-
tive manner taking into account the volatility and risk associated with in-
vesting in a portfolio of relatively longer-term fixed-income securities.
While the Bond Portfolio seeks, as part of its investment objective, to pre-
serve capital, investors should recognize that the net asset value per share
of the Bond Portfolio should be expected to be more volatile than the net as-
set value per share of a fund that invested in portfolio securities with a
shorter duration.
At least 75% of the value of the Bond Portfolio's net assets must consist of
securities which, in the case of bonds and other debt instruments, are rated
no lower than A by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff &
Phelps, Inc. ("Duff") or, if unrated, deemed to be of comparable quality by
BSFM. Up to 25% of the value of the Bond Portfolio's net assets may consist of
securities which, in the case of bonds and other debt instruments, are rated
no lower than Baa by Moody's and BBB by S&P, Fitch and Duff or, if unrated,
deemed to be of comparable quality by BSFM. The Bond Portfolio may invest in
short-term fixed-income obligations which are rated in the two highest rating
categories by Moody's, S&P, Fitch or Duff. See "Risk Factors--Fixed-Income Se-
curities" below, and "Appendix" in the Statement of Additional Information.
INVESTMENT TECHNIQUES
EACH PORTFOLIO MAY ENGAGE IN OPTIONS AND FUTURES TRANSACTIONS, SHORT SELLING
AND LENDING PORTFOLIO SECURITIES, EACH OF WHICH INVOLVES RISK. EACH EQUITY
PORTFOLIO ALSO MAY ENGAGE IN FOREIGN CURRENCY EXCHANGE TRANSACTIONS, WHICH
ALSO INVOLVE RISK.
Each Portfolio may engage in various investment techniques, such as options
and futures transactions, short selling and lending portfolio securities, each
of which involves risk. Each Equity Portfolio also may engage in foreign cur-
rency exchange transactions, which also involve risk. Options and futures
transactions, as well as investments in certain asset-backed, mortgage-backed
and government securities, involve "derivative securities." Short selling is
discussed below. For a discussion of these other investment techniques and
their related risks, see "Appendix--Investment Techniques" and "Risk Factors"
below.
8
<PAGE>
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. To com-
plete such a transaction, the Portfolio must borrow the security to make de-
livery to the buyer. The Portfolio then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security
was sold by the Portfolio. Until the security is replaced, the Portfolio is
required to pay to the lender amounts equal to any dividend which accrues dur-
ing the period of the loan. To borrow the security, the Portfolio also may be
required to pay a premium, which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short selling by the Bond Portfolio will be used primarily in conjunction with
a long transaction, but not necessarily in the same instrument or an instru-
ment with a similar maturity or interest rate, to effect a hedged position to
take advantage of spreads in the market place.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
cash, cash equivalents or U.S. Government securities, at such a level that (i)
the amount deposited in the account plus the amount deposited with the broker
as collateral will equal the current value of the security sold short and (ii)
the amount deposited in the segregated account plus the amount deposited with
the broker as collateral will not be less than the market value of the secu-
rity at the time it was sold short; or (b) otherwise cover its short position
in accordance with positions taken by the Staff of the Securities and Exchange
Commission.
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest the
Portfolio may be required to pay in connection with a short sale. Each Portfo-
lio may purchase call options to provide a hedge against an increase in the
price of a security sold short by the Portfolio. See "Appendix--Investment
Techniques--Options Transactions."
Each Portfolio anticipates that the frequency of short sales will vary sub-
stantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Portfolio's net assets. No Portfolio may sell
short the securities of any single issuer listed on a national securities ex-
change to the extent of more than 5% of the value of its net assets. No Port-
folio may sell short the securities of any class of an issuer to the extent,
at the time of the transaction, of more than 2% of the outstanding securities
of that class.
In addition to the short sales discussed above, each Portfolio may make short
sales "against the box," a transaction in which the Portfolio enters into a
short sale of a security which the Portfolio owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the
Portfolio delivers the security to close the short position. The Portfolio re-
ceives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the Port-
folio's net assets.
CERTAIN FUNDAMENTAL POLICIES
CERTAIN OF EACH PORTFOLIO'S INVESTMENT POLICIES ARE FUNDAMENTAL POLICIES THAT
CAN BE CHANGED ONLY BY SHAREHOLDER VOTE.
Each Portfolio may (i) borrow money to the extent permitted under the 1940
Act; (ii) invest up to 5% of the value of its total assets in the obligations
of any issuer, except that up to 25% of the value of the Portfolio's total as-
sets may be invested, and securities issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities may be purchased, without regard to
any such limitation; and (iii) invest up to 25% of the value of its total as-
sets in the securities of issuers in a single industry, provided that there is
no such limitation on investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. This paragraph describes
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in
9
<PAGE>
the 1940 Act) of such Portfolio's outstanding voting shares. See "Investment
Objective and Management Policies--Investment Restrictions" in the Statement
of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement
in more than seven days after notice and in other illiquid securities. In ad-
dition, each Equity Portfolio may purchase securities of any company having
less than three years' continuous operation (including operations of any pred-
ecessors) if such purchase does not cause the value of such Equity Portfolio's
investments in all such companies to exceed 5% of the value of its total as-
sets. See "Investment Objective and Management Policies--Investment Restric-
tions" in the Statement of Additional Information.
RISK FACTORS
NO INVESTMENT IS FREE FROM RISK. INVESTING IN A PORTFOLIO WILL SUBJECT INVEST-
ORS TO CERTAIN RISKS WHICH SHOULD BE CONSIDERED.
NET ASSET VALUE FLUCTUATIONS--(ALL PORTFOLIOS)
Each Portfolio's net asset value per share is not fixed and should be expected
to fluctuate. Investors should purchase Portfolio shares only as a supplement
to an overall investment program and only if investors are willing to under-
take the risks involved.
EQUITY SECURITIES--(EQUITY PORTFOLIOS)
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities, and
that fluctuations can be pronounced. The securities of smaller cap companies
may be subject to more abrupt or erratic market movements than larger cap com-
panies, both because the securities typically are traded in lower volume and
because the issuers typically are subject to a greater degree to changes in
earnings and prospects. Changes in the value of the equity securities in an
Equity Portfolio's portfolio will result in changes in the value of the Equity
Portfolio's shares and thus the Equity Portfolio's yield and total return to
investors.
FIXED-INCOME SECURITIES--(BOND PORTFOLIO)
Investors should be aware that even though interest-bearing securities are in-
vestments which promise a stable stream of income, the prices of such securi-
ties typically are inversely affected by changes in interest rates and, there-
fore, are subject to the risk of market price fluctuations. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its cost. Similarly, if interest
rates have declined from the time a security was purchased, such security, if
sold, might be sold at a price greater than its cost. In either instance, if
the security was purchased at face value and held to maturity, no gain or loss
would be realized. Certain securities purchased by the Bond Portfolio, such as
those with interest rates that fluctuate directly or indirectly based on mul-
tiples of a stated index, are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating
of a security purchased by the Bond Portfolio has been adversely changed, the
Bond Portfolio will consider all circumstances deemed relevant in determining
whether to continue to hold the security. Holding such securities that have
been downgraded below investment grade can subject the Bond Portfolio to addi-
tional risk. Certain securities purchased by the Bond Portfolio, such as those
rated Baa by Moody's or BBB by S&P, Fitch or Duff, may be subject to such risk
with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated fixed-income securities. Debt securities
which are rated Baa by Moody's are considered medium grade obligations; they
are neither highly protected nor poorly secured, and are considered by Moody's
to have speculative characteristics. Debt securities rated BBB by S&P are re-
garded as having adequate capacity to pay interest and repay principal, and
while such debt securities ordinarily 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 debt securities
in this category than in higher rated categories. Fitch considers the obli-
gor's ability to pay interest and repay principal on debt securities rated BBB
to be adequate; adverse changes in economic conditions and circumstances, how-
ever, are more likely to have an adverse impact on these debt securities and,
therefore, impair timely payment. Debt securities
10
<PAGE>
rated BBB by Duff are considered to have below average protection factors but
still considered sufficient for prudent investment.
No assurance can be given as to the liquidity of the market for certain mort-
gage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of in-
terest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accor-
dance with guidelines established by the Fund's Board of Trustees. In accor-
dance with such guidelines, BSFM will monitor investments in such securities
with particular regard to trading activity, availability of reliable price in-
formation and other relevant information. The Bond Portfolio intends to treat
other stripped mortgage-backed securities as illiquid securities. See "Appen-
dix--Certain Portfolio Securities--Illiquid Securities."
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. If the Bond Portfolio invests in such
securities it may be required, to maintain its qualification as a regulated
investment company and avoid liability for Federal income taxes, to distribute
the income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements.
CERTAIN INVESTMENT TECHNIQUES--(ALL PORTFOLIOS)
The use of investment techniques such as engaging in options and futures
transactions, engaging in foreign currency exchange transactions, short sell-
ing and lending portfolio securities involves greater risk than that incurred
by many other funds with a similar objective. Using these techniques may pro-
duce higher than normal portfolio turnover and may affect the degree to which
the Portfolio's net asset value fluctuates. Higher portfolio turnover rates
are likely to result in comparatively greater brokerage commissions or trans-
action costs. See "Appendix--Investment Techniques."
Each Portfolio's ability to engage in certain short-term transactions may be
limited by the requirement that, to qualify as a regulated investment company,
it must earn less than 30% of its gross income from the disposition of securi-
ties held for less than three months. This 30% test limits the extent to which
the Portfolio may sell securities held for less than three months, effect
short sales of securities held for less than three months, write options ex-
piring in less than three months and invest in certain futures contracts,
among other strategies. With the exception of the above requirement, the
amount of portfolio activity will not be a limiting factor when making portfo-
lio decisions. Under normal market conditions, the portfolio turnover rate of
each Portfolio generally will not exceed 100%. See "Portfolio Transactions" in
the Portfolios' Statement of Additional Information.
INVESTING IN FOREIGN SECURITIES--(ALL PORTFOLIOS)
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly, vol-
ume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States. The issuers of some of these securities, such as foreign bank
obligations, may be subject to less stringent or different regulations than
are U.S. issuers. In addition, there may be less publicly available informa-
tion about a non-U.S. issuer, and non-U.S. issuers generally are not subject
to uniform accounting and financial reporting standards, practices and re-
quirements comparable to those applicable to U.S. issuers.
Because stock certificates and other evidences of ownership of such securities
usually are held outside the United States, each Portfolio will be subject to
additional risks which include possible adverse political and economic devel-
opments, possible seizure or nationalization of foreign deposits and possible
adoption of governmental restrictions that might adversely affect the payment
of principal, interest and dividends on the foreign securities or might re-
strict the payment of principal, interest and dividends to investors located
outside the country of the issuers, whether from currency blockage or other-
wise. Custodial expenses for a portfolio of non-U.S. securities generally are
higher than for a portfolio of U.S. securities.
Since foreign securities often are purchased with and payable in currencies of
foreign countries, the value of these assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Some currency exchange costs may be incurred when a Port-
folio changes investments from one country to another.
11
<PAGE>
Furthermore, some of these securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by a Portfolio from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries, although applicable tax conventions may reduce or
eliminate such taxes. All such taxes paid by a Portfolio will reduce its net
income available for distribution to investors.
FOREIGN CURRENCY EXCHANGE--(EQUITY PORTFOLIOS)
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign govern-
ments or central banks, or the failure to intervene, or by currency controls
or political developments in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies oc-
curs on an exchange. Since a forward currency contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive an Equity
Portfolio of unrealized profits or force the Equity Portfolio to cover its
commitments for purchase or resale, if any, at the current market price.
FOREIGN COMMODITY TRANSACTIONS--(EQUITY PORTFOLIOS)
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic ex-
changes. See "Appendix--Investment Techniques." For example, some foreign ex-
changes are principal markets so that no common clearing facility exists and a
trader may look only to the broker for performance of the contract. In addi-
tion, unless an Equity Portfolio hedges against fluctuations in the exchange
rate between the U.S. dollar and the currencies in which trading is done on
foreign exchanges, any profits that the Equity Portfolio might realize in
trading could be eliminated by adverse changes in the exchange rate, or the
Equity Portfolio could incur losses as a result of those changes.
SIMULTANEOUS INVESTMENTS--(ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSFM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dis-
pose of, securities of the type in which a Portfolio invests at the same time
as the Portfolio, available investments or opportunities for sales will be al-
located equitably to each. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Portfolio or the
price paid or received by the Portfolio.
Management of the Fund
BOARD OF TRUSTEES
THE TRUSTEES ARE RESPONSIBLE FOR THE OVERALL MANAGEMENT AND SUPERVISION OF
EACH PORTFOLIO'S BUSINESS.
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. The Portfolios' Statement of Additional Information con-
tains the name and general business experience of each Trustee.
INVESTMENT ADVISER
THE PORTFOLIOS' INVESTMENT ADVISER, BSFM, MANAGES EACH PORTFOLIO'S INVEST-
MENTS.
The Portfolios' investment adviser is BSFM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York,
New York 10167. The Bear Stearns Companies Inc. is a holding company which,
through its subsidiaries including its principal subsidiary, Bear Stearns, is
a leading United States investment banking, securities trading and brokerage
firm serving United States and foreign corporations, governments and institu-
tional and individual investors. BSFM is a registered investment adviser and
offers, either directly or through affiliates, investment advisory and admin-
istrative services to open-end and closed-end investment funds and other man-
aged pooled investment vehicles with net assets at June 30, 1995 of over $979
million.
12
<PAGE>
BSFM supervises and assists in the overall management of the Portfolios' af-
fairs under an Investment Advisory Agreement between BSFM and the Fund, sub-
ject to the overall authority of the Fund's Board of Trustees in accordance
with Massachusetts law. Each Equity Portfolio's principal portfolio manager is
Neil T. Eigen. Mr. Eigen joined Bear Stearns Asset Management in 1990 as Di-
rector of Equity Investments-Bear Stearns Asset Management and Senior Managing
Director of Bear Stearns. The Bond Portfolio's principal portfolio manager is
John D. Knox. Mr. Knox joined Bear Stearns Asset Management in 1994 as Direc-
tor of Global Fixed Income Investments-Bear Stearns Asset Management and Man-
aging Director of Bear Stearns. For more than 11 years prior thereto, he was a
Principal and Senior Portfolio Manager at Morgan Stanley Asset Management
where he managed fixed income portfolios for a variety of domestic and inter-
national clients.
EACH EQUITY PORTFOLIO PAYS BSFM AN ADVISORY FEE AT AN ANNUAL RATE EQUAL TO .75
OF 1% OF THE EQUITY PORTFOLIO'S AVERAGE DAILY NET ASSETS AND THE BOND PORTFO-
LIO PAYS BSFM AN ADVISORY FEE AT THE ANNUAL RATE OF .45 OF 1% OF THE BOND
PORTFOLIO'S AVERAGE DAILY NET ASSETS.
Under the terms of the Investment Advisory Agreement, each Equity Portfolio
has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the
Equity Portfolio's average daily net assets and the Bond Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of .45 of 1% of the Bond Portfo-
lio's average daily net assets. The investment advisory fee payable by each
Equity Portfolio is higher than that paid by most other investment companies.
EACH PORTFOLIO'S ADMINISTRATOR IS BSFM. EACH PORTFOLIO PAYS BSFM AN ADMINIS-
TRATION FEE AT THE ANNUAL RATE OF .15 OF 1% OF ITS AVERAGE DAILY NET ASSETS.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with Massachu-
setts law. For providing administrative services to each Portfolio, the Fund
has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of each
Portfolio's average daily net assets. Under the terms of an Administrative
Services Agreement with the Fund, PFPC Inc. provides certain administrative
services to each Portfolio. For providing these services, the Fund has agreed
to pay PFPC Inc. an annual fee, with a minimum of $8,000 per Portfolio payable
monthly, as set forth below:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FEE AS A PERCENTAGE OF
PORTFOLIO'S AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
First $200 million................................ .10 of 1%
Next $200 million up to $400 million ............. .075 of 1%
Next $200 million up to $600 million ............. .05 of 1%
Assets in excess of $600 million ................. .03 of 1%
</TABLE>
From time to time, BSFM may waive receipt of its fees and/or voluntarily as-
sume certain Portfolio expenses, which would have the effect of lowering the
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM
at a later time for any amounts it may waive, nor will a Portfolio reimburse
BSFM for any amounts it may assume.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of Addi-
tional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment Ad-
visory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under each Portfolio's Distribution and Shareholder Servicing Plan
described below.
13
<PAGE>
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is each Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to each Portfolio.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
EACH PORTFOLIO HAS ADOPTED A RULE 12B-1 PLAN.
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Portfolio pays Bear Stearns for distrib-
uting Portfolio shares and for providing personal services to, and/or main-
taining accounts of, Portfolio shareholders a fee as follows of the average
daily net assets of the respective Class:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity Portfolios.............................................. .50% 1.00%
Bond Portfolio................................................. .35% .75%
</TABLE>
Under the Plan, Bear Stearns may pay third parties in respect of these serv-
ices such amount as it may determine. The fees paid to Bear Stearns under the
Plan are payable without regard to actual expenses incurred. The Fund under-
stands that these third parties also may charge fees to their clients who are
beneficial owners of Portfolio shares in connection with their client ac-
counts. These fees would be in addition to any amounts which may be received
by them from Bear Stearns under the Plan.
EXPENSES
All expenses incurred in the operation of the Fund will be borne by the Fund,
except to the extent specifically assumed by BSFM. The expenses to be borne by
the Fund will include: organizational costs, taxes, interest, loan commitment
fees, interest and distributions paid on securities sold short, brokerage fees
and commissions, if any, fees of board members who are not officers, direc-
tors, employees or holders of 5% or more of the outstanding voting securities
of BSFM or its affiliates, Securities and Exchange Commission fees, state Blue
Sky qualification fees, advisory, administrative and fund accounting fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal ex-
penses, costs of maintaining the Fund's existence, costs of independent pric-
ing services, costs attributable to investor services (including, without lim-
itation, telephone and personnel expenses), costs of shareholders' reports and
meetings, costs of preparing and printing certain prospectuses and statements
of additional information, and any extraordinary expenses. Expenses attribut-
able to a particular portfolio are charged against the assets of that portfo-
lio; other expenses of the Fund are allocated among the portfolios on the ba-
sis determined by the Board, including, but not limited to, proportionately in
relation to the net assets of each portfolio. See also "Management of the
Fund--Distribution and Shareholder Servicing Plan."
BSFM has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that, if in any fiscal year, certain expenses, includ-
ing the investment advisory fee and fees under the Plan, exceed 0.80% of the
average daily net assets of the Bond Portfolio--Class A, 1.2% of the average
daily net assets of the Bond Portfolio--Class C, 1.5% of the average daily net
assets of each Equity Portfolio--Class A and 2% of the average daily net as-
sets of each Equity Portfolio--Class C for the fiscal year, BSFM may waive a
portion of its investment advisory fee or bear other expenses to the extent of
the excess expense.
How to Buy Shares
GENERAL
AN INITIAL INVESTMENT IS $1,000, $500 FOR RETIREMENT PLANS; SUBSEQUENT INVEST-
MENTS MUST BE AT LEAST $250, $100 FOR RETIREMENT PLANS; SPECIFY THE CLASS YOU
WISH TO PURCHASE.
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at
14
<PAGE>
least $250 or $100 for retirement plans. Share certificates are issued only
upon written request. No certificates are issued for fractional shares. The
Fund reserves the right to reject any purchase order. The Fund reserves the
right to vary the initial and subsequent investment minimum requirements at
any time. Investments by employees of Bear Stearns and its affiliates are not
subject to minimum investment requirements.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the National Association of Securities Dealers, Inc. who have sales
agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a Portfo-
lio's shares also may be made directly through the Transfer Agent. When pur-
chasing Portfolio shares, investors must specify which Class is being pur-
chased.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the Trans-
fer Agent (the "trade date"). Payment for Portfolio shares generally is due to
Bear Stearns or the Authorized Dealer on the third business day (the "settle-
ment date") after the trade date. Investors who make payment before the set-
tlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment for payment until the settlement date. If
a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made be-
fore the settlement date.
PURCHASES CAN BE MADE THROUGH BEAR STEARNS ACCOUNT EXECUTIVES, AUTHORIZED
DEALERS OR THE TRANSFER AGENT.
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be accept-
ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro-
kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--[Name of
Portfolio]" if purchased directly from the Portfolio, and should be directed
to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--[Name of
Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check
or Federal Reserve draft must be received within three business days of re-
ceipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders
placed directly with the Transfer Agent must be accompanied by payment. Bear
Stearns (or an investor's Authorized Dealer) is responsible for forwarding
payment promptly to the Fund. The Fund will charge $7.50 for each wire redemp-
tion. The payment proceeds of a redemption of shares recently purchased by
check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in a Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with a Portfolio may be established by
completing and signing the Account Information Form indicating which Class of
shares is being purchased, a copy of which is attached to this Prospectus, and
mailing it, together with a check to cover the purchase, to PFPC Inc., Atten-
tion: The Bear Stearns Funds--[Name of Portfolio], P.O. Box 8960, Wilmington,
Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The Portfo-
lio account number should appear on the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange (cur-
rently 4:00 p.m., New York time) on any day the relevant Portfolio calculates
its net asset value are priced according to the net asset value determined on
that date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next deter-
mined.
NET ASSET VALUE IS COMPUTED DAILY AS OF THE CLOSE OF REGULAR TRADING ON THE
NEW YORK STOCK EXCHANGE.
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each Class of each Portfolio
15
<PAGE>
is computed by dividing the value of the Portfolio's net assets represented by
such Class (i.e., the value of its assets less liabilities) by the total num-
ber of shares of such Class outstanding. Each Equity Portfolio's investments
are valued based on market value or, where market quotations are not readily
available, based on fair value as determined in good faith by, or in accor-
dance with procedures established by, the Fund's Board of Trustees. Substan-
tially all of the Bond Portfolio's investments are valued each business day at
fair value as determined by one or more independent pricing services (the
"Service") approved by the Fund's Board of Trustees. Procedures of the Service
are reviewed under the general supervision of the Fund's Board of Trustees.
The remaining assets of the Bond Portfolio are valued using available market
quotations or at fair value as determined in good faith by, or in accordance
with procedures established by, the Fund's Board of Trustees. For further in-
formation regarding the methods employed in valuing each Portfolio's invest-
ments, see "Determination of Net Asset Value" in the Portfolios' Statement of
Additional Information.
Federal regulations require that investors provide a certified Taxpayer Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Reve-
nue Service (the "IRS").
CLASS A SHARES
THE SALES CHARGE MAY VARY DEPENDING ON THE DOLLAR AMOUNT INVESTED IN EACH
PORTFOLIO.
The public offering price for Class A shares of each Equity Portfolio is the
net asset value per share of that Class plus a sales load, which is imposed in
accordance with the following schedule:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.75% 4.99% 4.25%
$50,000 to less than
$100,000..................... 4.25 4.44 3.75
$100,000 to less than
$250,000..................... 3.75 3.90 3.25
$250,000 to less than
$500,000..................... 3.25 3.36 3.00
$500,000 to less than
$750,000..................... 2.75 2.83 2.50
$750,000 to less than
$1,000,000................... 2.25 2.30 2.00
$1,000,000 and above......... 0.00 0.00 0.00
</TABLE>
- ------
*For each Equity Portfolio, until September 22, 1995, or such later date as
Bear Stearns in its discretion may determine, the full amount of the sales
load will be reallowed as a Dealer Concession.
The public offering price for Class A shares of the Bond Portfolio is the net
asset value per share of that Class plus a sales load, which is imposed in ac-
cordance with the following schedule:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 3.75% 3.90% 3.25%
$50,000 to less than
$100,000..................... 3.25 3.36 2.75
$100,000 to less than
$250,000..................... 2.75 2.83 2.25
$250,000 to less than
$500,000..................... 2.25 2.30 2.00
$500,000 to less than
$750,000..................... 2.00 2.04 1.75
$750,000 to less than
$1,000,000................... 1.50 1.52 1.25
$1,000,000 and above......... 0.00 0.00 0.00
</TABLE>
- ------
*Until September 22, 1995, or such later date as Bear Stearns in its
discretion may determine, the full amount of the sales load will be reallowed
as a Dealer Concession.
16
<PAGE>
There is no initial sales charge on purchases of $1,000,000 or more of Class A
shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems those
shares within one year after purchase, a CDSC of 1.00% and .50% for each Eq-
uity Portfolio and the Bond Portfolio, respectively, will be imposed at the
time of redemption. The terms contained in the section of the Fund's Prospec-
tus entitled "How to Redeem Shares--Contingent Deferred Sales Charge--Class C"
are applicable to the Class A shares subject to a CDSC. Letter of Intent and
Right of Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow addi-
tional payments or promotional incentives to dealers that sell Class A shares.
In some instances, these incentives may be offered only to certain dealers who
have sold or may sell significant amounts of Class A shares. Dealers may re-
ceive a larger percentage of the sales load from Bear Stearns than they re-
ceive for selling most other funds.
Until September 22, 1995, or such later date as Bear Stearns in its discretion
may determine, Bear Stearns, at its expense, has agreed to pay Authorized
Dealers a fee in respect of the aggregate of all shares of the Portfolios and
each other investment company sponsored by Bear Stearns sold to their custom-
ers. The fee paid is based on the lesser of the aggregate net asset value of
all shares of the Portfolios and each other investment company sponsored by
Bear Stearns purchased by customers of the Authorized Dealer during such pe-
riod or the aggregate average daily value of such shares owned by customers of
the Authorized Dealer during 1995. For amounts greater than $1 million but
less than $5 million, the fee is .05% of such amount; for amounts greater than
$5 million, the fee is .10% of such amount. Any such amount is expected to be
paid, on a pro rata basis, quarterly.
Class A shares may be sold at net asset value to (a) Bear Stearns, its affili-
ates or their respective officers, directors or employees (including retired
employees), any partnership of which Bear Stearns is a general partner, any
Trustee or officer of the Fund and designated family members of any of the
above individuals; (b) qualified retirement plans of Bear Stearns; (c) any em-
ployee or registered representative of any Authorized Dealer or their respec-
tive spouses and minor children; (d) trustees or directors of investment com-
panies for which Bear Stearns or an affiliate acts as sponsor; (e) any state,
county or city, or any instrumentality, department, authority or agency there-
of, which is prohibited by applicable investment laws from paying a sales load
or commission in connection with the purchase of Portfolio shares; (f) any in-
stitutional investment clients including corporate sponsored pension and prof-
it-sharing plans, other benefit plans and insurance companies; and (g) any
pension funds, state and municipal governments or funds, Taft-Hartley plans
and qualified non-profit organizations, foundations and endowments; (h) trust
institutions (including bank trust departments) investing on their own behalf
or on behalf of their clients; and (i) accounts as to which an Authorized
Dealer charges an asset management fee. To take advantage of these exemptions,
a purchaser must indicate its eligibility for an exemption to Bear Stearns
along with its Account Information Form. Such purchaser agrees to notify Bear
Stearns if, at any time of any additional purchases, it is no longer eligible
for an exemption. Bear Stearns reserves the right to request certification or
additional information from a purchaser in order to verify that such purchaser
is eligible for an exemption. Bear Stearns reserves the right to limit the
participation in Class A shares of each Portfolio of its employees. Dividends
and distributions reinvested in Class A shares of a Portfolio will be made at
the net asset value per share on the reinvestment date.
Class A shares of each Portfolio also may be purchased at net asset value,
with the proceeds from the redemption of shares of an investment company sold
with a sales charge or commission and not distributed by Bear Stearns. Howev-
er, if such investor redeems those shares within one year after purchase, a
CDSC of .50% will be imposed at the time of redemption. This includes shares
of a mutual fund which were subject to a contingent deferred sales charge upon
redemption. The purchase must be made within 60 days of the redemption, and
Bear Stearns must be notified by the investor in writing, or by the investor's
investment professional, at the time the purchase is made. Bear Stearns will
offer to pay Authorized Dealers an amount up to .50% of the net asset value of
shares purchased by the dealers' clients or customers in this manner.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that Class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
17
<PAGE>
RIGHT OF ACCUMULATION--CLASS A SHARES
INVESTORS IN CLASS A SHARES MAY QUALIFY FOR A REDUCED SALES CHARGE.
Pursuant to the Right of Accumulation, certain investors are permitted to pur-
chase Class A shares of any Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) the current pub-
lic offering price of all Class A shares of the Portfolios, shares of the
Fund's other portfolios and shares of certain other funds sponsored or advised
by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns
Investment Trust, then held by the investor. The following purchases of Class
A shares may be aggregated for the purposes of determining the amount of pur-
chase and the corresponding sales load: (a) individual purchases on behalf of
a single purchaser, the purchaser's spouse and their children under the age of
21 years including shares purchased in connection with a retirement account
exclusively for the benefit of such individual(s), such as an IRA, and pur-
chases made by a company controlled by such individual(s); (b) individual pur-
chases by a trustee or other fiduciary account, including an employee benefit
plan (such as employer-sponsored pension, profit-sharing and stock bonus
plans, including plans under Section 401(k) of the Code, and medical, life and
disability insurance trusts); or (c) individual purchases by a trustee or
other fiduciary purchasing shares concurrently for two or more employee bene-
fit plans of a single employer or of employers affiliated with each other.
Subsequent purchases made under the conditions set forth above will be subject
to the minimum subsequent investment of $250 and will be entitled to the Right
of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load appli-
cable to the total number of Class A shares of each Portfolio, Class A shares
of the Fund's other portfolios and shares of certain other funds sponsored or
advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear
Stearns Investment Trust, purchased in a 13-month period pursuant to the terms
and under the conditions set forth herein. A minimum initial purchase of
$1,000 is required. The Transfer Agent will hold in escrow 5% of the amount
indicated in the Account Information Form for payment of a higher sales load
if the investor does not purchase the full amount indicated in the Account In-
formation Form. The escrow will be released when the investor fulfills the
terms of the Letter of Intent by purchasing the specified amount. If an in-
vestor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the total purchase at the end of 13 months. If to-
tal purchases are less than the amount specified, the investor will be re-
quested to remit an amount equal to the difference between the sales load ac-
tually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent,
as attorney-in-fact, will redeem an appropriate number of shares held in es-
crow to realize the difference. Checking a box in the Letter of Intent section
of the Account Information Form does not bind an investor to purchase, or a
Portfolio to sell, the full amount indicated at the sales load in effect at
the time of signing, but the investor must complete the intended purchase to
obtain the reduced sales load. At the time an investor purchases shares of any
of the above-listed funds, the investor must indicate its intention to do so
under the Letter of Intent section of the Account Information Form.
SYSTEMATIC INVESTMENT PLAN
EACH PORTFOLIO OFFERS SHAREHOLDERS CONVENIENT FEATURES AND BENEFITS, INCLUDING
THE SYSTEMATIC INVESTMENT PLAN.
The Systematic Investment Plan permits investors to purchase shares of a Port-
folio (minimum initial investment of $250 and minimum subsequent investments
of $100 per transaction) at regular intervals selected by the investor. Pro-
vided the investor's bank or other financial institution allows automatic
withdrawals, Portfolio shares may be purchased by transferring funds from the
account designated by the investor. At the investor's option, the account des-
ignated will be debited in the specified amount, and Portfolio shares will be
purchased once a month, on the twentieth day. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. Investors desiring to participate in the Systematic Invest-
ment Plan should call the Transfer Agent at 1-800-447-1139 (in Delaware call
collect 302-791-1031) to obtain the appropriate forms. The Systematic Invest-
ment Plan does not assure a profit and does not protect against loss in de-
clining markets. Since the Systematic Investment Plan involves the continuous
invest-
18
<PAGE>
ment in a Portfolio regardless of fluctuating price levels of the Portfolio's
shares, investors should consider their financial ability to continue to pur-
chase through periods of low price levels. The Fund may modify or terminate
the Systematic Investment Plan at any time or charge a service fee. No such
fee currently is contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
THE EXCHANGE PRIVILEGE PERMITS EASY PURCHASES OF OTHER FUNDS IN THE BEAR
STEARNS FAMILY.
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a Class of a Portfolio, shares of the same Class of the Fund's other port-
folios or shares of certain other funds sponsored or advised by Bear Stearns,
including the Emerging Markets Debt Portfolio of Bear Stearns Investment
Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent
such shares are offered for sale in the investor's state of residence. These
funds have different investment objectives which may be of interest to invest-
ors. To use this Privilege, investors should consult their account executive
at Bear Stearns, their account executive at an Authorized Dealer or the Trans-
fer Agent to determine if it is available and whether any conditions are im-
posed on its use.
To use this Privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to ex-
change shares of a Portfolio by phone because share certificates must accom-
pany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect
302-791-1031) to request the exchange. During periods of substantial economic
or market change, telephone exchanges may be difficult to complete and share-
holders may have to submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless other-
wise specified in writing by the shareholder with all signatures guaranteed by
an eligible guarantor institution as described below. To participate in the
Systematic Investment Plan or establish automatic withdrawal for the new ac-
count, however, an exchanging shareholder must file a specific written re-
quest. The exchange privilege may be modified or terminated at any time, or
from time to time, by the Fund on 60 days' notice to the affected portfolio or
fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Fund will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which an account is regis-
tered, the account number, recent transactions in the account, and the account
holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any Au-
thorized Dealer or the Transfer Agent. Except in the case of Personal Retire-
ment Plans, the shares being exchanged must have a current value of at least
$250; furthermore, when establishing a new account by exchange, the shares be-
ing exchanged must have a value of at least the minimum initial investment re-
quired for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or ex-
ceed the applicable minimum for subsequent investments. If any amount remains
in the investment portfolio from which the exchange is being made, such amount
must not be below the minimum account value required by the portfolio or fund.
Shares will be exchanged at the next determined net asset value; however, ex-
cept in the instances described below, a sales load may be charged with re-
spect to exchanges of Class A shares into
19
<PAGE>
portfolios or funds sold with a sales load. Generally, a sales load will be
charged if the shares being exchanged were subject to a sales load which is
lower than the sales load to which the shares being purchased are subject or
were not subject to any sales load. No CDSC will be imposed on Class C shares
at the time of an exchange. The CDSC applicable on redemption of the acquired
Class C shares will be calculated from the date of the initial purchase of the
Class C shares exchanged. If an investor is exchanging Class A shares into a
portfolio or fund that charges a sales load, the investor may qualify for
share prices which do not include the sales load or which reflect a reduced
sales load, if the shares of the portfolio or fund from which the investor is
exchanging were: (a) purchased with a sales load; (b) acquired by a previous
exchange from shares purchased with a sales load; or (c) acquired through re-
investment of dividends or distributions paid with respect to the foregoing
categories of shares. To qualify, at the time of the exchange the investor
must notify Bear Stearns, the Authorized Dealer or the Transfer Agent. Any
such qualification is subject to confirmation of the investor's holdings
through a check of appropriate records. No fees currently are charged share-
holders directly in connection with exchanges, although the Fund reserves the
right, upon not less than 60 days' written notice, to charge shareholders a
$5.00 fee in accordance with rules promulgated by the Securities and Exchange
Commission. The Fund reserves the right to reject any exchange request in
whole or in part. The Exchange Privilege may be modified or terminated at any
time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for Federal income tax purposes as a sale of the shares given in ex-
change by the shareholder and, therefore, an exchanging shareholder may real-
ize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
THE REDIRECTED DISTRIBUTION OPTION PERMITS INVESTMENT OF INVESTORS' DIVIDENDS
AND DISTRIBUTIONS IN SHARES OF OTHER FUNDS IN THE BEAR STEARNS FAMILY.
The Redirected Distribution Option enables a shareholder to invest automati-
cally dividends and/or capital gain distributions, if any, paid by a Portfolio
in shares of the same Class of another portfolio of the Fund or a fund advised
or sponsored by Bear Stearns of which the shareholder is an investor, or the
Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or
fund will be purchased at the then-current net asset value. If an investor is
investing in a Class that charges a CDSC, the shares purchased will be subject
on redemption to the CDSC, if any, applicable to the purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
THE REDEMPTION PRICE WILL BE BASED ON THE NET ASSET VALUE NEXT COMPUTED AFTER
RECEIPT OF A REDEMPTION REQUEST; IN CERTAIN INSTANCES A CDSC WILL BE CHARGED.
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one Class, any re-
quest for redemption must specify the Class of shares being redeemed. If the
investor fails to specify the Class of shares to be redeemed or if the in-
vestor owns fewer shares of the Class than specified to be redeemed, the re-
demption request may be delayed until the Transfer Agent receives further in-
structions from the investor, the investor's Bear Stearns account executive or
the investor's Authorized Dealer. The Fund imposes no charges (other than any
applicable CDSC) when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within
seven days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be
20
<PAGE>
transmitted until the check used for investment has cleared, which may take up
to 15 days. The Fund will reject requests to redeem shares by telephone or
wire for a period of 15 days after receipt by the Transfer Agent of the pur-
chase check against which such redemption is requested. This procedure does
not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days' written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the no-
tice period. Shareholders who have redeemed Class A shares may reinstate their
Portfolio account without a sales charge up to the dollar amount redeemed by
purchasing Class A shares of the same Portfolio within 60 days of the redemp-
tion. To take advantage of this reinstatement privilege, shareholders must no-
tify their Bear Stearns account executive, Authorized Dealer or the Transfer
Agent at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
CLASS C SHARES OF EACH PORTFOLIO ARE SUBJECT TO A CDSC OF 1% UPON REDEMPTION
WITHIN ONE YEAR OF PURCHASE.
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvest-
ment of dividends or capital gain distributions, plus (ii) increases in the
net asset value of an investor's Class C shares above the dollar amount of all
such investor's payments for the purchase of Class C shares held by the in-
vestor at the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares ac-
quired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of an Equity Portfolio at
$10 per share for a cost of $1,000. Subsequently, the shareholder acquired
five additional shares through dividend reinvestment. During the first year
after the purchase the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 1% for a total CDSC of $2.40.
The CDSC applicable to Class C shares will be waived in connection with (a)
redemptions made within one year after the death or disability, as defined in
Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the
"Code"), of the shareholder, (b) redemptions by employees participating in El-
igible Benefit Plans, (c) redemptions as a result of a combination of any in-
vestment company with a Portfolio by merger, acquisition of assets or other-
wise, and (d) a distribution following retirement under a tax-deferred retire-
ment plan or upon attaining age 70 1/2 in the case of an IRA or Keogh plan or
custodial account pursuant to Section 403(b) of the Code. If the Fund's Trust-
ees determine to discontinue the waiver of the CDSC, the disclosure in the
Portfolios' prospectus will be revised appropriately. Any Portfolio shares
subject to a CDSC which were purchased prior to the termination of such waiver
will have the CDSC waived as provided in the Portfolio's prospectus at the
time of the purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account execu-
tive or the investor's Authorized Dealer must notify the Distributor. Any such
qualification is subject to confirmation of the investor's entitlement.
21
<PAGE>
PROCEDURES
SHAREHOLDERS MAY REDEEM SHARES IN SEVERAL WAYS.
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their ac-
count executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a re-
demption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within seven
days, redemption proceeds will be paid by check or credited to the sharehold-
er's brokerage account at the election of the shareholder. Bear Stearns ac-
count executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably be-
lieved by the Transfer Agent to be genuine. The Fund will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor
the Transfer Agent will be liable for following telephone instructions reason-
ably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail re-
demption requests should be sent to the Transfer Agent at: PFPC Inc., Atten-
tion: The Bear Stearns Funds--[Name of Portfolio], P.O. Box 8960, Wilmington,
Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the share-
holder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Autho-
rized Dealer, or to the Transfer Agent if the shares are not held in a broker-
age account.
Written redemption instructions, indicating the Portfolio from which shares
are to be redeemed, and duly endorsed stock certificates, if previously is-
sued, must be received by the Transfer Agent in proper form and signed exactly
as the shares are registered. All signatures must be guaranteed. The Transfer
Agent has adopted standards and procedures pursuant to which signature-guaran-
tees in proper form generally will be accepted from domestic banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations, as well as from par-
ticipants in the New York Stock Exchange Medallion Signature Program, the
Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion
Program ("STAMP"). Such guarantees must be signed by an authorized signatory
thereof with "Signature Guaranteed" appearing with the shareholder's signa-
ture. If the signature is guaranteed by a broker or dealer, such broker or
dealer must be a member of a clearing corporation and maintain net capital of
at least $100,000. Signature-guarantees may not be provided by notaries pub-
lic. Redemption requests by corporate and fiduciary shareholders must be ac-
companied by appropriate documentation establishing the authority of the per-
son seeking to act on behalf of the account. Investors may obtain from the
Fund or the Transfer Agent forms of resolutions and other documentation which
have been prepared in advance to assist compliance with the Portfolio's proce-
dures. Any questions with respect to signature-guarantees should be directed
to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-
791-1031).
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting Bear Stearns or Authorized Dealers by telephone
to request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being proc-
essed at a later time than it would have been if telephone redemption had been
used. During the delay, each Portfolio's net asset value may fluctuate.
22
<PAGE>
AUTOMATIC WITHDRAWAL
Automatic withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for automatic withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through Au-
tomatic Withdrawal. Purchases of additional shares concurrently with withdraw-
als generally are undesirable.
Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject
to any applicable CDSC. Purchases of additional Class A shares where the sales
load is imposed concurrently with withdrawals of Class A shares generally are
undesirable.
Dividends, Distributions and Taxes
DIVIDENDS WILL BE AUTOMATICALLY REINVESTED IN ADDITIONAL PORTFOLIO SHARES AT
NET ASSET VALUE, UNLESS PAYMENT IN CASH IS REQUESTED OR DIVIDENDS ARE REDI-
RECTED INTO ANOTHER FUND PURSUANT TO THE REDIRECTED DISTRIBUTION OPTION.
The Bond Portfolio declares dividends from net investment income on each day
the New York Stock Exchange is open for business. These dividends usually are
paid on or about the twentieth day of each month. The earnings for Saturdays,
Sundays and holidays are declared as dividends on the preceding business day.
Shares begin accruing income dividends on the day the purchase order is effec-
tive. If all shares in an account are redeemed at any time, all dividends to
which the shareholder is entitled will be paid along with the proceeds of the
redemption.
Each Equity Portfolio ordinarily pays dividends from its net investment income
at least once a year.
Each Portfolio distributes net realized securities gains, if any, once a year,
but it may make distributions on a more frequent basis to comply with the dis-
tribution requirements of the Code, in all events in a manner consistent with
the provisions of the 1940 Act. No Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. Dividends are automatically reinvested in additional
Portfolio shares at net asset value, unless payment in cash is requested or
dividends are redirected into another fund pursuant to the Redirected Distri-
bution Option. All expenses are accrued daily and deducted before declaration
of dividends to investors. Dividends paid by each Class of each Portfolio will
be calculated at the same time and in the same manner and will be of the same
amount, except that the expenses attributable solely to a particular Class of
a Portfolio will be borne exclusively by such Class. Class C shares will re-
ceive lower per share dividends than Class A shares because of the higher ex-
penses borne by Class C. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains re-
alized from the sale or disposition of certain market discount bonds, paid by
a Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of the Portfolio or redi-
rected into another portfolio or fund. Distributions from net realized long-
term securities gains of a Portfolio will be taxable to U.S. shareholders as
long-term capital gains for Federal income tax purposes, regardless of how
long shareholders have held their Portfolio's shares and whether such distri-
butions are received in cash or reinvested in, or redirected into other,
shares. The Code provides that the net capital gain of an individual generally
will not be subject to Federal income tax at a rate in excess of 28%. Divi-
dends and distributions may be subject to state and local taxes.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of certain market discount bonds, paid by a Portfolio to a foreign in-
vestor generally are subject to U.S. nonresident withholding taxes at the rate
of 30%, unless the foreign investor claims the benefit of a lower rate speci-
fied in a tax treaty. Distributions from net realized long-term securities
gains paid by a Portfolio to a foreign investor as well as the proceeds of any
redemptions from a foreign investor's account, regardless of the extent to
which gain or loss may be realized, generally will not be subject to U.S. non-
resident withholding tax. However, such distributions may be subject to backup
withholding, as described below, unless the foreign investor certifies his
non-U.S. residency status.
23
<PAGE>
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and distribu-
tions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSFM or its affil-
iates within 91 days of purchase and such other fund reduces or eliminates its
otherwise applicable sales load for the purpose of the exchange. In this case,
the amount of the sales load charged the investor for such shares, up to the
amount of the reduction of the sales load charge on the exchange, is not in-
cluded in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
Federal regulations generally require the Fund to withhold ("backup withhold-
ing") and remit to the U.S. Treasury 31% of dividends, distributions from net
realized securities gains and the proceeds of any redemption, regardless of
the extent to which gain or loss may be realized, paid to a shareholder if
such shareholder fails to certify either that the TIN furnished in connection
with opening an account is correct or that such shareholder has not received
notice from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a Federal
income tax return. Furthermore, the IRS may notify the Fund to institute
backup withholding if the IRS determines a shareholder's TIN is incorrect or
if a shareholder has failed to properly report taxable dividend and interest
income on a Federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's Federal
income tax return.
NO PORTFOLIO IS EXPECTED TO HAVE ANY FEDERAL TAX LIABILITY; ALTHOUGH INVESTORS
SHOULD EXPECT TO BE SUBJECT TO FEDERAL, STATE OR LOCAL TAXES IN RESPECT OF
THEIR INVESTMENT IN PORTFOLIO SHARES.
It is expected that each Portfolio will qualify as a "regulated investment
company" under the Code so long as such qualification is in the best interests
of its shareholders. Such qualification relieves a Portfolio of any liability
for Federal income tax to the extent its earnings are distributed in accor-
dance with applicable provisions of the Code. In addition, each Portfolio is
subject to a non-deductible 4% excise tax, measured with respect to certain
undistributed amounts of taxable investment income and capital gains.
Each investor should consult its tax adviser regarding specific questions as
to Federal, state or local taxes.
Performance Information
EACH PORTFOLIO MAY ADVERTISE ITS PERFORMANCE IN A NUMBER OF WAYS.
For purposes of advertising, performance for each Class of each Portfolio may
be calculated on the basis of average annual total return and/or total return.
These total return figures reflect changes in the price of the shares and as-
sume that any income dividends and/or capital gains distributions made by a
Portfolio during the measuring period were reinvested in shares of the same
Class. These figures also take into account any applicable distribution and
shareholder servicing fees. As a result, at any given time, the performance of
Class C should be expected to be lower than that of Class A. Performance for
each Class will be calculated separately.
Performance of the Bond Portfolio also may be advertised on the basis of cur-
rent yield. Current yield refers to the Bond Portfolio's annualized net in-
vestment income per share over a 30-day period, expressed as a percentage of
the net asset value per share at the end of the period. For purposes of calcu-
lating current yield, the amount of net investment income per share during
that 30-day period, computed in accordance with regulatory requirements, is
compounded by assuming that it is reinvested at a constant rate over a six-
month period. An identical result is then assumed to have occurred during a
second six-month period which, when added to the result for the first six
months, provides an "annualized" yield for an entire one-year period.
24
<PAGE>
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an ini-
tial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable value of the investment at the end of the period. Advertisements of
each Portfolio's performance will include such Portfolio's average annual to-
tal return for one, five and ten year periods, or for shorter periods depend-
ing upon the length of time during which the Portfolio has operated. Computa-
tions of average annual total return for periods of less than one year repre-
sent an annualization of such Portfolio's actual total return for the applica-
ble period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percent-
age rate which is calculated by combining the income and principal changes for
a specified period and dividing by the net asset value (or maximum public of-
fering price in the case of Class A shares) per share at the beginning of the
period. Class C total return will reflect the deduction of the CDSC. Adver-
tisements may include the percentage rate of total return or may include the
value of a hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return. Total return for each
Portfolio also may be calculated by using 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 ap-
plicable CDSC at the end of the period for Class C shares. Calculations based
on the net asset value per share do not reflect the deduction of the sales
load on the Portfolio's Class A shares, which, if reflected, would reduce the
performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance infor-
mation, such as that described above, may not provide a basis for comparison
with other investments or other investment companies using a different method
of calculating performance.
Comparative performance information may be used from time to time in advertis-
ing or marketing each Equity Portfolio's shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index,
Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial
Average and other industry publications. Performance information that may be
used in advertising or marketing the Bond Portfolio's shares can include data
from Lipper Analytical Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond
Index, Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index,
Salomon Brothers Broad Investment-Grade Index and components thereof, Mutual
Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and other industry
publications.
General Information
The Fund was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust (the "Trust Agreement") dated September 29, 1994, and commenced opera-
tions on or about April 3, 1995. The Fund is authorized to issue an unlimited
number of shares of beneficial interest, par value $.001 per share. Each Port-
folio's shares are classified into three Classes--Class A, Class C and Class
Y. Each share has one vote and shareholders will vote in the aggregate and not
by Class, except as otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Fund or a Trustee. The Trust Agreement provides for indem-
nification from the respective Portfolio's property for all losses and ex-
penses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each
25
<PAGE>
Portfolio in a way so as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Portfolio. As discussed under "Manage-
ment of the Fund" in the Portfolios' Statement of Additional Information, each
Portfolio ordinarily will not hold shareholder meetings; however, shareholders
under certain circumstances may have the right to call a meeting of sharehold-
ers for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Fund
has the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submit-
ted under the provisions of the 1940 Act or applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company,
such as the Fund, will not be deemed to have been effectively acted upon un-
less approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfo-
lio shall be deemed to be affected by a matter unless it is clear that the in-
terests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the se-
lection of independent accountants and the election of Trustees from the sepa-
rate voting requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960, by
calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling
Bear Stearns at 1-800-766-4111.
26
<PAGE>
Appendix
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, each Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options and futures transactions involve "derivative securi-
ties."
OPTIONS TRANSACTIONS--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY ENGAGE IN OPTIONS TRANSACTIONS.
Each Portfolio is permitted to invest up to 5% of its assets, represented by
the premium paid, in the purchase of call and put options in respect of spe-
cific securities (or groups or "baskets" of specific securities) in which the
Portfolio may invest. Each Portfolio may write and sell covered call option
contracts on securities owned by the Portfolio not exceeding 20% of the value
of its net assets at the time such option contracts are written. Each Portfo-
lio also may purchase call options to enter into closing purchase transac-
tions. Each Portfolio also may write covered put option contracts to the ex-
tent of 20% of the value of its net assets at the time such option contracts
are written. A call option gives the purchaser of the option the right to buy,
and obligates the writer to sell, the underlying security at the exercise
price at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy,
the underlying security at the exercise price at any time during the option
period. A covered put option sold by a Portfolio exposes the Portfolio during
the term of the option to a decline in price of the underlying security or se-
curities. A put option sold by the Portfolio is covered when, among other
things, cash or liquid securities are placed in a segregated account with the
Fund's custodian to fulfill the obligation undertaken.
Each Equity Portfolio also may purchase and sell call and put options on for-
eign currency for the purpose of hedging against changes in future currency
exchange rates. Call options convey the right to buy the underlying currency
at a price which is expected to be lower than the spot price of the currency
at the time the option expires. Put options convey the right to sell the un-
derlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires.
Each Equity Portfolio may purchase and sell call and put options on stock in-
dexes listed on U.S. 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. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether an Equity Portfolio will realize a gain or loss from the pur-
chase or writing of options on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case of certain indexes,
in an industry or market segment, rather than movements in the price of a par-
ticular stock.
Successful use by each Equity Portfolio of options will be subject to BSFM's
ability to predict correctly movements in the direction of individual stocks,
the stock market generally, foreign currencies or interest rates. The Bond
Portfolio's successful use of options will be subject to BSFM's ability to
predict correctly movements in interest rates. To the extent BSFM's predic-
tions are incorrect, a Portfolio may incur losses which could adversely affect
the value of a shareholder's investment.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY ENGAGE IN FUTURES TRANSACTIONS.
Each Portfolio may enter into interest rate futures contracts and options with
respect thereto. Each Equity Portfolio also may enter into stock index futures
contracts and currency futures contracts, and options with respect thereto, in
U.S. domestic markets or on exchanges located outside the United States. See
"--Options Transactions" above. These transactions will be entered into as a
substitute for comparable market positions in the underlying securities or for
hedging purposes. Although no Portfolio would be a commodity pool, it would be
subject to rules of the CFTC limiting the extent to which it could engage in
these transactions.
Each Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
CFTC. In addition, a Portfolio may not
A-1
<PAGE>
engage in such transactions if the sum of the amount of initial margin depos-
its and premiums paid for unexpired commodity options, other than for bona
fide hedging transactions, would exceed 5% of the liquidation value of the
Portfolio's assets, after taking into account unrealized profits and
unrealized losses on such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in calculating the 5%. To the extent a
Portfolio engages in the use of futures and options on futures for other than
bona fide hedging purposes, the Portfolio may be subject to additional risk.
Engaging in these transactions involves risk of loss to a Portfolio which
could adversely affect the value of a shareholder's investment. 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 mar-
ket will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation permit-
ted 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 pe-
riods during the trading day. Futures contract prices could move to the limit
for several consecutive trading days with little or no trading, thereby pre-
venting prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. In addition, an Equity Portfolio engaging in
futures transactions in foreign markets may involve greater risks than trading
on domestic exchanges.
Successful use of futures by an Equity Portfolio or the Bond Portfolio also is
subject to BSFM's ability to predict correctly movements in the direction of
the market or foreign currencies, or interest rates, respectively, and, to the
extent the transaction is entered into for hedging purposes, to ascertain the
appropriate correlation between the transaction being hedged and the price
movements of the futures contract. For example, if a Portfolio has hedged
against the possibility of a decline in the market adversely affecting the
value of securities held in its portfolio and prices increase instead, the
Portfolio will lose part or all of the benefit of the increased value of secu-
rities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has in-
sufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. The Portfolio may have to
sell securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and Ex-
change Commission, each Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transac-
tions in an amount generally equal to the value of the underlying commodity.
The segregation of such assets will have the effect of limiting the Portfo-
lio's ability otherwise to invest those assets.
FORWARD COMMITMENTS--(BOND PORTFOLIO)
THE BOND PORTFOLIO MAY PURCHASE WHEN-ISSUED SECURITIES AND ENTER INTO FORWARD
COMMITMENT TRANSACTIONS.
The Bond Portfolio may purchase securities on a when-issued or forward commit-
ment basis, which means that the price is fixed at the time of commitment, but
delivery and payment ordinarily take place a number of days after the date of
the commitment to purchase. The Bond Portfolio will make commitments to pur-
chase such securities only with the intention of actually acquiring the secu-
rities, but the Bond Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Bond Portfolio will not accrue income in
respect of a security purchased on a forward commitment basis prior to its
stated delivery date.
Securities purchased on a when-issued or forward commitment basis and certain
other securities held by the Bond Portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest
rates decline and depreciating when interest rates rise) based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a when-
issued or forward commitment basis may expose the Bond Portfolio to risk be-
cause they may experience such fluctuations prior to their actual delivery.
Purchasing securities on a when-issued or forward commitment basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction it-
self. A segregated account of the Bond Portfolio consisting of cash, cash
equivalents or U.S. Government securities or other high quality liquid debt
securities of the type in which the Bond Portfolio invests at least equal at
all times to the amount of the
A-2
<PAGE>
when-issued or forward commitments will be established and maintained at the
Fund's custodian bank. Purchasing securities on a forward commitment basis
when the Bond Portfolio is fully or almost fully invested may result in
greater potential fluctuation in the value of the Bond Portfolio's net assets
and its net asset value per share.
FUTURE DEVELOPMENTS--(ALL PORTFOLIOS)
Each Portfolio may take advantage of opportunities in the area of options and
futures contracts, options on futures contracts and any other derivative in-
vestments which are not presently contemplated for use by a Portfolio or which
are not currently available but which may be developed, to the extent such op-
portunities are both consistent with a Portfolio's investment objective and
legally permissible for such Portfolio. Before entering into such transactions
or making any such investment, the Portfolio will provide appropriate disclo-
sure in its prospectus.
LENDING PORTFOLIO SECURITIES--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY EARN ADDITIONAL INCOME BY LENDING ITS PORTFOLIO SECURITIES.
From time to time, each Portfolio may lend securities from its portfolio to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. Such loans may not exceed 33 1/3% of the
value of a Portfolio's total assets. In connection with such loans, a Portfo-
lio will receive collateral consisting of cash, U.S. Government securities or
irrevocable letters of credit which will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned secu-
rities. Each Portfolio can increase its income through the investment of such
collateral. A Portfolio continues to be entitled to payments in amounts equal
to the interest, dividends and other distributions payable on the loaned secu-
rity and receives interest on the amount of the loan. Such loans will be ter-
minable at any time upon specified notice. A Portfolio might experience risk
of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with such Portfolio.
BORROWING MONEY--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY BORROW MONEY.
As a fundamental policy, each Portfolio is permitted to borrow 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.
However, each Portfolio currently intends to borrow money only for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of a Portfolio's total as-
sets, such Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS--(EQUITY PORTFOLIOS)
EACH EQUITY PORTFOLIO MAY INVEST IN SECURITIES OF FOREIGN ISSUERS IN THE FORM
OF AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS.
Each Equity Portfolio's assets may be invested in the securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") and European De-
positary Receipts ("EDRs"). These securities may not necessarily be denomi-
nated in the same currency as the securities into which they may be converted.
ADRs are receipts typically issued by a United States bank or trust company
which evidence ownership of underlying securities issued by a foreign corpora-
tion. EDRs, which are sometimes referred to as Continental Depositary Receipts
("CDRs"), are receipts issued in Europe typically by non-United States banks
and trust companies that evidence ownership of either foreign or domestic se-
curities. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and CDRs
through "sponsored" or "unsponsored" facilities. A sponsored facility is es-
tablished jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without participa-
tion by the issuer of the deposited security. Holders of unsponsored deposi-
tary receipts generally bear all the costs of such facilities and the deposi-
tary of an unsponsored facility frequently is under no obligation to distrib-
ute shareholder communications received from the issuer of the deposited secu-
rity or to pass through voting rights to the holders of such receipts in re-
spect of the deposited securities.
A-3
<PAGE>
MORTGAGE-RELATED SECURITIES--(BOND PORTFOLIO)
THE BOND PORTFOLIO MAY INVEST IN MORTGAGE-RELATED SECURITIES WHICH ARE COLLAT-
ERALIZED BY POOLS OF MORTGAGE LOANS.
Mortgage-related securities are securities collateralized by pools of mortgage
loans assembled for sale to investors by various governmental agencies, such
as the Government National Mortgage Association and government-related organi-
zations such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, as well as by private issuers such as commercial
banks, savings and loan institutions, mortgage banks and private mortgage in-
surance companies, and similar foreign entities. The mortgage-related securi-
ties in which the Bond Portfolio may invest include those with fixed, floating
and variable interest rates, those with interest rates that change based on
multiples of changes in interest rates and those with interest rates that
change inversely to changes in interest rates, as well as stripped mortgage-
backed securities which are derivative multiclass mortgage securities.
Stripped mortgage-backed securities usually are structured with two classes
that receive different proportions of interest and principal distributions on
a pool of mortgage-backed securities or whole loans. A common type of stripped
mortgage-backed security will have one class receiving some of the interest
and most of the principal from the mortgage collateral, while the other class
will receive most of the interest and the remainder of the principal. In the
most extreme case, one class will receive all of the interest (the interest-
only or "IO" class), while the other class will receive all of the principal
(the principal-only or "PO" class). Although certain mortgage-related securi-
ties are guaranteed by a third party or otherwise similarly secured, the mar-
ket value of the security, which may fluctuate, is not so secured. If the Bond
Portfolio purchases a mortgage-related security at a premium, all or part of
the premium may be lost if there is a decline in the market value of the secu-
rity, whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of certain of these securities are inversely affected by changes in in-
terest rates. However, though the value of a mortgage-related security may de-
cline when interest rates rise, the converse is not necessarily true, since in
periods of declining interest rates the mortgages underlying the security are
more likely to prepay. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages, and, therefore, it is not possible to predict accurately
the security's return to the Bond Portfolio. Moreover, with respect to
stripped mortgage-backed securities, if the underlying mortgage securities ex-
perience greater than anticipated prepayments of principal, the Bond Portfolio
may fail to fully recoup its initial investment in these securities even if
the securities are rated in the highest rating category by a nationally recog-
nized statistical rating organization. In addition, regular payments received
in respect of mortgage-related securities include both interest and principal.
No assurance can be given as to the return the Bond Portfolio will receive
when these amounts are reinvested. For further discussion concerning the in-
vestment considerations involved, see "Description of the Fund--Risk Factors--
Fixed-Income Securities" above and "Illiquid Securities" below and "Investment
Objective and Management Policies--Portfolio Securities--Mortgage-Related Se-
curities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES--(BOND PORTFOLIO)
THE BOND PORTFOLIO MAY INVEST IN ASSET-BACKED SECURITIES.
The Bond Portfolio may invest in asset-backed securities. The securitization
techniques used for asset-backed securities are similar to those used for
mortgage-related securities. These securities include debt securities and se-
curities with debt-like characteristics. The collateral for these securities
has included home equity loans, automobile and credit card receivables, boat
loans, computer leases, airplane leases, mobile home loans, recreational vehi-
cle loans and hospital account receivables.
Asset-backed securities present certain risks that are not presented by mort-
gage-backed securities. Primarily, these securities do not have the benefit of
the same security interest in the related collateral. Credit card receivables
generally are unsecured and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain pos-
session of the underlying obligations. If the servicer were to sell these ob-
ligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed secu-
rities. In addition, because of the large number of vehicles
A-4
<PAGE>
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support pay-
ments on these securities.
CONVERTIBLE SECURITIES--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY INVEST IN CONVERTIBLE SECURITIES.
Each Portfolio may purchase convertible securities, which are fixed-income se-
curities, such as bonds or preferred stock, which may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock of the same or a different issuer. Convertible securities are se-
nior to common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a fixed-in-
come stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a non-convertible debt security), a con-
vertible security also affords an investor the opportunity, through its con-
version feature, to participate in the capital appreciation of the common
stock into which it is convertible.
The Bond Portfolio also may invest in debt securities with warrants attached
or in units with warrants. A warrant is an instrument issued by a corporation
which gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of time.
In connection with its purchases of convertible securities (which include debt
securities with warrants), the Bond Portfolio from time to time may hold com-
mon stock received upon the conversion of the security or the exercise of the
warrant. The Bond Portfolio does not intend to retain the common stock in its
portfolio and will sell it as promptly as it can and in a manner which it be-
lieves will reduce the risk to the Bond Portfolio of loss in connection with
the sale.
In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income security) or its "con-
version value" (i.e., the value of the underlying shares of common stock if
the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and gen-
erally decreases when interest rates rise. However, the price of a convertible
security also is influenced by the market value of the security's underlying
common stock. Thus, the price of a convertible security generally increases as
the market value of the underlying stock increases, and generally decreases as
the market value of the underlying stock declines. Investments in convertible
securities generally entail less risk than investments in the common stock of
the same issuer.
MUNICIPAL OBLIGATIONS--(BOND PORTFOLIO)
THE BOND PORTFOLIO MAY INVEST IN MUNICIPAL OBLIGATIONS.
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their polit-
ical subdivisions, agencies and instrumentalities, or multistate agencies or
authorities. While in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and in some cases greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Dividends received by shareholders which are attributable to in-
terest income received by it from municipal obligations generally will be sub-
ject to Federal income tax. Municipal obligations bear fixed, floating or
variable rates of interest, which are determined in some instances by formulas
under which the municipal obligation's interest rate will change directly or
inversely to changes in interest rates or an index, or multiples thereof, in
many cases subject to a maximum and minimum. The Bond Portfolio currently in-
tends to invest no more than 25% of its assets in municipal obligations. How-
ever, this percentage may be varied from time to time without shareholder ap-
proval.
A-5
<PAGE>
ZERO COUPON AND STRIPPED SECURITIES--(BOND PORTFOLIO)
THE BOND PORTFOLIO MAY INVEST IN ZERO COUPON U.S. TREASURY SECURITIES, WHICH
ARE TREASURY NOTES AND BONDS THAT HAVE BEEN STRIPPED OF THEIR UNMATURED INTER-
EST COUPONS.
The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which
are Treasury Notes and Bonds that have been stripped of their unmatured inter-
est coupons, the coupons themselves and receipts or certificates representing
interests in such stripped debt obligations and coupons. The Bond Portfolio
also may invest in zero coupon securities issued by corporations and financial
institutions which constitute a proportionate ownership of the issuer's pool
of underlying U.S. Treasury securities. A zero coupon security pays no inter-
est to its holder during its life and is sold at a discount to its face value
at maturity. The amount of the discount fluctuates with the market price of
the security. The market prices of zero coupon securities generally are more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to a greater degree to changes in interest rates
than non-zero coupon securities having similar maturities and credit quali-
ties.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES--(BOND
PORTFOLIO)
THE BOND PORTFOLIO MAY INVEST IN OBLIGATIONS ISSUED OR GUARANTEED BY ONE OR
MORE FOREIGN GOVERNMENTS.
The Bond Portfolio may invest in U.S. dollar denominated obligations issued or
guaranteed by one or more foreign governments or any of their political subdi-
visions, agencies or instrumentalities that are determined by BSFM to be of
comparable quality to the other obligations in which the Bond Portfolio may
invest. Such securities also include debt obligations of supranational enti-
ties. Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or de-
velopment and international banking institutions and related government agen-
cies. Examples include the International Bank for Reconstruction and Develop-
ment (the World Bank), the European Coal and Steel Community, the Asian Devel-
opment Bank and the InterAmerican Development Bank. The percentage of the Bond
Portfolio's assets invested in securities issued by foreign governments will
vary depending on the relative yields of such securities, the economic and fi-
nancial markets of the countries in which the investments are made and the in-
terest rate climate of such countries.
MONEY MARKET INSTRUMENTS
EACH PORTFOLIO MAY INVEST IN A VARIETY OF MONEY MARKET INSTRUMENTS.
Each Portfolio may invest, in the circumstances described under "Description
of the Fund--Management Policies," in the following types of money market in-
struments, each of which at the time of purchase must have or be deemed to
have under rules of the Securities and Exchange Commission remaining maturi-
ties of 13 months or less.
U.S. TREASURY SECURITIES--(ALL PORTFOLIOS)
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes
have initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES--(ALL PORTFOLIOS)
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage As-
sociation pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan Mar-
keting Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Principal and
interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
A-6
<PAGE>
BANK OBLIGATIONS--(ALL PORTFOLIOS)
Each Portfolio may invest in bank obligations, including certificates of de-
posit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign subsidi-
aries of domestic banks, and domestic and foreign branches of foreign banks, a
Portfolio may be subject to additional investment risks that are different in
some respects from those incurred by a fund which invests only in debt obliga-
tions of U.S. domestic issuers. Such risks include possible future political
and economic developments, the possible imposition of foreign withholding
taxes on interest income payable on the securities, the possible establishment
of exchange controls or the adoption of other foreign governmental restric-
tions which might adversely affect the payment of principal and interest on
these securities and the possible seizure or nationalization of foreign depos-
its.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15%
of the value of its net assets in time deposits maturing in more than seven
days and in other securities that are illiquid.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
REPURCHASE AGREEMENTS--(ALL PORTFOLIOS)
Repurchase agreements involve the acquisition by a Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and
such Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. Certain costs may be incurred by a Portfolio
in connection with the sale of the securities if the seller does not repur-
chase them in accordance with the repurchase agreement. In addition, if bank-
ruptcy proceedings are commenced with respect to the seller of the securities,
realization on the securities by a Portfolio may be delayed or limited.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS--(ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each Port-
folio will consist only of direct obligations which, at the time of their pur-
chase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by
Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding
unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by
S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable
quality to those rated obligations which may be purchased by a Portfolio. Each
Portfolio may purchase floating and variable rate demand notes and bonds,
which are obligations ordinarily having stated maturities in excess of one
year, but which permit the holder to demand payment of principal at any time
or at specified intervals.
WARRANTS--(EQUITY PORTFOLIOS)
EACH EQUITY PORTFOLIO MAY INVEST UP TO 5% OF ITS NET ASSETS IN WARRANTS.
Each Equity Portfolio may invest up to 5% of its net assets in warrants, ex-
cept that this limitation does not apply to warrants acquired in units or at-
tached to securities. Included in such amount, but not to exceed 2% of the
value of an Equity Portfolio's net assets, may be warrants which are not
listed on the New York or American Stock Exchange. A warrant is an instrument
issued by a corporation which gives the holder the right to subscribe to a
specified amount of the corporation's capital stock at a set price for a spec-
ified period of time.
A-7
<PAGE>
INVESTMENT COMPANY SECURITIES--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY INVEST IN SECURITIES OF OTHER INVESTMENT COMPANIES.
Each Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, a Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of such Portfolio's net assets with re-
spect to any one investment company and (iii) 10% of the Portfolio's net as-
sets in the aggregate. Investments in the securities of other investment com-
panies will involve duplication of advisory fees and certain other expenses.
ILLIQUID SECURITIES--(ALL PORTFOLIOS)
EACH PORTFOLIO MAY PURCHASE ILLIQUID SECURITIES.
Each Portfolio may invest up to 15% of the value of its net assets in securi-
ties as to which a liquid trading market does not exist, provided such invest-
ments are consistent with the Portfolio's investment objective. Such securi-
ties may include securities that are not readily marketable, such as certain
securities that are subject to legal or contractual restrictions on resale,
repurchase agreements providing for settlement in more than seven days after
notice, options traded in the over-the-counter market and securities used to
cover such options, and certain asset-backed and mortgage-backed securities,
such as certain collateralized mortgage obligations and stripped mortgage-
backed securities. As to these securities, each Portfolio is subject to a risk
that should such Portfolio desire to sell them when a ready buyer is not
available at a price the Portfolio deems representative of their value, the
value of such Portfolio's net assets could be adversely affected.
RATINGS--(ALL PORTFOLIOS)
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the
quality of the obligations which they undertake to rate. It should be empha-
sized, however, that ratings are relative and subjective and, although ratings
may be useful in evaluating the safety of interest and principal payments,
they do not evaluate the market value risk of such obligations. Therefore, al-
though these ratings may be an initial criterion for selection of portfolio
investments, BSFM also will evaluate such obligations and the ability of their
issuers to pay interest and principal. Each Portfolio will rely on BSFM's
judgment, analysis and experience in evaluating the creditworthiness of an is-
suer. In this evaluation, BSFM will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic condi-
tions and trends, the quality of the issuer's management and regulatory mat-
ters. It also is possible that a rating agency might not timely change the
rating on a particular issue to reflect subsequent events. Once the rating of
a security held by a Portfolio has been changed, BSFM will consider all cir-
cumstances deemed relevant in determining whether such Portfolio should con-
tinue to hold the security.
A-8
<PAGE>
The Bear Stearns Funds
S&P STARS Portfolio
Class A and Class C Shares
SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 1, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGE 16 OF
THE PROSPECTUS IN THE LAST PARAGRAPH OF THE SECTION ENTITLED "HOW TO BUY
SHARES--CLASS A SHARES."
Class A shares of the STARS Portfolio may be purchased at net asset value,
with the proceeds from the redemption of shares of an investment company sold
with a sales charge or commission and not distributed by Bear Stearns. From
April 15, 1996 through June 28, 1996, Bear Stearns will offer to pay Autho-
rized Dealers an amount up to 1% of the net asset value of shares purchased by
the Dealers' clients or customers with such proceeds. If such shares are re-
deemed within one year of purchase, a CDSC of 1% will be imposed.
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED IN THE PRO-
SPECTUS IN THE SECTIONS ENTITLED "DESCRIPTION OF THE STARS PORTFOLIO" AND "AP-
PENDIX."
The Master Series is permitted to invest in put options in respect of specific
securities (or groups or "baskets" of specific securities) in which the Master
Series may invest. A put option gives the purchaser of the option the right to
sell, and obligates the writer to buy, the underlying security at the exercise
price at any time during the option period. See also, "Description of the
STARS Portfolio--Management Policies--Investment Techniques," "Description of
the STARS Portfolio--Risk Factors--Certain Investment Techniques" and "Appen-
dix--Investment Techniques--Options Transactions."
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGES 15
AND 16 OF THE PROSPECTUS.
Class A Shares of the STARS Portfolio may be purchased at net asset value by
the following customers of a broker that operates a master account for pur-
chasing and redeeming, and otherwise providing shareholder services in respect
of, Fund shares pursuant to agreements with the Fund or Bear Stearns: (i) in-
vestment advisers and financial planners who place trades for their own ac-
counts or for the accounts of their clients and who charge a management, con-
sulting or other fee, (ii) clients of such investment advisers and financial
planners if such clients place trades through accounts linked to master ac-
counts of such investment advisers or financial planners on the books and rec-
ords of such broker and (iii) retirement and deferred compensation plans, and
trusts used to fund such plans, including, but not limited to, plans or trusts
defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986,
as amended, and "rabbi trusts", provided, in each case, the purchase transac-
tion is effected through such broker. The broker may charge a fee for transac-
tions in STARS Portfolio shares.
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
S&P STARS Portfolio
S&P STARS PORTFOLIO (the "STARS Portfolio") is a separate non-diversified
portfolio of The Bear Stearns Funds (the "Fund"), an open-end management in-
vestment company, known as a mutual fund. The STARS Portfolio's investment ob-
jective is to provide investment results that exceed the total return of pub-
licly traded common stocks in the aggregate, as represented by the Standard &
Poor's 500 Stock Index (the "S&P 500").
[RIGHT
ARROW]
As its investment strategy, the investment adviser uses Standard &
Poor's ("S&P") STock Appreciation Ranking System (or STARS) to iden-
tify a universe of securities in the highest category (which is five
stars) to evaluate for purchase and in the lowest category (which is
one star) to evaluate for short selling. The investment adviser be-
lieves that this approach will provide opportunities to achieve per-
formance that exceeds the S&P 500's total return.
[RIGHT
ARROW]
The STARS Portfolio invests all of its assets in the S&P STARS Mas-
ter Series (the "Master Series") of S&P STARS Fund (the "Master
Fund"), an open-end management investment company, rather than in a
portfolio of securities. This arrangement typically is known as a
"master-feeder" structure. The Master Series has the same investment
objective as the STARS Portfolio. Therefore, the STARS Portfolio's
investment experience will correspond directly with the Master Se-
ries' investment experience. Master Series' shares may be purchased
only by other investment companies or similar accredited investors.
By this Prospectus, the STARS Portfolio is offering two Classes of shares.
Class A shares are subject to a sales charge imposed at the time of purchase
and Class C shares are subject to a 1% contingent deferred sales charge im-
posed on redemptions made within the first year of purchase. Other differences
between the Classes include the services offered to and the expenses borne by
each Class and certain voting rights, as described herein. These alternatives
are offered so an investor may choose the method of purchasing shares that is
most beneficial given the amount of the purchase, the length of time the in-
vestor expects to hold the shares and other circumstances. The STARS Portfolio
issues another Class of shares which has different expenses which would affect
performance. Investors desiring to obtain information about this Class of
shares should call 1-800-766-4111 or ask their sales representative or the
STARS Portfolio's distributor.
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 & CO. INC. ("Bear Stearns"), an affiliate of BSFM, serves as the
STARS Portfolio's distributor.
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE STARS PORTFOLIO
THAT YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FU-
TURE REFERENCE.
Part B (also known as the Statement of Additional Information), dated Septem-
ber 1, 1995, which may be revised from time to time, provides a further dis-
cussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. For a free copy, write to
the address or call one of the telephone numbers listed under "General Infor-
mation" in this Prospectus.
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or en-
dorsed by, any bank, and are not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SEPTEMBER 1, 1995
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Condensed Financial Information............................................ 4
Alternative Purchase Methods............................................... 5
Description of the STARS Portfolio......................................... 5
Risk Factors.............................................................. 10
Management of the STARS Portfolio.......................................... 11
How to Buy Shares.......................................................... 13
Shareholder Services....................................................... 17
How to Redeem Shares....................................................... 19
Dividends, Distributions and Taxes......................................... 21
Performance Information.................................................... 22
General Information........................................................ 23
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table*
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
CLASS A CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)**............................................. 4.75% --
Maximum Deferred Sales Charge Imposed on Redemptions (as a
percentage of the amount subject to charge)................... *** 1.00%
ANNUAL STARS PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Master Series Management Fees (after fee waiver)****.......... 0.00% 0.00%
12b-1 Fees.................................................... 0.50% 1.00%
Other Expenses (after expense reimbursement)****.............. 1.00% 1.00%
Total STARS Portfolio Operating Expenses (after fee waiver and
expense reimbursement)****.................................... 1.50% 2.00%
EXAMPLE:
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 YEAR....................................................... $62 $30
3 YEARS...................................................... $93 $63
You would pay the following expenses on the same investment,
assuming no redemption:
1 YEAR....................................................... $62 $20
3 YEARS...................................................... $93 $63
</TABLE>
- ------
*This fee table summarizes the expenses of both the STARS Portfolio and the
Master Series. The Board of Trustees believes that the aggregate per share
expenses of the STARS Portfolio and the Master Series will be less than or
equal to the expenses which the STARS Portfolio would incur if the STARS
Portfolio retained the services of an investment adviser and the assets of the
STARS Portfolio were invested directly in the type of securities being held by
the Master Series. See the text following this table.
**Other mutual funds may invest in the Master Series and such other funds'
expenses and, correspondingly, investment returns may differ from those of the
STARS Portfolio.
***In certain situations, where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed on
redemptions within the first year after purchase. See "How to Buy Shares--
Class A Shares."
****Based on estimated expenses for the current fiscal year. BSFM has
undertaken to waive its investment advisory fee and assume certain expenses of
the Master Series and the STARS Portfolio other than brokerage fees,
extraordinary items and taxes to the extent Total STARS Portfolio Operating
Expenses exceed 1.50% for Class A and 2.00% for Class C. Without such waiver
and expense reimbursement, Master Series Management Fees stated above would be
0.75%, Other Expenses would be 1.22% and Total STARS Portfolio Operating
Expenses would be 2.47% for Class A and 2.97% for Class C.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDI-
CATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE STARS PORT-
FOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the vari-
ous costs and expenses that investors will bear, directly or indirectly, the
payment of which will reduce investors' return on an annual basis. Other Ex-
penses and Total STARS Portfolio Operating Expenses are based on estimated
amounts for the current fiscal year. In addition to the expenses noted above,
the Fund will charge $7.50 for each wire redemption. See "How to Redeem
Shares." Long-term investors could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. For a further description of
the various costs and expenses that are expected to be incurred in the STARS
Portfolio's operation, as well as expense reimbursement or waiver arrange-
ments, see "Management of the STARS Portfolio."
3
<PAGE>
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
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 A
and Class C share of the STARS Portfolio for the period April 5, 1995 (com-
mencement of investment operations of the Master Series) to June 30, 1995.
This information has been derived from information provided in the STARS Port-
folio's financial statements (unaudited).
<TABLE>
<CAPTION>
CLASS A CLASS C
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................... $12.00 $12.00
Net realized and unrealized gain on investments*........... 1.32 1.30
------- -------
Net increase in net assets resulting from operations....... 1.32 1.30
------- -------
Net asset value, end of period............................. $13.32 $13.30
======= =======
Total return+.............................................. 11.00% 10.83%
======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).................. $22,487 $12,122
Ratio of expenses to average net assets++**................ 1.50% 2.00%
Ratio of net investment income/(loss) to average net as-
sets++**.................................................. (0.19%) (0.71%)
Decrease reflected in above expense ratios and net invest-
ment income/(loss) due to waivers and reimbursements***... 1.23% 1.23%
</TABLE>
- ------
+ Total return does not consider the effects of sales loads or contingent de-
ferred 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.
++ Reflects waivers and reimbursements.
* The amount shown for a share outstanding throughout the period is not in ac-
cord 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 period.
** Annualized.
*** 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 investment
operations) to June 30, 1995. This information has been derived from informa-
tion provided in the Master Series' financial statements (unaudited).
<TABLE>
<S> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).............................. $34,677
Ratio of expenses to average net assets+*.............................. 0.20%
Ratio of net investment income/(loss) to average net assets+*.......... 1.09%
Decrease reflected in above expense ratios and net investment
income/(loss) due to waivers and reimbursements....................... 1.11%
Portfolio turnover rate**.............................................. 59.38%
Average commission rate per share...................................... $0.06
</TABLE>
- ------
+ Reflects waivers and reimbursements.
* Annualized.
** Not annualized.
Further information about performance will be contained in the STARS Portfo-
lio's annual report, which should be available on or about May 30, 1996, and
which may be obtained without charge by writing to the address or calling one
of the telephone numbers listed under "General Information."
4
<PAGE>
Alternative Purchase Methods
BY THIS PROSPECTUS, THE STARS PORTFOLIO OFFERS YOU TWO METHODS OF PURCHASING
ITS SHARES.
By this Prospectus, the STARS Portfolio offers investors two methods of pur-
chasing its shares; inves- tors may choose the Class of shares that best suits
their needs, given the amount of purchase, the length of time the investor ex-
pects to hold the shares and any other relevant circumstances. Each Portfolio
share represents an identical pro rata interest in the STARS Portfolio's in-
vestment portfolio.
Class A shares of the STARS Portfolio are sold at net asset value per share
plus a maximum initial sales charge of 4.75% of the public offering price im-
posed at the time of purchase. The initial sales charge may be reduced or
waived for certain purchases. See "How to Buy Shares--Class A Shares." The
Class A shares of the STARS Portfolio are subject to an annual distribution
and shareholder servicing fee at the rate of .50 of 1% of the value of the av-
erage daily net assets. See "Management of the Fund--Distribution and Share-
holder Servicing Plan."
Class C shares of the STARS Portfolio are subject to a 1% contingent deferred
sales charge ("CDSC") which is assessed only if Class C shares are redeemed
within one year of purchase. See "How to Redeem Shares--Class C Shares." These
shares of the STARS Portfolio also are subject to an annual distribution and
shareholder servicing fee at the rate of 1% of the value of the average daily
net assets of Class C. See "Management of the Fund--Distribution and Share-
holder Servicing Plan." The distribution and shareholder servicing fee paid by
Class C will cause such Class to have a higher expense ratio and to pay lower
dividends than Class A.
The decision as to which Class of shares is more beneficial to each investor
depends on the amount and the intended length of the investor's investment.
Each investor should consider whether, during the anticipated life of the in-
vestor's investment in the Fund, the accumulated distribution and shareholder
servicing fee and CDSC, if any, on Class C shares would be less than the ini-
tial sales charge on Class A shares purchased at the same time, and to what
extent, if any, such differential would be offset by the return of Class A.
Additionally, investors qualifying for reduced initial sales charges who ex-
pect to maintain their investment for an extended period of time might con-
sider purchasing Class A shares because the accumulated continuing distribu-
tion and shareholder servicing fees on Class C shares may exceed the initial
sales charge on Class A shares during the life of the investment. Finally,
each investor should consider the effect of the CDSC period in the context of
the investor's own investment time frame. Generally, Class A shares may be
more appropriate for investors who invest $1,000,000 or more in STARS Portfo-
lio's shares, but will not be appropriate for investors who invest less than
$50,000 in STARS Portfolio's shares, unless they intend to hold those shares
for more than ten years.
Description of the STARS Portfolio
GENERAL
THE FUND IS A "SERIES FUND." IT IS PART OF A "MASTER-FEEDER" ARRANGEMENT.
The 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 of 1940, as amended (the "1940 Act"), and for
other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. As described below, for certain matters
Fund shareholders vote together as a group; as to others they vote separately
by portfolio. By this Prospectus, shares of the STARS Portfolio are being of-
fered. From time to time, other portfolios may be established and sold pursu-
ant to other offering documents. See "General Information."
The STARS Portfolio is part of a so-called "master-feeder" structure. As such,
it invests all of its assets in the Master Series, a separate series of the
Master Fund, which has the same investment objective as the STARS Portfolio.
See "Investment Objective" and "Management Policies" below. The Master Fund is
organized as a trust under the laws of the State of Delaware. See "Management
of the STARS Portfolio." In addition to selling its shares to the STARS Port-
folio, the Master Series may sell its shares to certain other mutual funds or
institutional investors. Information regarding additional options, if any, for
investment in shares of the Master Series may be obtained by contacting PFPC
International Ltd., Attention: S&P STARS Master Series, 80 Harcourt Street,
Dublin 2, Ireland or by calling (353) 1 790 3500. The expenses and, corre-
spondingly, the returns of other investment options in the Master Fund may
differ from those of the STARS Portfolio.
5
<PAGE>
A MASTER-FEEDER ARRANGEMENT SHOULD PROVIDE BENEFITS TO SHAREHOLDERS; UNDER
CERTAIN CIRCUMSTANCES, IT CAN GIVE RISE TO SOME ADDITIONAL RISK.
The Fund's Board of Trustees believes that, if other mutual funds or institu-
tional investors invest their assets in the Master Series, certain economies
of scale may be realized. For example, fixed expenses that otherwise would
have been borne solely by the STARS Portfolio would be spread among a larger
asset base provided by more than one fund investing in the Master Series. The
STARS Portfolio and other entities investing in the Master Series will each be
liable for all obligations of the Master Series. However, the risk of the
STARS Portfolio incurring financial loss on account of such liability is lim-
ited to circumstances in which both inadequate insurance existed and the Mas-
ter Fund itself was unable to meet its obligations. Accordingly, the Fund's
Board of Trustees believes that neither the STARS Portfolio nor its sharehold-
ers will be adversely affected by reason of investing their assets in the Mas-
ter Series. However, if a mutual fund or institutional investor with a large
pro rata ownership of the Master Series' securities withdraws its investment
from the Master Series, the economies of scale (e.g., spreading fixed expenses
among a larger asset base) that the Fund's Board believes should be available
through investment in the Master Series may not be fully achieved.
The Master Series' investment objective and other fundamental policies, which
are the same as those of the STARS Portfolio, cannot be changed without ap-
proval by the holders of a majority (as defined in the 1940 Act) of the Master
Series' outstanding voting shares. Whenever the STARS Portfolio, as the Master
Series' shareholder, is requested to vote on matters pertaining to the Master
Series, the STARS Portfolio will hold a meeting of its shareholders to con-
sider such matters and the STARS Portfolio will cast its votes in proportion
to the votes received from STARS Portfolio shareholders. The STARS Portfolio
will vote Master Series shares for which it receives no voting instructions in
the same proportion as the votes received from STARS Portfolio shareholders.
In addition, certain policies of the Master Series which are non-fundamental
could be changed by vote of a majority of the Master Fund's Trustees without
shareholder vote. If the Master Series' investment objective or fundamental or
non-fundamental policies are changed, the STARS Portfolio could subsequently
change its objective or policies to correspond to those of the Master Series
or the STARS Portfolio could redeem its Master Series shares and either seek a
new investment company with a matching objective in which to invest or retain
its own investment adviser to manage its portfolio in accordance with its ob-
jective. In the latter case, the STARS Portfolio's inability to find a substi-
tute investment company in which to invest or equivalent management services
could adversely affect shareholders' investments in the STARS Portfolio. The
STARS Portfolio will provide shareholders with 30 days' written notice prior
to any change in the investment objective of the STARS Portfolio or Master Se-
ries, to the extent possible.
INVESTMENT OBJECTIVE
THE STARS PORTFOLIO SEEKS TO PROVIDE INVESTMENT RESULTS THAT EXCEED THE TOTAL
RETURN OF PUBLICLY TRADED COMMON STOCKS, IN THE AGGREGATE, AS REPRESENTED BY
THE S&P 500.
The STARS Portfolio's investment objective is to provide investment results
that exceed the total return of publicly traded common stocks, in the aggre-
gate, as represented by the S&P 500. The STARS Portfolio's investment objec-
tive cannot be changed without approval by the holders of a majority (as de-
fined in the 1940 Act) of its outstanding voting shares.
The Master Series' investment objective, which is the same as the STARS Port-
folio's, cannot be changed without approval by the holders of a majority (as
defined in the 1940 Act) of its outstanding voting shares. Shareholders of the
STARS Portfolio will be provided the opportunity to vote on any proposed
change to the Master Series' investment objective, and the STARS Portfolio
will vote on any such proposal in proportion to the votes received from STARS
Portfolio shareholders. See "General" above.
There can be no assurance that the investment objective of the STARS Portfolio
or Master Series will be achieved.
6
<PAGE>
STARS
STARS IS S&P'S PROPRIETARY STOCK RANKING SYSTEM. IT IS USED BY BSFM TO
IDENTIFY A UNIVERSE OF SECURITIES IN THE HIGHEST CATEGORY TO EVALUATE FOR
PURCHASE AND IN THE LOWEST CATEGORY TO EVALUATE FOR SHORT SELLING.
STARS ranks on a scale from five stars (highest) to one star (lowest) the
stocks of approximately 1,100 issuers analyzed by S&P's research staff of se-
curities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
*****Buy--Expected to be among the best performers over the next 12
months and to rise in price.
****Accumulate--Expected to be an above-average performer.
***Hold--Expected to be an average performer.
**Avoid--Expected to be a below-average performer.
*Sell--Expected to be a well-below-average performer and to fall in
price.
STARS was introduced by S&P in January 1987. Since 1992, on average, the five
star category has consisted of approximately 75 stocks, the four star category
has consisted of approximately 300 stocks, the three star category has con-
sisted of approximately 500 stocks, the two star category has consisted of ap-
proximately 100 stocks, and the one star category has consisted of between ap-
proximately 12 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P ana-
lysts.
For purposes of evaluating the performance of stocks in the various catego-
ries--and thus of the performance of its analysts--S&P has created a model
which initially equally weights by dollar amount the stocks in the various
categories, does not rebalance the portfolio based on changes in values or
rankings and does not take into account dividends or transaction costs. STARS
is only a model; it does not reflect actual investment performance. While its
performance cannot be used to predict actual results, S&P believes it is use-
ful in evaluating the capability of its analysts. Investors should recognize
that the pool of S&P analysts changes and their past performance is not neces-
sarily predictive of future results either of the model or of the STARS Port-
folio.
From January 1, 1987 through June 30, 1995:
[RIGHT ARROW] The S&P 500 (measured on a total return basis, with-
out dividend reinvestment)* increased by 124.95%.
[RIGHT ARROW] The ranked stocks, measured as described above,
changed in value as follows*:
[RIGHT ARROW] Five stars--+278.76%
[RIGHT ARROW] Four stars--+171.20%
[RIGHT ARROW] Three stars--+115.49%
[RIGHT ARROW] Two stars--+101.05%
[RIGHT ARROW] One star-- -29.64%
- ------
*During this period, the average dividend yields on securities included in the
S&P 500 and the securities ranked five stars were approximately 3.2% and 2.0%,
respectively.
The STARS Portfolio believes that this information should be used by investors
only in their consideration that, historically, the five star stocks, measured
as described above, have significantly outperformed lower ranked stocks and
the one star stocks, similarly measured, have significantly underperformed the
higher ranked stocks. THIS INFORMATION SHOULD NOT BE USED TO PREDICT WHETHER
THE RESULTS WILL OCCUR IN THE FUTURE OR THE ACTUAL PERFORMANCE OF A PARTICULAR
CATEGORY. STARS performance has been more volatile than that of conventional
indices such as the Dow Jones Industrial Average and the S&P 500. In addition,
at times, lower ranked STARS categories have outperformed higher ranked STARS
categories and higher ranked STARS categories have under-performed the S&P
500. Specifically, the performance of five star and one star stocks has not
consistently exceeded or fallen below the performance of the S&P 500. In some
years, one star stocks have outperformed the S&P 500 as well as five star
stocks; in other years, both one and five star stocks have outperformed the
S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn
outperformed five star stocks. Investors also should consider that the Master
Series is managed actively--and, thus, its performance will depend materially
on BSFM's investment determinations--
7
<PAGE>
and will incur transaction and other costs, including management and 12b-1
fees, which are not reflected in the foregoing information.
STARS is available to the public through various S&P publications. BSFM has
access to STARS through S&P's MarketScope, a computer-accessed subscription
service available for an annual fee, currently with more than 65,000 subscrib-
ers.
MANAGEMENT POLICIES
GENERAL
AS PART OF A MASTER-FEEDER ARRANGEMENT, THE STARS PORTFOLIO INVESTS ALL ITS
ASSETS IN THE MASTER SERIES, WHICH HAS THE SAME INVESTMENT OBJECTIVE AS THE
STARS PORTFOLIO.
The STARS Portfolio invests all of its assets in the Master Series, which has
the same investment objective as the STARS Portfolio. The STARS Portfolio may
withdraw its investment in 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. Upon any such withdrawal, the Fund's Board of Trustees would con-
sider what action should be taken, including investing all the STARS Portfo-
lio's assets in another pooled investment entity having the same investment
objective as the STARS Portfolio, or retaining an investment adviser to manage
the STARS Portfolio's assets in accordance with the policies described below.
Since the investment characteristics of the STARS Portfolio will correspond
directly to those of the Master Series, the following is a discussion of the
management policies used by the Master Series.
THE MASTER SERIES INVESTS PRIMARILY IN EQUITY SECURITIES THAT, AT THE TIME OF
PURCHASE WERE RANKED AS FIVE STARS IN STARS OR AT THEIR TIME OF SHORT SALE
WERE RANKED AS ONE STAR IN STARS.
As its investment strategy, BSFM uses STARS to identify a universe of securi-
ties in the five star category to evaluate for purchase and in the one star
category to evaluate for short selling. BSFM anticipates that at least 85% of
the value of the Master Series' total assets (except when maintaining a tempo-
rary defensive position) will be invested in common stocks that, at their time
of purchase, were ranked as five stars in STARS or, at their time of short
sale, were ranked as one star in STARS. BSFM will not seek to replicate STARS
performance and will not necessarily sell a security once it has been down-
graded from five stars or cover a short position once it has been upgraded
from one star. From time to time, certain closed-end investment companies are
ranked by STARS and will be eligible for purchase by the Master Series. The
Master Series may invest, in anticipation of investing cash positions, in
money market instruments consisting of U.S. Government securities, certifi-
cates of deposit, time deposits, bankers' acceptances, short-term investment
grade corporate bonds and other short-term debt instruments, and repurchase
agreements, as set forth in the Appendix. Under normal market conditions, the
Master Series expects to have less than 15% of its assets invested in money
market instruments. However, when BSFM determines that adverse market condi-
tions exist, the Master Series may adopt a temporary defensive posture and in-
vest without limitation in money market instruments.
INVESTMENT TECHNIQUES
THE MASTER SERIES MAY ENGAGE IN SHORT SELLING, LENDING PORTFOLIO SECURITIES,
SELLING COVERED CALL OPTIONS AND PURCHASING CALL OPTIONS TO COVER THESE POSI-
TIONS, EACH OF WHICH INVOLVES RISK.
The Master Series may engage in various investment techniques, such as short
selling, lending portfolio securities, selling covered call options and pur-
chasing call options to cover these positions, each of which involves risk.
Options transactions involve "derivative securities." Short selling is dis-
cussed below. For a discussion of these other investment techniques and their
related risks, see "Appendix--Investment Techniques" and "Risk Factors" below.
Short sales are transactions in which the Master Series sells a security it
does not own in anticipation of a decline in the market value of that securi-
ty. To complete such a transaction, the Master Series must borrow the security
to make delivery to the buyer. The Master Series then is obligated to replace
the security borrowed by purchasing it at the market price at the time of re-
placement. The price at such time may be more or less than the price at which
the security was sold by the Master Series. Until the security is replaced,
the Master Series is required to pay to the lender amounts equal to any divi-
dend which accrues during the period of the loan. To borrow the security, the
Master Series also may be required to pay a premium, which would increase the
cost of the security
8
<PAGE>
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is
closed out.
Until the Master Series replaces a borrowed security in connection with a
short sale, the Master Series will: (a) maintain daily a segregated account,
containing cash, cash equivalents or U.S. Government securities, at such a
level that (i) the amount deposited in the account plus the amount deposited
with the broker as collateral will equal the current value of the security
sold short and (ii) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will not be less than the mar-
ket value of the security at the time it was sold short; or (b) otherwise
cover its short position in accordance with positions taken by the Staff of
the Securities and Exchange Commission.
The Master Series will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Master Series replaces the borrowed security. The Master Series will
realize a gain if the security declines in price between those dates. This re-
sult is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium or amounts in lieu
of interest the Master Series may be required to pay in connection with a
short sale. The Master Series may purchase call options to provide a hedge
against an increase in the price of a security sold short by the Master Se-
ries. See "Appendix--Investment Techniques--Options Transactions."
The Master Series anticipates that the frequency of short sales will vary sub-
stantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Master Series' net assets. The Master Series
may not sell short the securities of any single issuer listed on a national
securities exchange to the extent of more than 5% of the value of its net as-
sets. The Master Series may not sell short the securities of any class of an
issuer to the extent, at the time of the transaction, of more than 2% of the
outstanding securities of that class.
In addition to the short sales discussed above, the Master Series may make
short sales "against the box," a transaction in which the Master Series enters
into a short sale of a security which the Master Series owns. The proceeds of
the short sale will be held by a broker until the settlement date at which
time the Master Series delivers the security to close the short position. The
Master Series receives the net proceeds from the short sale. The Master Series
at no time will have more than 15% of the value of its net assets in deposits
on short sales against the box. It currently is anticipated that the Master
Series will make short sales against the box for purposes of protecting the
value of the Master Series' net assets.
CERTAIN FUNDAMENTAL POLICIES
CERTAIN OF THE STARS PORTFOLIO'S AND MASTER SERIES' INVESTMENT POLICIES ARE
FUNDAMENTAL POLICIES THAT CAN BE CHANGED ONLY BY SHAREHOLDER VOTE.
The STARS Portfolio and the Master Series may (i) borrow money to the extent
permitted under the 1940 Act; and (ii) invest up to 25% of the value of its
total assets in the securities of issuers in a single industry, provided that
there is no such limitation on investments in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. This paragraph de-
scribes fundamental policies that cannot be changed as to the STARS Portfolio
or the Master Series without approval by the holders of a majority (as defined
in the 1940 Act) of the outstanding voting securities of the STARS Portfolio
or the Master Series, as the case may be. See "Investment Objective and Man-
agement Policies--Investment Restrictions" in the Statement of Additional
Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The STARS Portfolio and the Master Series may (i) purchase securities of any
company having less than three years' continuous operation (including opera-
tions of any predecessors) if such purchase does not cause the value of its
investments in all such companies to exceed 5% of the value of its total as-
sets; (ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but
only to secure permitted borrowings; and (iii) invest up to 15% of the value
of its net assets in repurchase agreements providing for settlement in more
than seven days after notice and in other illiquid securities. See "Investment
Objective and Management Policies--Investment Restrictions" in the Statement
of Additional Information.
9
<PAGE>
RISK FACTORS
NO INVESTMENT IS FREE FROM RISK. INVESTING IN THE STARS PORTFOLIO WILL SUBJECT
INVESTORS TO CERTAIN RISKS WHICH SHOULD BE CONSIDERED.
GENERAL
Since the investment characteristics and, therefore, investment risks associ-
ated with such characteristics of the STARS Portfolio will correspond directly
to those of the Master Series, the following is a discussion of the risks as-
sociated with an investment in the Master Series.
NET ASSET VALUE FLUCTUATIONS
The Master Series' net asset value is not fixed and should be expected to
fluctuate. Investors should purchase STARS Portfolio shares only as a supple-
ment to an overall investment program and only if investors are willing to un-
dertake the risks involved, including the potential loss of a significant por-
tion of their investment.
EQUITY SECURITIES
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities, and
that fluctuations can be pronounced. Changes in the value of the common stocks
in the Master Series' portfolio will result in changes in the value of its
shares and thus its yield and total return to investors.
STARS PERFORMANCE
STARS rankings are the subjective determination of S&P's analysts. The pool of
these analysts changes. Past performance of securities and issuers included in
STARS cannot be used to predict future results of the Master Series, which is
managed actively by BSFM and the results of which should be expected to vary
from the performance of STARS. None of the STARS Portfolio, Bear Stearns or
BSFM have any ongoing relationship with S&P regarding the STARS Portfolio
other than the right for a fee to use the S&P, Standard & Poor's and STARS
trademarks in connection with the management of mutual funds and access to
STARS through S&P's publicly available subscription service.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques, such as short selling, lending portfolio se-
curities and engaging in options transactions, involves greater risk than that
incurred by many other funds with a similar objective. See "Appendix--Invest-
ment Techniques."
The Master Series' ability to engage in certain short-term transactions may be
limited by the requirement that, for the STARS Portfolio to qualify as a regu-
lated investment company, it must earn less than 30% of its gross income from
the disposition of securities held for less than three months. This 30% test
limits the extent to which the Master Series may sell securities held for less
than three months, effect short sales of securities held for less than three
months, and write options expiring in less than three months, among other
strategies. Except for this requirement, the amount of portfolio activity will
not be a limiting factor when making portfolio decisions. Under normal market
conditions, the Master Series' portfolio turnover rate generally will not ex-
ceed 150%. Higher portfolio turnover rates are likely to result in compara-
tively greater brokerage commissions or transaction costs. Short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. See "Portfolio Transactions" in the STARS Portfolio's Statement of Ad-
ditional Information.
NON-DIVERSIFIED STATUS
The Master Series', and thus the STARS Portfolio's, classification as a "non-
diversified" investment company means that the proportion of its assets that
may be invested in the securities of a single issuer is not limited by the
1940 Act. A "diversified" investment company is required by the 1940 Act gen-
erally, with respect to 75% of its total assets, to invest not more than 5% of
such assets in the securities of a single issuer and to hold not more than 10%
of the outstanding voting securities of a single issuer. However, the Master
Series intends to conduct its operations so as to qualify as a "regulated in-
vestment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Master Series' total
assets be invested in cash, U.S. Government securities, the securities of
other regulated investment companies and other securities, with such other se-
curities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Master Series' total assets and
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets be invested in the securities of any
10
<PAGE>
one issuer (other than U.S. Government securities or the securities of other
regulated investment companies). Since a relatively high percentage of the
Master Series' assets may be invested in the securities of a limited number of
issuers, some of which may be within the same industry or economic sector, the
Master Series' portfolio securities may be more susceptible to any single eco-
nomic, political or regulatory occurrence than the portfolio securities of a
diversified investment company.
SIMULTANEOUS INVESTMENTS
Investment decisions for the Master Series are made independently from those
of other investment companies or accounts advised by BSFM. However, if such
other investment companies or accounts are prepared to invest in, or desire to
dispose of, securities of the type in which the Master Series invests at the
same time as the Master Series, available investments or opportunities for
sales will be allocated equitably to each. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Master Series or the price paid or received by the Master Series.
Management of the STARS Portfolio
The STARS Portfolio has not retained the services of an investment adviser be-
cause all of its assets are invested in the Master Series.
BOARD OF TRUSTEES
THE TRUSTEES ARE RESPONSIBLE FOR THE OVERALL MANAGEMENT AND SUPERVISION OF THE
STARS PORTFOLIO'S BUSINESS.
The STARS Portfolio's business affairs are managed under the general supervi-
sion of the Fund's Board of Trustees. The STARS Portfolio's Statement of Addi-
tional Information contains the name and general business experience of each
Trustee.
MASTER SERIES INVESTMENT ADVISER
THE MASTER SERIES' INVESTMENT ADVISER, BSFM, MANAGES THE STARS PORTFOLIO'S
INVESTMENTS.
The Master Series' investment adviser is BSFM, a wholly-owned subsidiary of
The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New
York, New York 10167. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSFM is a registered investment ad-
viser and offers, either directly or through affiliates, investment advisory
and administrative services to open-end and closed-end investment funds and
other managed pooled investment vehicles with net assets at June 30, 1995 of
over $979 million.
BSFM serves as investment adviser of the Master Series under an Investment Ad-
visory Agreement between BSFM and the Master Fund, subject to the overall au-
thority of the Master Fund's Board of Trustees in accordance with Delaware
law. The Master Series' principal portfolio manager is Robert S. Reitzes. Mr.
Reitzes joined Bear Stearns Asset Management in 1994 as Director of Mutual
Funds-Bear Stearns Asset Management and Senior Managing Director of Bear
Stearns. From 1991 until 1994, he was Co-Director of Research and Senior Chem-
ical Analyst at C.J. Lawrence/Deutsche Bank Securities Corp. For six years
prior thereto, Mr. Reitzes was employed by Mabon, Nugent & Co. as Chief In-
vestment Officer and Chemical Analyst.
THE MASTER FUND PAYS BSFM AN ADVISORY FEE AT AN ANNUAL RATE EQUAL TO .75 OF 1%
OF THE MASTER SERIES' AVERAGE DAILY NET ASSETS.
Under the terms of the Investment Advisory Agreement, the Master Fund has
agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Master
Series' average daily net assets. The investment advisory fee payable by the
Master Series is higher than that paid by most other investment companies.
THE STARS PORTFOLIO'S ADMINISTRATOR IS BSFM. THE STARS PORTFOLIO PAYS BSFM AN
ADMINISTRATION FEE AT THE ANNUAL RATE OF .15 OF 1% OF ITS AVERAGE DAILY NET
ASSETS.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of the STARS Portfolio, subject to the
overall authority of the Fund's Board of
11
<PAGE>
Trustees in accordance with Massachusetts law. For providing administrative
services to the STARS Portfolio, the Fund has agreed to pay BSFM a monthly fee
at the annual rate of .15 of 1% of the STARS Portfolio's average daily net as-
sets. Under the terms of an Administrative Services Agreement with the Fund,
PFPC Inc. provides certain administrative services to the STARS Portfolio. For
providing these services, the Fund has agreed to pay PFPC Inc. $4,000 per
month. In addition, the Master Series will pay PFPC International Ltd. the
following monthly fee, with a minimum of $8,500 payable monthly, as set forth
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MASTER SERIES' ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
First $200 million................................ .12 of 1%
Next $200 million up to $400 million.............. .09 of 1%
Next $200 million up to $600 million.............. .075 of 1%
Assets in excess of $600 million.................. .05 of 1%
</TABLE>
From time to time, BSFM may waive receipt of its fees and/or voluntarily as-
sume certain Master Series or STARS Portfolio expenses, which would have the
effect of lowering the Master Series' or STARS Portfolio's expense ratio, as
the case may be, and increasing yield to investors at the time such amounts
are waived or assumed, as the case may be. Neither the Master Fund nor the
STARS Portfolio will pay BSFM at a later time for any amounts it may waive,
nor will either reimburse BSFM for any amounts it may assume.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of the
STARS Portfolio's shares. See "Portfolio Transactions" in the Statement of Ad-
ditional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment Ad-
visory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the STARS Portfolio's principal underwriter within the meaning of the 1940 Act
and as distributor of the STARS Portfolio's shares pursuant to an agreement
which is renewable annually. Bear Stearns is entitled to receive the sales
load described under "How to Buy Shares" and payments under the STARS Portfo-
lio's Distribution and Shareholder Servicing Plan described below.
STARS PORTFOLIO'S CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the STARS Portfolio's custodian. PFPC Inc.,
Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809,
is the STARS Portfolio's transfer agent, dividend disbursing agent and regis-
trar (the "Transfer Agent"). The Transfer Agent also provides certain adminis-
trative services to the STARS Portfolio.
MASTER SERIES' CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company also is the Master Series' custodian. PFPC Interna-
tional Ltd., 80 Harcourt Street, Dublin 2, Ireland, is the Master Series'
transfer agent, dividend disbursing agent and registrar. PFPC International
Ltd. also provides accounting services to the Master Series.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
THE STARS PORTFOLIO HAS ADOPTED A RULE 12B-1 PLAN UNDER WHICH IT PAYS BEAR
STEARNS AT THE ANNUAL RATE OF .50% OF CLASS A'S AVERAGE DAILY NET ASSETS AND
1% OF CLASS C'S AVERAGE DAILY NET ASSETS.
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), the STARS Portfolio pays Bear Stearns for
distributing STARS Portfolio shares and for providing personal services to,
and/or maintaining accounts of, STARS Portfolio shareholders a fee
12
<PAGE>
at the annual rate of .50% and 1% of the average daily net assets of Class A
and Class C, respectively. Under the Plan, Bear Stearns may pay third parties
in respect of these services such amount as it may determine. The fees paid to
Bear Stearns under the Plan are payable without regard to actual expenses in-
curred. The STARS Portfolio understands that these third parties also may
charge fees to their clients who are beneficial owners of STARS Portfolio
shares in connection with their client accounts. These fees would be in addi-
tion to any amounts which may be received by them from Bear Stearns under the
Plan.
EXPENSES
The STARS Portfolio and the Master Series each bear their respective operating
expenses. Operating expenses include: organizational costs, taxes, interest,
loan commitment fees, interest and distributions paid on securities sold
short, brokerage fees and commissions, if any, fees of board members who are
not officers, directors, employees or holders of 5% or more of the outstanding
voting securities of BSFM or its affiliates, Securities and Exchange Commis-
sion fees, state Blue Sky qualification fees, administrative and fund account-
ing fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of maintaining the existence of the STARS Portfolio
and the Master Series, costs attributable to investor services (including,
without limitation, telephone and personnel expenses), costs of shareholders'
reports and meetings, costs of preparing and printing certain prospectuses and
statements of additional information, and any extraordinary expenses. Expenses
attributable to a particular portfolio of the Fund are charged against the as-
sets of that portfolio; other expenses of the Fund are allocated among the
portfolios on the basis determined by the Board, including, but not limited
to, proportionately in relation to the net assets of each portfolio. See also
"Management of the Fund--Distribution and Shareholder Servicing Plan."
The Master Series also bears the following expenses: advisory and administra-
tive fees and costs of independent pricing services.
The STARS Portfolio also bears administration fees, fees under the Plan and
transfer and dividend disbursing agents' fees.
BSFM has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that, if in any fiscal year, certain expenses, includ-
ing the investment advisory fee and fees under the Plan, exceed 1.5% of Class
A's average daily net assets and 2% of Class C's average daily net assets for
the fiscal year, BSFM may waive a portion of its investment advisory fee or
bear other expenses to the extent of the excess expense.
How to Buy Shares
GENERAL
AN INITIAL INVESTMENT IS $1,000, $500 FOR RETIREMENT PLANS; SUBSEQUENT
INVESTMENTS MUST BE AT LEAST $250, $100 FOR RETIREMENT PLANS; SPECIFY THE
CLASS YOU WISH TO PURCHASE.
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at least $250 or $100 for retirement
plans. Share certificates are issued only upon written request. No certifi-
cates are issued for fractional shares. The STARS Portfolio reserves the right
to reject any purchase order. The STARS Portfolio reserves the right to vary
the initial and subsequent investment minimum requirements at any time. In-
vestments by employees of Bear Stearns and its affiliates are not subject to
minimum investment requirements.
Purchases of the STARS Portfolio's shares may be made through a brokerage ac-
count maintained with Bear Stearns or through certain investment dealers who
are members of the National Association of Securities Dealers, Inc. who have
sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of the
STARS Portfolio's shares also may be made directly through the Transfer Agent.
When purchasing STARS Portfolio's shares, investors must specify which Class
is being purchased.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the Trans-
fer Agent (the "trade date"). Payment for
13
<PAGE>
STARS Portfolio shares generally is due to Bear Stearns or the Authorized
Dealer on the third business day (the "settlement date") after the trade date.
Investors who make payment before the settlement date may permit the payment
to be held in their brokerage accounts or may designate a temporary investment
for payment until the settlement date. If a temporary investment is not desig-
nated, Bear Stearns or the Authorized Dealer will benefit from the temporary
use of the funds if payment is made before the settlement date.
PURCHASES CAN BE MADE THROUGH BEAR STEARNS ACCOUNT EXECUTIVES, AUTHORIZED
DEALERS OR THE TRANSFER AGENT.
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be accept-
ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro-
kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "STARS Portfolio" if purchased di-
rectly from the STARS Portfolio, and should be directed to the Transfer Agent:
PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware
19899-8960. Payment by check or Federal Reserve draft must be received within
three business days of receipt of the purchase order by Bear Stearns or an Au-
thorized Dealer. Orders placed directly with the Transfer Agent must be accom-
panied by payment. Bear Stearns (or an investor's Authorized Dealer) is re-
sponsible for forwarding payment promptly to the Fund. The Fund will charge
$7.50 for each wire redemption. The payment proceeds of a redemption of shares
recently purchased by check may be delayed as described under "How to Redeem
Shares."
Investors who are not Bear Stearns clients may purchase STARS Portfolio shares
through the Transfer Agent. To make an initial investment in the STARS Portfo-
lio, an investor must establish an account with the STARS Portfolio by fur-
nishing necessary information to the Fund. An account with the STARS Portfolio
may be established by completing and signing the Account Information Form in-
dicating which Class of shares is being purchased, a copy of which is attached
to this Prospectus, and mailing it, together with a check to cover the pur-
chase, to PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington,
Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The STARS
Portfolio account number should appear on the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange (cur-
rently 4:00 p.m., New York time) on any day the STARS Portfolio calculates its
net asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next deter-
mined.
NET ASSET VALUE IS COMPUTED DAILY AS OF THE CLOSE OF REGULAR TRADING ON THE
NEW YORK STOCK EXCHANGE.
Shares of the STARS Portfolio are sold on a continuous basis. Net asset value
per share is determined as of the close of regular trading on the floor of the
New York Stock Exchange (currently 4:00 p.m., New York time) on each business
day. The net asset value per share of each Class of the STARS Portfolio is
computed by dividing the value of the STARS Portfolio's net assets represented
by such Class (i.e., the value of its assets less liabilities) by the total
number of shares of such Class outstanding. The STARS Portfolio's investments
are valued based on market value or, where market quotations are not readily
available, based on fair value as determined in good faith by, or in accor-
dance with procedures established by, the Master Fund's Board of Trustees. For
further information regarding the methods employed in valuing the STARS Port-
folio's investments, see "Determination of Net Asset Value" in the STARS Port-
folio's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Reve-
nue Service (the "IRS").
14
<PAGE>
CLASS A SHARES
THE SALES CHARGE MAY VARY DEPENDING ON THE DOLLAR AMOUNT INVESTED IN THE STARS
PORTFOLIO.
The public offering price for Class A shares of the STARS Portfolio is the net
asset value per share of that Class plus a sales load, which is imposed in ac-
cordance with the following schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.75% 4.99% 4.25%
$50,000 to less than
$100,000..................... 4.25 4.44 3.75
$100,000 to less than
$250,000..................... 3.75 3.90 3.25
$250,000 to less than
$500,000..................... 3.25 3.36 3.00
$500,000 to less than
$750,000..................... 2.75 2.83 2.50
$750,000 to less than
$1,000,000................... 2.25 2.30 2.00
$1,000,000 and above......... 0.00 0.00 0.00
</TABLE>
- ------
*Until September 22, 1995, or such later date as Bear Stearns in its
discretion may determine, the full amount of the sales load will be reallowed
as a Dealer Concession.
There is no initial sales charge on purchases of $1,000,000 or more of Class A
shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems those
shares within one year after purchase, a CDSC of 1.00% will be imposed at the
time of redemption. The terms contained in the section of the Fund's Prospec-
tus entitled "How to Redeem Shares--Contingent Deferred Sales Charge--Class C"
are applicable to the Class A shares subject to a CDSC. Letter of Intent and
Right of Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow addi-
tional payments or promotional incentives to dealers that sell Class A shares.
In some instances, these incentives may be offered only to certain dealers who
have sold or may sell significant amounts of Class A shares. Dealers may re-
ceive a larger percentage of the sales load from Bear Stearns than they re-
ceive for selling most other funds.
Until September 22, 1995, or such later date as Bear Stearns in its discretion
may determine, Bear Stearns, at its expense, has agreed to pay Authorized
Dealers a fee in respect of the aggregate of all shares of the STARS Portfolio
and each other investment company sponsored by Bear Stearns sold to their cus-
tomers. The fee paid is based on the lesser of the aggregate net asset value
of all shares of the STARS Portfolio and each other investment company spon-
sored by Bear Stearns purchased by customers of the Authorized Dealer during
such period or the aggregate average daily value of such shares owned by cus-
tomers of the Authorized Dealer during 1995. For amounts greater than $1 mil-
lion but less than $5 million, the fee is .05% of such amount; and for amounts
greater than $5 million the fee is .10% of such amount. Any such amount is ex-
pected to be paid, on a pro-rata basis, quarterly.
Class A shares may be sold at net asset value to (a) Bear Stearns, its affili-
ates or their respective officers, directors or employees (including retired
employees), any partnership of which Bear Stearns is a general partner, any
Trustee or officer of the Fund and designated family members of any of the
above individuals; (b) qualified retirement plans of Bear Stearns; (c) any em-
ployee of McGraw-Hill, Inc. and its affiliates, or their respective spouses
and minor children; (d) any employee or registered representative of any Au-
thorized Dealer or their respective spouses and minor children; (e) trustees
or directors of investment companies for which Bear Stearns or an affiliate
acts as sponsor; (f) any state, county or city, or any instrumentality, de-
partment, authority or agency thereof, which is prohibited by applicable in-
vestment laws from paying a sales load or commission in connection with the
purchase of STARS Portfolio shares; (g) any institutional investment clients
including corporate sponsored pension and profit-sharing plans, other benefit
plans and insurance companies; (h) any pension funds, state and municipal gov-
ernments or funds, Taft-Hartley plans and qualified non-profit organizations,
foundations and endowments; (i) trust institutions (including bank trust de-
partments) investing on their own behalf or on behalf of their clients; and
(j) accounts as to which an Authorized
15
<PAGE>
Dealer charges an asset management fee. To take advantage of these exemptions,
a purchaser must indicate its eligibility for an exemption to Bear Stearns
along with its Account Information Form. Such purchaser agrees to notify Bear
Stearns if, at any time of any additional purchases, it is no longer eligible
for an exemption. Bear Stearns reserves the right to request certification or
additional information from a purchaser in order to verify that such purchaser
is eligible for an exemption. Bear Stearns reserves the right to limit the
participation of its employees in Class A shares of the STARS Portfolio. Divi-
dends and distributions reinvested in Class A shares of the STARS Portfolio
will be made at the net asset value per share on the reinvestment date.
Class A shares of the STARS Portfolio also may be purchased at net asset val-
ue, with the proceeds from the redemption of shares of an investment company
sold with a sales charge or commission and not distributed by Bear Stearns.
However, if such investor redeems those shares within one year after purchase,
a CDSC of .50% will be imposed at the time of redemption. This includes shares
of a mutual fund which were subject to a contingent deferred sales charge upon
redemption. The purchase must be made within 60 days of the redemption, and
Bear Stearns must be notified by the investor in writing, or by the investor's
investment professional, at the time the purchase is made. Bear Stearns will
offer to pay Authorized Dealers an amount up to .50% of the net asset value of
shares purchased by the dealers' clients or customers in this manner.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that Class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION
INVESTORS MAY QUALIFY FOR A REDUCED SALES CHARGE.
Pursuant to the Right of Accumulation, certain investors are permitted to pur-
chase Class A shares of the STARS Portfolio at the sales charge applicable to
the total of (a) the dollar amount then being purchased plus (b) the current
public offering price of all Class A shares of the STARS Portfolio, shares of
the Fund's other portfolios and shares of certain other funds sponsored or ad-
vised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear
Stearns Investment Trust, then held by the investor. The following purchases
of Class A shares may be aggregated for the purposes of determining the amount
of purchase and the corresponding sales load: (a) individual purchases on be-
half of a single purchaser, the purchaser's spouse and their children under
the age of 21 years including shares purchased in connection with a retirement
account exclusively for the benefit of such individual(s), such as an IRA, and
purchases made by a company controlled by such individual(s); (b) individual
purchases by a trustee or other fiduciary account, including an employee bene-
fit plan (such as employer-sponsored pension, profit-sharing and stock bonus
plans, including plans under Section 401(k) of the Code, and medical, life and
disability insurance trusts); or (c) individual purchases by a trustee or
other fiduciary purchasing shares concurrently for two or more employee bene-
fit plans of a single employer or of employers affiliated with each other.
Subsequent purchases made under the conditions set forth above will be subject
to the minimum subsequent investment of $250 and will be entitled to the Right
of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load appli-
cable to the total number of Class A shares of the STARS Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds spon-
sored or advised by Bear Stearns, including the Emerging Markets Debt Portfo-
lio of Bear Stearns Investment Trust, purchased in a 13-month period pursuant
to the terms and under the conditions set forth herein. A minimum initial pur-
chase of $1,000 is required. The Transfer Agent will hold in escrow 5% of the
amount indicated in the Account Information Form for payment of a higher sales
load if the investor does not purchase the full amount indicated in the Ac-
count Information Form. The escrow will be released when the investor fulfills
the terms of the Letter of Intent by purchasing the specified amount. If an
investor's purchases qualify for a further sales load reduction, the sales
load will be adjusted to reflect the total purchase at the end of 13 months.
If total purchases are less than the amount specified, the investor will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggre-
16
<PAGE>
gate purchases actually made. If such remittance is not received within 20
days, the Transfer Agent, as attorney-in-fact, will redeem an appropriate num-
ber of shares held in escrow to realize the difference. Checking a box in the
Letter of Intent section of the Account Information Form does not bind an in-
vestor to purchase, or the STARS Portfolio to sell, the full amount indicated
at the sales load in effect at the time of signing, but the investor must com-
plete the intended purchase to obtain the reduced sales load. At the time an
investor purchases shares of any of the above-listed funds, the investor must
indicate its intention to do so under the Letter of Intent section of the Ac-
count Information Form.
SYSTEMATIC INVESTMENT PLAN
THE STARS PORTFOLIO OFFERS SHAREHOLDERS CONVENIENT FEATURES AND BENEFITS,
INCLUDING THE SYSTEMATIC INVESTMENT PLAN.
The Systematic Investment Plan permits investors to purchase shares of the
STARS Portfolio (minimum initial investment of $250 and minimum subsequent in-
vestments of $100 per transaction) at regular intervals selected by the in-
vestor. Provided the investor's bank or other financial institution allows au-
tomatic withdrawals, STARS Portfolio shares may be purchased by transferring
funds from the account designated by the investor. At the investor's option,
the account designated will be debited in the specified amount, and STARS
Portfolio shares will be purchased once a month, on the twentieth day. Only an
account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. Investors desiring to participate
in the Systematic Investment Plan should call the Transfer Agent at 1-800-447-
1139 (in Delaware call collect 302-791-1031) to obtain the appropriate forms.
The Systematic Investment Plan does not assure a profit and does not protect
against loss in declining markets. Since the Systematic Investment Plan in-
volves the continuous investment in the STARS Portfolio regardless of fluctu-
ating price levels of the STARS Portfolio's shares, investors should consider
their financial ability to continue to purchase through periods of low price
levels. The Fund may modify or terminate the Systematic Investment Plan at any
time or charge a service fee. No such fee currently is contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
THE EXCHANGE PRIVILEGE PERMITS EASY PURCHASES OF OTHER FUNDS IN THE BEAR
STEARNS FAMILY.
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a Class of the STARS Portfolio, shares of the same Class of the Fund's
other portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Invest-
ment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the ex-
tent such shares are offered for sale in the investor's state of residence.
These funds have different investment objectives which may be of interest to
investors. To use this Privilege, investors should consult their account exec-
utive at Bear Stearns, their account executive at an Authorized Dealer or the
Transfer Agent to determine if it is available and whether any conditions are
imposed on its use.
To use this Privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to ex-
change shares of the STARS Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account
that previously did not provide for this option, a Telephone Exchange Authori-
zation Form must be filed with the Transfer Agent. This form is available from
the Transfer Agent. Once this election has been made, the shareholder may con-
tact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call col-
lect 302-791-1031) to request the exchange. During periods of substantial eco-
nomic or market change, telephone exchanges may be difficult to complete and
shareholders may have to submit exchange requests to the Transfer Agent in
writing.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless other-
wise specified in writing by the shareholder with all signatures guaranteed by
an eligible
17
<PAGE>
guarantor institution as described below. To participate in the Systematic In-
vestment Plan or estab- lish automatic withdrawal for the new account, howev-
er, an exchanging shareholder must file a specific written request. The ex-
change privilege may be modified or terminated at any time, or from time to
time, by the Fund on 60 days' notice to the affected portfolio or fund share-
holders. The Fund, BSFM and Bear Stearns will not be liable for any loss, lia-
bility, cost or expense for acting upon telephone instructions that are rea-
sonably believed to be genuine. In attempting to confirm that telephone in-
structions are genuine, the Fund will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which an account is regis-
tered, the account number, recent transactions in the account, and the account
holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any Au-
thorized Dealer or the Transfer Agent. Except in the case of Personal Retire-
ment Plans, the shares being exchanged must have a current value of at least
$250; furthermore, when establishing a new account by exchange, the shares be-
ing exchanged must have a value of at least the minimum initial investment re-
quired for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or ex-
ceed the applicable minimum for subsequent investments. If any amount remains
in the investment portfolio from which the exchange is being made, such amount
must not be below the minimum account value required by the portfolio or fund.
Shares will be exchanged at the next determined net asset value; however, ex-
cept in the instances described below, a sales load may be charged with re-
spect to exchanges of Class A shares into portfolios or funds sold with a
sales load. Generally, a sales load will be charged if the shares being ex-
changed were subject to a sales load which is lower than the sales load to
which the shares being purchased are subject or were not subject to any sales
load. No CDSC will be imposed on Class C shares at the time of an exchange.
The CDSC applicable on redemption of the acquired Class C shares will be cal-
culated from the date of the initial purchase of the Class C shares exchanged.
If an investor is exchanging Class A into a portfolio or fund that charges a
sales load, the investor may qualify for share prices which do not include the
sales load or which reflect a reduced sales load, if the shares of the portfo-
lio or fund from which the investor is exchanging were: (a) purchased with a
sales load; (b) acquired by a previous exchange from shares purchased with a
sales load; or (c) acquired through reinvestment of dividends or distributions
paid with respect to the foregoing categories of shares. To qualify, at the
time of the exchange the investor must notify Bear Stearns, the Authorized
Dealer or the Transfer Agent. Any such qualification is subject to confirma-
tion of the investor's holdings through a check of appropriate records. No
fees currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written no-
tice, to charge shareholders a $5.00 fee in accordance with rules promulgated
by the Securities and Exchange Commission. The Fund reserves the right to re-
ject any exchange request in whole or in part. The Exchange Privilege may be
modified or terminated at any time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for Federal income tax purposes as a sale of the shares given in ex-
change by the shareholder and, therefore, an exchanging shareholder may real-
ize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
THE REDIRECTED DISTRIBUTION OPTION PERMITS INVESTMENT OF INVESTORS' DIVIDENDS
AND DISTRIBUTIONS IN SHARES OF OTHER FUNDS IN THE BEAR STEARNS FAMILY.
The Redirected Distribution Option enables a shareholder to invest automati-
cally dividends and/or capital gain distributions, if any, paid by the STARS
Portfolio in shares of the same Class of another portfolio of the Fund or a
fund advised or sponsored by Bear Stearns of which the shareholder is an in-
vestor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the then-current net asset value.
If an investor is investing in a Class that charges a CDSC, the shares pur-
chased will be subject on redemption to the CDSC, if any, applicable to the
purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
18
<PAGE>
How to Redeem Shares
GENERAL
THE REDEMPTION PRICE WILL BE BASED ON THE NET ASSET VALUE NEXT COMPUTED AFTER
RECEIPT OF A REDEMPTION REQUEST; IN CERTAIN INSTANCES A CDSC WILL BE CHARGED.
Investors may request redemption of STARS Portfolio shares at any time. Re-
demption requests may be made as described below. When a request is received
in proper form, the STARS Portfolio will redeem the shares at the next deter-
mined net asset value. If the investor holds STARS Portfolio shares of more
than one Class, any request for redemption must specify the Class of shares
being redeemed. If the investor fails to specify the Class of shares to be re-
deemed or if the investor owns fewer shares of the Class than specified to be
redeemed, the redemption request may be delayed until the Transfer Agent re-
ceives further instructions from the investor, the investor's Bear Stearns ac-
count executive or the investor's Authorized Dealer. The Fund imposes no
charges (other than any applicable CDSC) when shares are redeemed directly
through Bear Stearns.
The STARS Portfolio ordinarily will make payment for all shares redeemed
within seven days after receipt by the Transfer Agent of a redemption request
in proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased STARS Portfolio shares by
check and subsequently submits a redemption request by mail, the redemption
proceeds will not be transmitted until the check used for investment has
cleared, which may take up to 15 days. The Fund will reject requests to redeem
shares by telephone or wire for a period of 15 days after receipt by the
Transfer Agent of the purchase check against which such redemption is request-
ed. This procedure does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days' written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the no-
tice period. Shareholders who have redeemed Class A shares may reinstate their
STARS Portfolio account without a sales charge up to the dollar amount re-
deemed by purchasing Class A shares of the STARS Portfolio within 60 days of
the redemption. To take advantage of this reinstatement privilege, sharehold-
ers must notify their Bear Stearns account executive, Authorized Dealer or the
Transfer Agent at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
CLASS C SHARES OF THE STARS PORTFOLIO ARE SUBJECT TO A CDSC OF 1% UPON REDEMP-
TION WITHIN ONE YEAR OF PURCHASE.
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvest-
ment of dividends or capital gain distributions, plus (ii) increases in the
net asset value of an investor's Class C shares above the dollar amount of all
such investor's payments for the purchase of Class C shares held by the in-
vestor at the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the STARS Portfolio's performance, the applicable
CDSC may be applied to the then-current net asset value rather than the pur-
chase price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares ac-
quired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of the STARS Portfolio at
$10 per share for a cost of $1,000. Subsequently, the shareholder acquired
five additional shares through dividend reinvestment. During the first year
after the purchase the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC
19
<PAGE>
would not be applied to the value of the reinvested dividend shares and the
amount which represents appreciation ($260). Therefore, $240 of the $500 re-
demption proceeds ($500 minus $260) would be charged at a rate of 1% for a to-
tal CDSC of $2.40.
The CDSC applicable to Class C shares will be waived in connection with (a)
redemptions made within one year after the death or disability, as defined in
Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the
"Code"), of the shareholder, (b) redemptions by employees participating in El-
igible Benefit Plans, (c) redemptions as a result of a combination of any in-
vestment company with the STARS Portfolio by merger, acquisition of assets or
otherwise, and (d) a distribution following retirement under a tax-deferred
retirement plan or upon attaining age 70 1/2 in the case of an IRA or Keogh
plan or custodial account pursuant to Section 403(b) of the Code. If the
Fund's Trustees determine to discontinue the waiver of the CDSC, the disclo-
sure in the STARS Portfolio's prospectus will be revised appropriately. Any
STARS Portfolio shares subject to a CDSC which were purchased prior to the
termination of such waiver will have the CDSC waived as provided in the STARS
Portfolio's prospectus at the time of the purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account execu-
tive or the investor's Authorized Dealer must notify the Distributor. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
SHAREHOLDERS MAY REDEEM SHARES IN SEVERAL WAYS.
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their ac-
count executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a re-
demption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within seven
days, redemption proceeds will be paid by check or credited to the sharehold-
er's brokerage account at the election of the shareholder. Bear Stearns ac-
count executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably be-
lieved by the Transfer Agent to be genuine. The Fund will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor
the Transfer Agent will be liable for following telephone instructions reason-
ably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail re-
demption requests should be sent to the Transfer Agent at: PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the share-
holder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Autho-
rized Dealer, or to the Transfer Agent if the shares are not held in a broker-
age account.
Written redemption instructions, indicating the portfolio from which shares
are to be redeemed, and duly endorsed stock certificates, if previously is-
sued, must be received by the Transfer Agent in proper form and signed exactly
as the shares are registered. All signatures must be guaranteed. The Transfer
Agent has adopted standards and procedures pursuant to which signature-guaran-
tees in proper form generally will be accepted from domestic banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations, as well as from par-
ticipants in the New York Stock Exchange Medallion Signature Program, the
Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion
Program
20
<PAGE>
("STAMP"). Such guarantees must be signed by an authorized signatory thereof
with "Signature Guaranteed" appearing with the shareholder's signature. If the
signature is guaranteed by a broker or dealer, such broker or dealer must be a
member of a clearing corporation and maintain net capital of at least
$100,000. Signature-guarantees may not be provided by notaries public. Redemp-
tion requests by corporate and fiduciary shareholders must be accompanied by
appropriate documentation establishing the authority of the person seeking to
act on behalf of the account. Investors may obtain from the Fund or the Trans-
fer Agent forms of resolutions and other documentation which have been pre-
pared in advance to assist compliance with the Portfolio's procedures. Any
questions with respect to signature-guarantees should be directed to the
Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-
1031).
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting Bear Stearns or Authorized Dealers by telephone
to request a redemption of STARS Portfolio shares. In such cases, investors
should consider using the other redemption procedures described herein. Use of
these other redemption procedures may result in the redemption request being
processed at a later time than it would have been if telephone redemption had
been used. During the delay, the STARS Portfolio's net asset value may fluctu-
ate.
AUTOMATIC WITHDRAWAL
Automatic withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for automatic withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through Au-
tomatic Withdrawal. Purchases of additional shares concurrently with withdraw-
als generally are undesirable.
Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject
to any applicable CDSC. Purchases of additional Class A shares where the sales
load is imposed concurrently with withdrawals of Class A shares generally are
undesirable.
Dividends, Distributions and Taxes
DIVIDENDS WILL BE AUTOMATICALLY REINVESTED IN ADDITIONAL STARS PORTFOLIO
SHARES AT NET ASSET VALUE, UNLESS PAYMENT IN CASH IS REQUESTED OR DIVIDENDS
ARE REDIRECTED INTO ANOTHER FUND PURSUANT TO THE REDIRECTED DISTRIBUTION
OPTION.
The STARS Portfolio ordinarily pays dividends from net investment income and
distributes net realized securities gains, if any, once a year, but it may
make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the provi-
sions of the 1940 Act. The STARS Portfolio will not make distributions from
net realized securities gains unless capital loss carryovers, if any, have
been utilized or have expired. Dividends are automatically reinvested in addi-
tional STARS Portfolio shares at net asset value, unless payment in cash is
requested or dividends are redirected into another fund pursuant to the Redi-
rected Distribution Option. All expenses are accrued daily and deducted before
declaration of dividends to investors. Dividends paid by each Class of the
STARS Portfolio will be calculated at the same time and in the same manner and
will be of the same amount, except that the expenses attributable solely to a
particular Class will be borne exclusively by such Class. Class C shares will
receive lower per share dividends than Class A shares because of the higher
expenses borne by Class C. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains re-
alized from the sale or disposition of certain market discount bonds, paid by
the STARS Portfolio will be taxable to U.S. shareholders as ordinary income
whether received in cash or reinvested in additional shares of the STARS Port-
folio or redirected into another portfolio or fund. Distributions from net re-
alized long-term securities gains of the STARS Portfolio will be taxable to
U.S. shareholders as long-term capital gains for Federal income tax purposes,
regardless of how long shareholders have held their STARS Portfolio's shares
and whether such distributions are received in cash or reinvested in, or redi-
rected into other, shares. The Code provides that the net capital gain of an
individual generally will not be subject to Federal income tax at a rate in
excess of 28%. Dividends and distributions may be subject to state and local
taxes.
21
<PAGE>
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of certain market discount bonds, paid by the STARS Portfolio to a for-
eign investor generally are subject to U.S. nonresident withholding taxes at
the rate of 30%, unless the foreign investor claims the benefit of a lower
rate specified in a tax treaty. Distributions from net realized long-term se-
curities gains paid by the STARS Portfolio to a foreign investor as well as
the proceeds of any redemptions from a foreign investor's account, regardless
of the extent to which gain or loss may be realized, generally will not be
subject to U.S. nonresident withholding tax. However, such distributions may
be subject to backup withholding, as described below, unless the foreign in-
vestor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and distribu-
tions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on the STARS Portfolio's Class A shares if an investor exchanges such shares
for shares of another fund or portfolio advised or sponsored by BSFM or its
affiliates within 91 days of purchase and such other fund reduces or elimi-
nates its otherwise applicable sales load for the purpose of the exchange. In
this case, the amount of the sales load charged the investor for such shares,
up to the amount of the reduction of the sales load charge on the exchange, is
not included in the basis of such shares for purposes of computing gain or
loss on the exchange, and instead is added to the basis of the fund shares re-
ceived on the exchange.
Federal regulations generally require the Fund to withhold ("backup withhold-
ing") and remit to the U.S. Treasury 31% of dividends, distributions from net
realized securities gains and the proceeds of any redemption, regardless of
the extent to which gain or loss may be realized, paid to a shareholder if
such shareholder fails to certify either that the TIN furnished in connection
with opening an account is correct or that such shareholder has not received
notice from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a Federal
income tax return. Furthermore, the IRS may notify the Fund to institute
backup withholding if the IRS determines a shareholder's TIN is incorrect or
if a shareholder has failed to properly report taxable dividend and interest
income on a Federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's Federal
income tax return.
THE STARS PORTFOLIO IS NOT EXPECTED TO HAVE ANY FEDERAL TAX LIABILITY; AL-
THOUGH INVESTORS SHOULD EXPECT TO BE SUBJECT TO FEDERAL, STATE OR LOCAL TAXES
IN RESPECT OF THEIR INVESTMENT IN STARS PORTFOLIO SHARES.
It is expected that the STARS Portfolio will qualify as a "regulated invest-
ment company" under the Code so long as such qualification is in the best in-
terests of its shareholders. Such qualification relieves the STARS Portfolio
of any liability for Federal income tax to the extent its earnings are dis-
tributed in accordance with applicable provisions of the Code. In addition,
the STARS Portfolio is subject to a non-deductible 4% excise tax, measured
with respect to certain undistributed amounts of taxable investment income and
capital gains.
Each investor should consult its tax adviser regarding specific questions as
to Federal, state or local taxes.
Performance Information
THE STARS PORTFOLIO MAY ADVERTISE ITS PERFORMANCE IN A NUMBER OF WAYS.
For purposes of advertising, performance for each Class may be calculated on
the basis of average annual total return and/or total return. These total re-
turn figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the STARS Portfo-
lio during the measuring period were reinvested in shares of the same Class.
These figures also take into account any applicable distribution and share-
holder servicing fees. As a result, at any given time, the performance of
Class C should be expected to be lower than that of Class A. Performance for
each Class will be calculated separately.
22
<PAGE>
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the STARS Portfolio was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable value of the investment at the end of the period. Advertisements of
the STARS Portfolio's performance will include its average annual total return
for one, five and ten year periods, or for shorter periods depending upon the
length of time during which the STARS Portfolio has operated. Computations of
average annual total return for periods of less than one year represent an an-
nualization of the STARS Portfolio's actual total return for the applicable
period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percent-
age rate which is calculated by combining the income and principal changes for
a specified period and dividing by the net asset value (or maximum public of-
fering price in the case of Class A shares) per share at the beginning of the
period. Class C total return will reflect the deduction of the CDSC. Adver-
tisements may include the percentage rate of total return or may include the
value of a hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return. Total return for the STARS
Portfolio also may be calculated by using 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 ap-
plicable CDSC at the end of the period for Class C shares. Calculations based
on the net asset value per share do not reflect the deduction of the sales
load on the STARS Portfolio's Class A shares, which, if reflected, would re-
duce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance infor-
mation, such as that described above, may not provide a basis for comparison
with other investments or other investment companies using a different method
of calculating performance.
Comparative performance information may be used from time to time in advertis-
ing or marketing the STARS Portfolio's shares, including data from Lipper Ana-
lytical Services, Inc. and other industry publications, and indices such as
the S&P 500 and the Dow Jones Industrial Average.
General Information
The Fund was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust (the "Trust Agreement") dated September 29, 1994, and commenced opera-
tions on or about April 3, 1995. The Fund is authorized to issue an unlimited
number of shares of beneficial interest, par value $.001 per share. The STARS
Portfolio's shares are classified into three Classes--Class A, Class C and
Class Y. Each share has one vote and shareholders will vote in the aggregate
and not by Class, except as otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the STARS Portfolio. However,
the Trust Agreement disclaims shareholder liability for acts or obligations of
the STARS Portfolio and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the STARS
Portfolio or a Trustee. The Trust Agreement provides for indemnification from
the STARS Portfolio's property for all losses and expenses of any shareholder
held personally liable for the obligations of the STARS Portfolio. Thus, the
risk of a shareholder incurring financial loss on account of a shareholder li-
ability is limited to circumstances in which the STARS Portfolio itself would
be unable to meet its obligations, a possibility which management believes is
remote. Upon payment of any liability incurred by the STARS Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the STARS Portfolio. The Fund's Trustees intend to conduct
the operations of the STARS Portfolio in a way so as to avoid, as far as pos-
sible, ultimate liability of the shareholders for liabilities of the STARS
Portfolio. As discussed under "Management of the STARS Portfolio" in the STARS
Portfolio's Statement of Additional Information, the STARS Portfolio ordinar-
ily will not hold shareholder meetings; however, shareholders under certain
circumstances may have the right to call a meeting of shareholders for the
purpose of voting to remove Trustees.
23
<PAGE>
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Fund
has the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submit-
ted under the provisions of the 1940 Act or applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company,
such as the Fund, will not be deemed to have been effectively acted upon un-
less approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfo-
lio shall be deemed to be affected by a matter unless it is clear that the in-
terests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the se-
lection of independent accountants and the election of Trustees from the sepa-
rate voting requirements of the Rule.
The STARS Portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to shareholders of
the STARS Portfolio or any member of the public regarding the advisability of
investing in the STARS Portfolio. S&P's only ongoing relationship to Bear
Stearns and its affiliates is the licensing for a fee of certain S&P trade-
marks and trade names and the provision of access to the STARS ranking system
through a publicly available subscription service of S&P. This license is ter-
minable under circumstances generally described in the STARS Portfolio's
Statement of Additional Information under "Information About the STARS Portfo-
lio." BSFM will have no greater access to STARS than any other subscriber to
MarketScope. S&P has no obligation to take the needs of Bear Stearns and its
affiliates or shareholders of the STARS Portfolio into consideration in oper-
ating the STARS system. S&P is not responsible for and has not participated in
the determination of the securities to be purchased by the STARS Portfolio.
S&P has advised that its Equity Information Services Department, which pub-
lishes STARS, operates independently of, and has no access to information ob-
tained by, its Ratings Group, which may in its regular operations obtain in-
formation of a confidential nature.
The Transfer Agent maintains a record of share ownership and will send confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by
calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling
Bear Stearns at 1-800-766-4111.
24
<PAGE>
Appendix
Since the investment characteristics of the STARS Portfolio will correspond
directly to those of the Master Series, the following is a discussion of the
investment techniques used, and certain securities purchased, by the Master
Series.
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, the Master Series
may employ, among others, the following investment techniques which may in-
volve certain risks. Options transactions involve "derivative securities."
OPTIONS TRANSACTIONS
THE MASTER SERIES MAY ENGAGE IN OPTIONS TRANSACTIONS.
The Master Series may write and sell covered call option contracts to the ex-
tent of 20% of the value of its net assets at the time such option contracts
are written and may purchase call options to close such positions. A call op-
tion gives the purchaser of the option the right to buy, and obligates the
writer to sell, the underlying security at the exercise price at any time dur-
ing the option period.
The Master Series may purchase call and put options on stock indexes listed on
U.S. securities exchanges. A stock index fluctuates with changes in the market
values of the stocks included in the index. Because the value of an index op-
tion depends upon movements in the level of the index rather than the price of
a particular stock, whether the Master Series will realize a gain or loss from
purchasing options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock.
The Master Series may not invest more than 5% of its assets, represented by
the premium paid, in the purchase of options at any one time.
Successful use by the Master Series of options will be subject to BSFM's abil-
ity to predict correctly movement in the direction of individual stocks or the
stock market generally. To the extent BSFM's predictions are incorrect, the
Master Series may incur losses which could adversely affect the value of a
shareholder's investment.
LENDING PORTFOLIO SECURITIES
THE MASTER SERIES MAY EARN ADDITIONAL INCOME BY LENDING ITS PORTFOLIO SECURI-
TIES.
From time to time, the Master Series may lend securities from its portfolio to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. Such loans may not exceed 33 1/3% of the
value of its total assets. In connection with such loans, the Master Series
will receive collateral consisting of cash, U.S. Government securities or ir-
revocable letters of credit which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The Master Series can increase its income through the investment of such col-
lateral. The Master Series continues to be entitled to payments in amounts
equal to the interest, dividends and other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Master Series might experi-
ence risk of loss if the institution with which it has engaged in a portfolio
loan transaction breaches its agreement with the Master Series.
BORROWING MONEY
THE MASTER SERIES MAY BORROW MONEY.
As a fundamental policy, the Master Series is permitted to borrow to the ex-
tent 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 as-
sets. However, the Master Series currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 15% of
the value of its total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made. While borrowings exceed 5% of its total as-
sets, the Master Series will not make any additional investments.
A-1
<PAGE>
CERTAIN PORTFOLIO SECURITIES
AMERICAN DEPOSITARY RECEIPTS
THE MASTER SERIES MAY INVEST IN SECURITIES OF FOREIGN ISSUERS IN THE FORM OF
AMERICAN DEPOSITARY RECEIPTS.
The Master Series' assets may be invested in the securities of foreign issuers
in the form of American Depositary Receipts ("ADRs"). These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. The Master Series may invest in ADRs through "spon-
sored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and the depositary of an
unsponsored facility frequently is under no obligation to distribute share-
holder communications received from the issuer of the deposited security or to
pass through voting rights to the holders of such receipts in respect of the
deposited securities.
MONEY MARKET INSTRUMENTS
THE MASTER SERIES MAY INVEST IN A VARIETY OF MONEY MARKET INSTRUMENTS.
The Master Series may invest, in the circumstances described under "Descrip-
tion of the STARS Portfolio--Management Policies," in the following types of
money market instruments, each of which at the time of purchase must have or
be deemed to have under rules of the Securities and Exchange Commission re-
maining maturities of 13 months or less.
U.S. GOVERNMENT SECURITIES
The Master Series may purchase securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, which include U.S. Treasury
securities that differ in their interest rates, maturities and times of issu-
ance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds gener-
ally have initial maturities of greater than ten years. Some obligations is-
sued or guaranteed by U.S. Government agencies and instrumentalities, for ex-
ample, Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow
from the U.S. Treasury; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others,
such as those issued by the Student Loan Marketing Association, only by the
credit of the agency or instrumentality. These securities bear fixed, floating
or variable rates of interest. Principal and interest may fluctuate based on
generally recognized reference rates or the relationship of rates. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always
do so, because it is not so obligated by law.
BANK OBLIGATIONS
The Master Series may purchase certificates of deposit, time deposits, bank-
ers' acceptances and other short-term obligations of domestic banks, foreign
subsidiaries of domestic banks, foreign branches of domestic banks, and domes-
tic and foreign branches of foreign banks, domestic savings and loan associa-
tions and other banking institutions. With respect to such securities issued
by foreign branches of domestic banks, foreign subsidiaries of domestic banks,
and domestic and foreign branches of foreign banks, the Master Series may be
subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. Such risks include possible future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange con-
trols or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities and
the possible seizure or nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
A-2
<PAGE>
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Master Series will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Master Series will not invest more
than 15% of the value of its net assets in time deposits maturing in more than
seven days and in other securities that are illiquid.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Master Series of an un-
derlying debt instrument, subject to an obligation of the seller to repur-
chase, and the Master Series to resell, the instrument at a fixed price usu-
ally not more than one week after its purchase. Certain costs may be incurred
by the Master Series in connection with the sale of the securities if the
seller does not repurchase them in accordance with the repurchase agreement.
In addition, if bankruptcy proceedings are commenced with respect to the
seller of the securities, realization on the securities by the Master Series
may be delayed or limited.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by the Master
Series will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service
Inc. ("Moody's"), A-1 by the S&P Ratings Group (which operates separately from
and independently of S&P's Equity Information Services Department, which pub-
lishes STARS), F-1 by Fitch Investors Service, Inc. ("Fitch") or Duff-1 by
Duff & Phelps, Inc. ("Duff"), (b) issued by companies having an outstanding
unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by
S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable
quality to those rated obligations which may be purchased by the Master Se-
ries. The Master Series may purchase floating and variable rate demand notes
and bonds, which are obligations ordinarily having stated maturities in excess
of one year, but which permit the holder to demand payment of principal at any
time or at specified intervals.
INVESTMENT COMPANY SECURITIES
THE MASTER SERIES MAY INVEST IN SECURITIES OF OTHER INVESTMENT COMPANIES WHICH
ARE RANKED BY STARS.
The Master Series may invest in securities issued by other investment compa-
nies which are ranked by STARS. Under the 1940 Act, the Master Series' invest-
ment in such securities currently is limited to, subject to certain excep-
tions, (i) 3% of the total voting stock of any one investment company, (ii) 5%
of the Master Series' net assets with respect to any one investment company
and (iii) 10% of the Master Series' net assets in the aggregate. Investments
in the securities of other investment companies will involve duplication of
advisory fees and certain other expenses.
ILLIQUID SECURITIES
THE MASTER SERIES MAY PURCHASE ILLIQUID SECURITIES.
The Master Series may invest up to 15% of the value of its net assets in secu-
rities as to which a liquid trading market does not exist, provided such in-
vestments are consistent with its investment objective. Such securities may
include securities that are not readily marketable, such as certain securities
that are subject to legal or contractual restrictions on resale and repurchase
agreements providing for settlement in more than seven days after notice. As
to these securities, the Master Series is subject to a risk that should it de-
sire to sell them when a ready buyer is not available at a price it deems rep-
resentative of their value, the value of its net assets could be adversely af-
fected.
A-3
<PAGE>
The Bear Stearns Funds
The Insiders Select Fund
Class A and Class C Shares
SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 10, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGE 18 OF
THE PROSPECTUS IN THE LAST PARAGRAPH OF THE SECTION ENTITLED "HOW TO BUY
SHARES--CLASS A SHARES."
Class A shares of the Portfolio may be purchased at net asset value, with the
proceeds from the redemption of shares of an investment company sold with a
sales charge or commission and not distributed by Bear Stearns. From April 15,
1996 through June 28, 1996, Bear Stearns will offer to pay Authorized Dealers
an amount up to 1% of the net asset value of shares purchased by the Dealers'
clients or customers with such proceeds. If such shares are redeemed within
one year of purchase, a CDSC of 1% will be imposed.
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION CONTAINED ON PAGES 17
AND 18 OF THE PROSPECTUS.
Class A shares of the Portfolio may be purchased at net asset value by the
following customers of a broker that operates a master account for purchasing
and redeeming, and otherwise providing shareholder services in respect of,
Fund shares pursuant to agreements with the Fund or Bear Stearns: (i) invest-
ment advisers and financial planners who place trades for their own accounts
or for the accounts of their clients and who charge a management, consulting
or other fee, (ii) clients of such investment advisers and financial planners
if such clients place trades through accounts linked to master accounts of
such investment advisers or financial planners on the books and records of
such broker and (iii) retirement and deferred compensation plans, and trusts
used to fund such plans, including, but not limited to, plans or trusts de-
fined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986,
as amended, and "rabbi trusts", provided, in each case, the purchase transac-
tion is effected through such broker. The broker may charge a fee for transac-
tions in Portfolio shares.
THE FOLLOWING INFORMATION SUPERSEDES ANY CONTRARY INFORMATION CONTAINED IN THE
PROSPECTUS.
Effective January 1, 1996, the Portfolio's name was changed to "The Insiders
Select Fund."
