Registration Nos. 33-84842
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 9 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 9 /X/
(Check appropriate box or boxes)
THE BEAR STEARNS FUNDS
(Exact Name of Registrant as Specified in Charter)
245 Park Avenue
New York, New York 10167
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 272-2000
Stephen A. Bornstein, Esq.
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
(Name and Address of Agent for Service)
copy to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004-2696
This Registration Statement also has been executed by the Principal Executive
Officer, Principal Financial Officer and Board of Trustees of the S&P STARS
Fund.
<PAGE>
It is proposed that this filing will become effective (check appropriate
box)
X immediately upon filing pursuant to paragraph (b)
-----
on (date) pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(i)
-----
on (date) pursuant to paragraph (a)(i)
-----
75 days after filing pursuant to paragraph (a)(ii)
-----
on (date) pursuant to paragraph (a)(ii) of Rule 485.
-----
If appropriate, check the following box:
this post-effective amendment designates a new
----- effective date for a previously filed post-effective
amendment.
Registrant has registered an indefinite number of shares of its beneficial
interest under the Securities Act of 1933 pursuant to Section 24(f) of the
Investment Company Act of 1940. Registrant's Rule 24f-2 Notice for the fiscal
year ended March 31, 1996 was filed on May 29, 1996.
Cross-Reference Sheet Pursuant to Rule 495(a)
<TABLE>
<CAPTION>
Large Cap
Value, Small
Cap Value and S&P STARS The Insiders
Total Return Portfolio Select Fund
Items in Bond Portfolios Class A Class A and
Part A of Class A and and Class Class C
FORM N-1A CAPTION CLASS C SHARES C SHARES SHARES
<S> <C> <C> <C> <C>
1 Cover Cover Cover Cover
2 Synopsis 3 3 3
3 Condensed Financial 5 4 4
Information
4 General Description 6 5 5
of Registrant
5 Management of the Fund 12 11 10
5(a) Management's * * *
Discussion of Fund's
Performance
6 Capital Stock and 25 23 25
Other Securities
7 Purchase of 14 13 15
Securities Being
Offered
8 Redemption or 20 19 20
Repurchase
9 Pending Legal * * *
Proceedings
The
Large Cap Value, Insiders
Items in Small Cap Value S&P STARS Select
Part A of and Total Return Portfolio Fund
Form Bond Portfolios Class Y Class Y
N-1A CAPTION CLASS Y SHARES SHARES SHARES
1 Cover Cover Cover Cover
2 Synopsis 3 3 3
3 Condensed Financial 4 4 4
Information
4 General Description of 5 5 4
Registrant
5 Management of the Fund 11 10 10
The
Large Cap Value, Insiders
Items in Small Cap Value S&P STARS Select
Part A of and Total Return Portfolio Fund
Form Bond Portfolios Class Y Class Y
N-1A CAPTION CLASS Y SHARES SHARES SHARES
5(a) Management's Discussion * * *
of Fund's Performance
6 Capital Stock and Other 19 17 19
Securities
7 Purchase of Securities 12 12 14
Being Offered
8 Redemption or Repurchase 15 14 16
9 Pending Legal * * *
Proceedings
The
Large Cap Value, Insiders
Items in Small Cap Value Select
Part B of and Total Return S&P STARS Fund
Form Bond Portfolios Portfolio All
N-1A CAPTION ALL CLASSES ALL CLASSES CLASSES
10 Cover Page B-1 B-1 B-1
11 Table of Contents B-1 B-1 B-1
12 General Information and * * *
History
13 Investment Objectives B-2 B-2 B-2
and Policies
14 Management of the Fund B-14 B-10 B-12
15 Control Persons and B-14 B-10 B-12
Principal Holders of
Securities
16 Investment Advisory and B-18 B-15 B-16
Other Services
17 Brokerage Allocation B-28 B-23 B-25
18 Capital Stock and Other B-32 B-26 B-27
Securities
19 Purchase, Redemption B-22, B-24 B-19, B-20 B-20,
and Pricing of B-21
Securities Being Offered
20 Tax Status B-26 B-21 B-22
The
Large Cap Value, Insiders
Items in Small Cap Value Select
Part B of and Total Return S&P STARS Fund
Form Bond Portfolios Portfolio All
N-1A CAPTION ALL CLASSES ALL CLASSES CLASSES
21 Underwriters B-1 B-1 B-1
22 Calculations of B-30 B-25 B-26
Performance Data
23 Financial Statements B-36 B-28 B-29
Items in
Part C of
FORM N-1A ALL PORTFOLIOS
24 Financial Statements and C-1
Exhibits
25 Persons Controlled by or C-3
Under Common Control with
Registrant
26 Number of Holders of C-3
Securities
27 Indemnification C-4
28 Business and Other C-4
Connections of Investment
Adviser
29 Principal Underwriter C-5
30 Location of Accounts and C-6
Records
31 Management Services C-6
32 Undertakings C-6
* Omitted since answer is negative or inapplicable.
</TABLE>
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
PROSPECTUS
The Bear Stearns Funds
Large Cap Value Portfolio - Small Cap Value Portfolio - Total Return Bond
Portfolio
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. 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").
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. The Bond Portfolio will invest
primarily in investment grade, U.S. dollar denominated fixed-income securities
of domestic and foreign issuers. Under normal 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 65% of the Salomon Brothers Broad Investment Grade ("BIG") Bond
Index and not more than 135% of the Salomon Brothers BIG Bond 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
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 investor
expects to hold the shares and other circumstances. Each 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 Portfolio'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 June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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 AN
D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
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
FEE TABLE
- -------------------------------------------------------------------------------
SMALL CAP LARGE CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A CLASS A CLASS A
- ------------------------------------------------------------------------------
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
5 Years..................................... $125 $125 $80
10 Years..................................... $218 $218 $133
- -----
* 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."
** BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of each Portfolio other than brokerage commissions, extraordinary
items, interest and taxes to the extent Total Portfolio Operating Expenses
exceed 1.50% and 0.80% for each Equity Portfolio and the Bond Portfolio,
respectively. The expenses noted above for the Bond Portfolio have been restated
and reduced from the prior year. For the fiscal year ended March 31, 1996, Other
Expenses and Total Portfolio Operating Expenses for the Bond Portfolio, after
fee waivers and expense reimbursements then in effect, were 0.50% and 0.85%,
respectively. With respect to all Portfolios, without such waiver and expense
reimbursement, Management Fees stated above would have been 0.75% and 0.45%, for
each Equity Portfolio and Bond Portfolio, respectively. Other Expenses would
have been 4.59%, 2.57%, and 2.92% for Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio, respectively, and Total Portfolio Operating
Expenses would have been 5.84%, 3.82% and 3.72% for Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio, respectively.
FEE TABLE (continued)
- -------------------------------------------------------------------------------
SMALL CAP LARGE CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS C CLASS C CLASS 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
5 Years..................................... $108 $108 $ 66
10 Years..................................... $233 $233 $145
You would pay the following expenses on
the same investment, assuming no
redemption:
1 Year...................................... $ 20 $ 20 $ 12
3 Years..................................... $ 63 $ 63 $ 38
5 Years..................................... $108 $108 $ 66
10 Years..................................... $233 $233 $145
- -----
* BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of each Portfolio other than brokerage commissions, extraordinary
items, interest and taxes to the extent Total Portfolio Operating Expenses
exceed 2.00% and 1.20% for each Equity Portfolio and the Bond Portfolio,
respectively. The expenses noted above for the Bond Portfolio have been restated
and reduced from the prior year. For the fiscal year ended March 31, 1996, Other
Expenses and Total Portfolio Operating Expenses for the Bond Portfolio, after
fee waivers and expense reimbursements then in effect, were 0.50% and 1.25%,
respectively. With respect to all Portfolios, without such waiver and expense
reimbursement, Management Fees stated above would have been 0.75% and 0.45%, for
each Equity Portfolio and Bond Portfolio, respectively. Other Expenses would
have been 4.64%, 2.64% and 3.00% for Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio, respectively, and Total Portfolio Operating
Expenses would have been 6.39%, 4.39% and 4.20% for Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio, respectively.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, each
Portfolio'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 costs
and expenses borne by each Portfolio and investors, the payment of which will
reduce investors' annual return. 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 description of the expense
reimbursement or waiver arrangements in effect, see "Management of the Fund."
Condensed Financial Information
The information in the table below covering each Portfolio's investment results
for the period indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolios' Annual Report for the
fiscal year ended March 31, 1996 which is incorporated by reference into the
Portfolios' Statement of Additional Information which is available upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, 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
investment operations through March 31, 1996. This information has been derived
from information provided in each Portfolio's financial statements.
<TABLE>
<CAPTION>
Large Cap Small Cap Total Return
Value Value Bond
Portfolio(1) Portfolio(2) Portfolio(3)
---------------- ------------------- -----------------
Class A Class C Class A Class C Class A Class C
------- ------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance*
Net asset value, beginning of period....... $12.00 $12.00 $12.00 $12.00 $12.00 $12.00
------- --------- -------- --------- ------- --------
Net investment income/(loss) (4)........... 0.06 (0.01) (0.07) (0.10) 0.71 0.67
Net realized and unrealized gain on
investments (5)............................ 3.10 3.10 4.17 4.11 0.30 0.30
------- --------- ------- --------- ------- --------
Net increase in net assets
resulting from operations.................. 3.16 3.09 4.10 4.01 1.01 0.97
------- --------- ------- --------- ------- --------
Dividends and distributions to shareholders from:
Net investment income...................... (0.02) - - - (0.71) (0.67)
Net realized capital gains................. (0.01) (0.01) (0.23) (0.22) (0.04) (0.04)
------- --------- ------- -------- ------- --------
(0.03) (0.01) (0.23) (0.22) (0.75) (0.71)
------- --------- ------- -------- ------- --------
Net asset value, end of period............. $15.13 $15.08 $15.87 $15.79 $12.26 $12.26
======= ========= ======= ======== ======= ========
Total investment return (6)................ 26.35% 25.71% 34.36% 33.59% 8.54% 8.13%
======= ========= ======= ======== ======= ========
Ratios/Supplemental Data
Net assets, end of period (000's omitted).. $3,616 $3,520 $6,474 $6,753 $4,467 $1,775
Ratio of expenses to average
net assets (4)(7).......................... 1.50% 2.00% 1.50% 2.00% 0.85% 1.25%
Ratio of net investment income/(loss) to
average net assets (4)(7).................. 0.46% (0.06%) (0.66%) (1.09%) 5.76% 5.38%
Decrease reflected in above expense
ratios and net investment income/(loss)
due to waivers and reimbursements (7)...... 4.34% 4.39% 2.32% 2.39% 2.87% 2.95%
Portfolio turnover rate (8)................ 45.28% 45.28% 40.79% 40.79% 107.35% 107.35%
Average commission rate per share.......... $0.06 $0.06 $0.06 $0.06 - -
- ------
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the dates of distributions.
(1) Commenced its investment operations on April 4, 1995.
(2) Commenced its investment operations on April 3, 1995.
(3) Commenced its investment operations on April 5, 1995.
(4) Reflects waivers and reimbursements.
(5) The amount shown for a share outstanding throughout the respective period is
not in accord with the change in the aggregate gains and losses in
investments during the respective period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset value
during the period.
(6) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(7) Annualized.
(8) Not annualized.
</TABLE>
Further information about performance is contained in the Portfolios' Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
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
portfolio.
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 Portfolio and the
Bond Portfolio are subject to an annual distribution and shareholder 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-Distribution 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 time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor'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 initial 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 expect
to maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distribution 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 Portfolio
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
holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares. There can be no assurance that a Portfolio's
investment 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,
substantially all of its assets in equity securities of issuers with market
capitalizations of $1 billion or more and identified by BSFM as value companies.
The Small Cap Value Portfolio invests, under normal market conditions,
substantially all of its assets in equity securities of issuers with market
capitalizations 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
ratios, price to earnings ratios, earnings growth, dividend payout ratios,
return 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 classified as value
companies.
For potential investments, BSFM also, among other matters, may review new
management and upcoming corporate restructuring plans, consider the general
business cycle and the company's position within the specific industry and
consider 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 total
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 consist of common
stocks, convertible securities and preferred stocks. The convertible securities
and preferred stocks in which each Equity Portfolio may invest will be rated at
least investment grade by a nationally recognized st atistical rating
organization at the time of purchase. Each Equity Portfolio may invest, in
anticipation of investing cash positions, in money market instruments 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 instruments. 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
instruments.
The Bond Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Bond
Portfolio is permitted to invest in a broad range of investment grade, U.S.
dollar denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign 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
mortgage-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
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Bond Portfolio seeks to provide performance results that equal or exceed the
Salomon Brothers BIG Bond Index, which is a market-capitalization weighted index
that includes U.S. Treasury, Government-sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothes BIG Bond Index. As of March 31, 1996, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond Index
was approximately nine years and their effective duration 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 65% of the Salomon Brothers BIG
Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index.
As a measure of a fixed-income security's cash flow, duration is an alternative
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 interest
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 measures 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 final 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 prepayments and by changes in
interest rates. Incorporating a security's yield, coupon 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 believes will
achieve the Bond Portfolio's objective in a relatively conservative manner
taking into account the volatility and risk associated with investing in a
portfolio of relatively longer-term fixed-income securities. Wh ile the Bond
Portfolio seeks, as part of its investment objective, to preserve 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 asset value per
share of a fund that invested in portfolio securities with a shorter duration.
At least 70% 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
Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch
Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff")
or, if unrated, deemed to be of comparable quality by BSFM. Up to 30% 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 Securities" 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 currency
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.
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Portfolio must borrow the security to make
delivery 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 during 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 instrument
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 the
amount deposited in the account plus the amount deposited with the broker as
collateral always equals the current value of the security sold short; or (b)
otherwise cover its short position in accordance with positions taken by the
Staff of the 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 Portfolio 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
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets. No Portfolio may sell short the
securities of any single issuer listed on a national securities exchange to the
extent of more than 5% of the value of its net assets. No Portfolio may sell
short the securities of any class of an issuer to the extent, at the time of the
transaction, of more than 2% of the outstanding securities of that class.
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
receives 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 Portfolio'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 assets
may be invested, and securities issued or guaranteed by the U.S. Government, 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 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 describes
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in 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 addition,
each Equity Portfolio may purchase securities of any company having less than
three years' continuous operation (including operations of any predecessors) 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 assets. See
"Investment Objective and Management Policies-Investment Restrictions" in the
Statement of Additional Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
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 undertake 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 companies,
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
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities purchased by the Bond
Portfolio, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
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 additional 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 regarded
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 obligor's
ability to pay interest and repay principal on debt securities rated BBB to be
adequate; adverse changes in economic conditions and circumstances, however, are
more likely to have an adverse impact on these debt securities and, therefore,
impair timely payment. Debt securities 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
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Fund's Board of Trustees. In accordance with
such guidelines, BSFM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. The Bond Portfolio intends to treat
other stripped mortgage-backed securities as illiquid securities. See
"Appendix-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 selling
and lending portfolio securities involves greater risk than that incurred by
many other funds with a similar objective. Using these techniques may produce
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 transaction
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
securities 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
expiring 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 portfolio
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, volume 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 information about a non-U.S.
issuer, and non-U.S. issuers generally are not subject to uniform accounting and
financial reporting standards, practices and requirements 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
developments, 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
restrict the payment of principal, interest and dividends to investors located
outside the country of the issuers, whether from currency blockage or otherwise.
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
Portfolio changes investments from one country to another.
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 governments 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
occurs 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 exchanges.
See "Appendix-Investment Techniques." For example, some foreign exchanges 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 addition, 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 dispose
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 allocated
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 contains
the name and general business experience of each Trustee.
Investment Adviser
The Portfolios' investment adviser, BSFM, manages each Portfolio's investments.
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 institutional and
individual investors. BSFM is a registered investment adviser 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 March 31, 1996 of over $1.9 billion.
BSFM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSFM and the Fund, subject 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 Director of
Equity Investments-Bear Stearns Asset Management and Senior Managing Director of
Bear Stearns. The Bond Portfolio's principal portfolio 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 Investments of Bear
Stearns Asset Management, positions he held during his employment with Bear
Stearns from June 1987 through November 1994. From November 1994 to November
1995 he was a financial consultant.
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 Portfolio
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 Portfolio's
average daily net assets. From April 3, 1995 (commencement of operations)
through March 31, 1996, no fees were paid by the Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio pursuant to an undertaking by BSFM.
Each Portfolio's administrator is BSFM. Each 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 each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts 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, as set forth below:
- ---------------------------------------------------------------------
ANNUAL FEE AS A PERCENTAGE OF
PORTFOLIO'S AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- ---------------------------------------------------------------------
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%
The above-referenced fees are subject to a monthly minimum fee of $11,000 per
Portfolio.
From April 3, 1995 (commencement of operations) through March 31, 1996, the
Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio each
paid PFPC Inc. a monthly fee at the effective annual rate of .90 of 1%, .48 of
1% and .55 of 1%, respectively of the Portfolio's average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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. From time to time PFPC Inc. may waive a portion
of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will
reduce each Portfolio's monthly minimum to $7,500 for net assets of less than
$25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for
net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this
voluntary fee waiver at any time.
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 Additional
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
Advisory 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.
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
distributing Portfolio shares and for providing personal services to, and/or
maintaining accounts of, Portfolio shareholders a fee as follows of the average
daily net assets of the respective Class:
- ------------------------------------
CLASS A CLASS C
- ------------------------------------
Equity Portfolios... .50% 1.00%
Bond Portfolio...... .35% .75%
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 incurred. The Fund understands
that these third parties also may charge fees to their clients who are
beneficial owners of Portfolio shares in connection with their client accounts.
These fees would be in addition to any amounts which may be received by them
from Bear Stearns under the Plan.
Expense Limitation
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, including
the investment advisory fee and fees under the Plan, exceed 0.80% of the average
daily net assets of the Bond Portfolio-Class A, 1.20% of the average daily net
assets of the Bond Portfolio-Class C, 1.50% of the average daily net assets of
each Equity Portfolio-Class A and 2.00% of the average daily net assets 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
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 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
Portfolio's shares also may be made directly through the Transfer Agent. When
purchasing Portfolio 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 Transfer
Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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 receipt 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 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 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., Attention: 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 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
(currently 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 determined.
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 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 number 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 accordance with procedures
established by, the Fund's Board of Trustees. Substantially 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 information regarding the methods
employed in valuing each Portfolio's investments, see "Determination of Net
Asset Value" in the Portfolios' Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Re
venue 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
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
accordance with the following schedule:
- ------------------------------------------------------------------------------------------
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*
- ------------------------------------------------------------------------------------------
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
- --------------
* Until further notice to the contrary, the full amount of the sales load will
be reallowed as a dealer concession.
</TABLE>
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 Equity
Portfolio and the Bond Portfolio, respectively, will be imposed at the time of
redemption. The terms contained in the section of the Fund's Prospectus entitled
"How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares" 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 additional
payments or promotional incentives to dealers that sell Class A shares. In some
instances, these incentives may be offered only to certain dealers who have sold
or may sell significant amounts of Class A shares. Dealers may receive a larger
percentage of the sales load from Bear Stearns than they receive for selling
most other funds.
Through September 30, 1996, 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 customers though September 26, 1995. The fee paid is based on 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 the period ended September 26, 1995, reduced for
redemptions during the year ending September 30, 1996. 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
affiliates 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
employee or registered representative of any Authorized Dealer or their
respective spouses and minor children; (d) trustees or directors of investment
companies for which Bear Stearns or an affiliate acts as sponsor; (e) any state,
county or city, or any instrumentality, department, authority or agency thereof,
which is prohibited by applicable investment laws from paying a sales load or
commission in connection with the purchase of Portfolio shares; (f) any
institutional investment clients including corporate sponsored pension and
profit-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. However, if such
investor redeems those shares within one year after purchase, a CDSC of 1.00%
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 1.00% 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-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
purchase 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 public
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 purchase
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 purchases made by a
company controlled by such individual(s); (b) individual pu rchases 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 benefit 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
applicable 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 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 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 escrow 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
Portfolio (minimum initial investment of $250 and minimum subsequent investments
of $100 per transaction) at regular intervals selected by the investor. Provided
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 designated
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 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 involves the continuous invest- ment in a
Portfolio regardless of fluctuating price levels of the 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 a 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
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
investors. To use this Privilege, investors should consult their account ex
ecutive 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 exchange shares of a
Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously di d 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 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 otherwise
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
account, however, an exchanging shareholder must file a specific written
request. 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 registered, 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
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the shares
being exchanged must have a value of at least the minimum initial investment
required 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 exceed
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,
except in the instances described below, a sales load may be charged with
respect 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
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 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 confirmation of the
investor's holdings through a check of appropriate records. No fees currently
are charged shareholders di rectly 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 exchange by the
shareholder and, therefore, an exchanging shareholder may realize 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 automatically
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
request 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 investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
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
three 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
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 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 notice
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
redemption. To take advantage of this reinstatement privilege, shareholders 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 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 reinvestment
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 investor 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
acquired 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 5
additional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated 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 Eligible
Benefit Plans, (c) redemptions as a result of a combination of any investment
company with a Portfolio by merger, acquisition of assets or otherwise, and (d)
a distribution following retirement under a tax-deferred retirement plan or upon
attaining age 701/2 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 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 executive 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 account 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 redemption 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 three days, redemption proceeds will be paid
by check or credited to the shareholder's brokerage account at the election of
the shareholder. Bear Stearns account 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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the Portfolio from which shares are
to be redeemed, and duly endorsed stock certificates, if previously issued, 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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 processed
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.
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 Automatic
Withdrawal. Purchases of additional shares concurrent with withdrawals
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 redirected
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 effective. 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
distribution 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
Distribution 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 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
realized 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
redirected 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
distributions 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%. Dividends
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
disposition of certain market discount bonds, paid by a Portfolio to a foreign
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 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. nonresident
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.
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 distributions 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 affiliates
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
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 received on
the exchange.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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.
Management of the Fund believes that each Portfolio has qualified for the fiscal
year ended March 31, 1996 as a "regulated investment company" under the Code.
Each Portfolio intends to continue to so qualify if 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 accordance 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 assume
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 current
yield. Current yield refers to the Bond Portfolio's annualized net investment
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 calculating
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.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the 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 redeemable
value of the investment at the end of the period. Advertisements of each
Portfolio's performance will include such Portfolio's average annual total
return for one, five and ten year periods, or for shorter periods depending upon
the length of time during which the Portfolio has operated. Computations of
average annual total return for periods of less than one year represent an
annualization of such 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 percentage
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 offering
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. Advertisements 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 applicable 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
information, 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 advertising
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 operations 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 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 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
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which 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 Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Fund" in the Portfolios' Statement of
Additional In formation, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: [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.
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 securities."
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 specific
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 Portfolio
also may purchase call options to enter into closing purchase transactions. Each
Portfolio also may write covered put option contracts to the extent 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 securities. 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 foreign
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 underlying 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
indexes 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 purchase 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 particular
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 predictions
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 engage in such transactions if the sum of
the amount of initial margin deposits 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 market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting 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 securities which
it has hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if the Portfolio has insufficient 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
Exchange Commission, each Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transactions
in an amount generally equal to the value of the underlying co mmodity. The
segregation of such assets will have the effect of limiting the Portfolio'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
commitment 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
purchase such securities only with the intention of actually acquiring the
securities, 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 ba sis 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
because 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 itself.
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 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
investments 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
opportunities 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 disclosure
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 331/3% of the value
of a Portfolio's total assets. In connection with such loans, a Portfolio 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 securities. 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 security and receives interest on
the amount of the loan. Such loans will be terminable 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 331/3% 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 assets,
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
Depositary Receipts ("EDRs"). 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. 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
securities. 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
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
shareholder 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.
Mortgage-Related Securities-(Bond Portfolio)
The Bond Portfolio may invest in mortgage-related securities which are
collateralized by pools of mortgage loans.
Mortgage-related securities are a form of derivative 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 organizations 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 insurance companies, and similar foreign
entities. The mortgage-related securities 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
securities are guaranteed by a third party or otherwise similarly secured, the
market 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
security, 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
interest rates. However, though the value of a mortgage-related security may
decline 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 experience gr
eater 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 recognized 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 investment 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 Securities" 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 which are a form of
derivative securities. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. These
securities include debt securities and securities 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 vehicle loans and hospital
account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-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
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of 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 payments
on these securities.
Convertible Securities-(All Portfolios)
Each Portfolio may invest in convertible securities.
Convertible securities 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 senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed-income 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 convertible security also affords an
investor the opportunity, through its conversion 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 common
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
believes 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
"conversion 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
generally 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
political 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 interest income received by it from municipal obligations generally will be
subject 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
intends to invest no more than 25% of its assets in municipal obligations.
However, this percentage may be varied from time to time without shareholder
approval.
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 interest
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 interest
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 interest 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 qualities.
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
subdivisions, 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 entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development 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
financial markets of the countries in which the investments are made and the
interest 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
instruments, each of which at the time of purchase must have or be deemed to
have under rules of the Securities and Exchange Commission remaining maturities
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
instrumentalities. 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 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, since it is not so obligated by law.
Bank Obligations-(All Portfolios)
Each Portfolio may invest in bank obligations, including certificates of
deposit, 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
subsidiaries 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 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 controls 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.
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
uninsured, 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 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 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
Portfolio will consist only of direct obligations which, at the time of their
purchase, 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, except
that this limitation does not apply to warrants acquired in units or attached to
securities. Included in such amount, but not to exceed 2% of the value of 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 specified period of
time.
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 total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies 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 securities
as to which a liquid trading market does not exist, provided such investments
are consistent with the Portfolio's 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, 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
emphasized, 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, although 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 issuer. In this evaluation, BSFM will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, the quality of the issuer's management and regulatory matters. 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 circumstances
deemed relevant in determining whether such Portfolio should continue to hold
the security.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-002-03
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
PROSPECTUS
The Bear Stearns Funds
Large Cap Value Portfolio - Small Cap Value Portfolio - Total Return Bond
Portfolio
Class Y Shares Only
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, Class Y 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").
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. The Bond Portfolio will invest
primarily in investment grade, U.S. dollar denominated fixed-income
securities of domestic and foreign issuers. Under normal market co
nditions, 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 65% of the Salomon Brothers Broad Investment
Grade ("BIG") Bond Index and not more than 135% of the Salomon Brothers BIG
Bond Index.
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. Each Portfolio issues other Classes of
shares which have sales charges and different expenses which would affect
performance. Investors desiring to obtain information about these other Classes
of shares should call 1-800-766-4111 or ask their sales representative or the
Portfolio'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 June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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 AN
D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
Fee Table........................... 3
Condensed Financial Information..... 4
Description of the Fund............. 5
Risk Factors........................ 8
Management of the Fund.............. 11
How to Buy Shares................... 12
Shareholder Services................ 14
How to Redeem Shares................ 15
Dividends, Distributions and Taxes.. 17
Performance Information............. 18
General Information................. 19
Appendix............................ A-1
<TABLE>
<CAPTION>
Fee Table
- ------------------------------------------------------------------------------------------
SMALL CAP LARGE CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS Y CLASS Y CLASS Y
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................. None None None
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount subject
to charge).......................................... None None None
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.......................................... None None None
Other Expenses (after expense reimbursement)*....... 1.00% 1.00% 0.45%
Total Portfolio Operating Expenses (after fee waiver
and expense reimbursement)*......................... 1.00% 1.00% 0.45%
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............................................. $10 $ 10 $ 5
3 Years............................................ $32 $ 32 $14
5 Years............................................ $55 $ 55 $25
10 Years............................................ $122 $122 $57
- -----
* BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of each Portfolio other than brokerage commissions, extraordinary
items, interest and taxes to the extent Total Portfolio Operating Expenses
exceed 1.00% and 0.45% 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%, for each Equity Portfolio and Bond
Portfolio, respectively. Other Expenses would be 4.66%, 2.70% and 2.89% for
Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, re
spectively, and Total Portfolio Operating Expenses would be 5.41%, 3.45% and
3.34% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond
Portfolio, respectively.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, each
Portfolio'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 costs
and expenses borne by each Portfolio and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of the Fund."
</TABLE>
Condensed Financial Information
The information in the table below covering each Portfolio's investment results
for the period indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolios' Annual Report for the
fiscal year ended March 31, 1996 which is incorporated by reference into the
Portfolios' Statement of Additional Information which is available upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for a Class Y
share of each Portfolio for the period from commencement of initial public
offering through March 31, 1996. This information has been derived from
information provided in each Portfolio's financial statements.
<TABLE>
<CAPTION>
Large Total
Cap Small Cap Return
Value Value Bond
Portfolio Portfolio Portfolio
- ------------------------------------------------------------- ---------- ---------- ----------
Class Y(1) Class Y(2) Class Y(3)
- ------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance*
Net asset value, beginning of period......................... $13.98 $13.09 $12.35
---------- ---------- --------
Net investment income (4).................................... 0.07 - 0.41
Net realized and unrealized gain/(loss) on investments (5)... 1.16 3.05 (0.05)
---------- ---------- --------
Net increase in net assets resulting from operations......... 1.23 3.05 0.36
---------- ---------- --------
Dividends and distributions to shareholders from:
Net investment income........................................ (0.08) - (0.41)
Net realized capital gains................................... (0.01) (0.29) (0.04)
---------- ---------- ---------
(0.09) (0.29) (0.45)
---------- ---------- ---------
Net asset value, end of period............................... $15.12 $15.85 $12.26
========== ========== =========
Total investment return (6).................................. 8.75% 23.52% 2.92%
========== ========== =========
Ratios/Supplemental Data
Net assets, end of period (000's omitted).................... $3,413 $8,989 $12,199
Ratio of expenses to average net assets (4)(7)............... 1.00% 1.00% 0.45%
Ratio of net investment income to average net assets (4)(7).. 0.76% - 5.93%
Decrease reflected in above expense ratios and net investment
income due to waivers and reimbursements (7)................. 4.41% 2.45% 2.89%
Portfolio turnover rate (8).................................. 45.28% 40.79% 107.35%
Average commission rate per share............................ $0.06 $0.06 -
- -----------
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the dates of distributions.
(1) Commenced its initial public offering on August 11, 1995.
(2) Commenced its initial public offering on June 22, 1995
(3) Commenced its initial public offering on September 8, 1995.
(4) Reflects waivers and reimbursements.
(5) The amount shown for a share outstanding throughout the respective period is
not in accord with the change in the aggregate gains and losses in
investments during the respective period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset values
during the period.
(6) Total return is calculated assuming a purchase of shares on the first day
and a sale of shares on the last day of each period reported and includes
reinvestment of dividends and distributions, if any. Total returns are not
annualized.
(7) Annualized.
(8) Not annualized.
</TABLE>
Further information about performance is contained in the Portfolios' Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
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 Portfolio
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 holders of a
majority (as defined in the 1940 Act) of such Portfolio's outstanding voting
shares. There can be no assurance that a Portfolio's investment 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,
substantially all of its assets in equity securities of issuers with market
capitalizations of $1 billion or more and identified by BSFM as value companies.
The Small Cap Value Portfolio invests, under normal market conditions,
substantially all of its assets in equity securities of issuers with market
capitalizations 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
ratios, price to earnings ratios, earnings growth, dividend payout ratios,
return 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 classified as value
companies.
For potential investments, BSFM also, among other matters, may review new
management and upcoming corporate restructuring plans, consider the general
business cycle and the company's position within the specific industry and
consider 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
total 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
consist of common stocks, convertible securities and preferred stocks. The
convertible securities and preferred stocks in which each Equity Portfolio may
invest will be rated at least investment grade by a nationally recognized st
atistical rating organization at the time of purchase. Each Equity Portfolio may
invest, in anticipation of investing cash positions, in money market instruments
consisting of U.S. Government securities, certificates of deposit, time
deposits, bankers' acceptances, short-term investment grade corporate bo nds 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 instruments. 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
instruments.
The Bond Portfolio invests at least 65% of the value of its total assets (except
when maintaining a temporary defensive position) in bonds (which it defines as
bonds, debentures and other fixed-income securities). The Bond Portfolio is
permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign 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
mortgage-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
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Bond Portfolio seeks to provide performance results that equal or exceed the
Salomon Brothers BIG Bond Index, which is a market-capitalization weighted index
that includes U.S. Treasury, Government-sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothers BIG Bond Index. As of March 31, 1996, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond Index
was approximately nine years and their effective duration 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 65% of the Salomon Brothers BIG
Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index.
As a measure of a fixed-income security's cash flow, duration is an alternative
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 interest
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 measures 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 final 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 prepayments and by changes in
interest rates. Incorporating a security's yield, coupon 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 believes will
achieve the Bond Portfolio's objective in a relatively conservative manner
taking into account the volatility and risk associated with investing in a
portfolio of relatively longer-term fixed-income securities. While the Bond
Portfolio seeks, as part of its investment objective, to preserve 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 asset value per
share of a fund that invested in portfolio securities with a shorter duration.
At least 70% 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 Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"),
Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff") or, if unrated, deemed to be of comparable quality by BSFM. Up to 30%
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 Securities" 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 currency
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.
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Portfolio must borrow the security to make
delivery 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 during 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 instrument
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 the
amount deposited in the account plus the amount deposited with the broker as
collateral always equals the current value of the security sold short; or (b)
otherwise cover its short position in accordance with positions taken by the
Staff of the 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 Portfolio 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
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets. No Portfolio may sell short the
securities of any single issuer listed on a national securities exchange to the
extent of more than 5% of the value of its net assets. No Portfolio may sell
short the securities of any class of an issuer to the extent, at the time of the
transaction, of more than 2% of the outstanding securities of that class.
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 receives 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
Portfolio'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 assets may
be invested, and securities issued or guaranteed by the U.S. Government, 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 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 describes
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares. See "Investment Objective and Management Po
licies-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 addition,
each Equity Portfolio may purchase securities of any company having less than
three years' continuous operation (including operations of any predecessors) 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 assets. See
"Investment Objective and Management Policies-Investment Restrictions" in the
Statement of Additional Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
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 undertake 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 companies,
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
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities purchased by the Bond
Portfolio, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
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 additional
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 regarded 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 obligor's
ability to pay interest and repay principal on debt securities rated BBB to be
adequate; adverse changes in economic conditions and circumstances, however, are
more likely to have an adverse impact on these debt securities and, therefore,
impair timely payment. Debt securities 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
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Fund's Board of Trustees. In accordance with
such guidelines, BSFM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. The Bond Portfolio intends to treat
other stripped mortgage-backed securities as illiquid securities. See
"Appendix-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 selling
and lending portfolio securities involves greater risk than that incurred by
many other funds with a similar objective. Using these techniques may produce
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 transaction
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
securities 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
expiring 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 portfolio
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, volume
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 information
about a non-U.S. issuer, and non-U.S. issuers generally are not subject to
uniform accounting and financial reporting standards, practices and requirements
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
developments, 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
restrict the payment of principal, interest and dividends to investors located
outside the country of the issuers, whether from currency blockage or otherwise.
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
Portfolio changes investments from one country to another.
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 governments 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
occurs 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 exchanges.
See "Appendix-Investment Techniques." For example, some foreign exchanges 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 addition, 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 dispose
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 allocated
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 contains
the name and general business experience of each Trustee.
Investment Adviser
The Portfolios' investment adviser, BSFM, manages each Portfolio's investments.
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 institutional and
individual investors. BSFM is a registered investment adviser 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 March 31, 1996 of over $1.9 billion.
BSFM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSFM and the Fund, subject 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 Director of
Equity Investments-Bear Stearns Asset Management and Senior Managing Director of
Bear Stearns. The Bond Portfolio's principal portfolio 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 Investments of Bear
Stearns Asset Management, positions he held during his employment with Bear
Stearns from June 1987 through November 1994. From November 1994 to November
1995 he was a financial consultant.
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 Portfolio
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 Portfolio's
average daily net assets. From April 3, 1995 (commencement of operations)
through March 31, 1996, no fees were paid by the Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio, pursuant to an undertaking by
BSFM.
Each Portfolio's administrator is BSFM. Each 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 each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts 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, as set forth below:
- --------------------------------------------------------------------
PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------
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%
The above-referenced fees are subject to a monthly minimum fee of $11,000 per
Portfolio.
From April 3, 1995 (commencement of operations) through March 31, 1996, the
Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, each
paid PFPC Inc. a monthly fee at the effective annual rate .90 of 1%, .48 of 1%
and .55 of 1%, respectively, of the Portfolio's average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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. From time to time, PFPC Inc. may waive a portion
of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will
reduce its monthly minimum for each Portfolio to $7,500 for net assets of less
than $25 million; $9,167 for net assets of $25 million to $50 million; $11,000
for net assets in excess of $50 million. PFPC Inc. reserves the right to revoke
this voluntary fee waiver at any time.
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 Additional
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
Advisory 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.
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.
Expense Limitation
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, including
the investment advisory fee, exceed 0.45% of the average daily net assets of the
Bond Portfolio-Class Y and 1.00% of the average daily net assets of each Equity
Portfolio-Class Y 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
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request. 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 the minimum investment requirement. In addition, accounts under the
discretionary management of Bear Stearns and its affiliates are not subject to
the minimum investment requirement.
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
Portfolio's shares also may be made directly through the Transfer Agent.
Investors must specify that Class Y is being purchased.
Purchases are effected at Class Y's net asset value per share next determined
after a purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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]-Class Y" if purchased directly from the Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns
Funds-[Name of Portfolio]-Class Y, 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
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 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 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., Attention: The Bear
Stearns Funds-[Name of Portfolio]-Class Y, 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 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
(currently 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 determined.
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 Class Y of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by Class Y (i.e.,
the value of its assets less liabilities) by the total number of shares of Class
Y 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 accordance with procedures established by,
the Fund's Board of Trustees. Substantially 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 information regarding the methods
employed in valuing each Portfolio's investments, see "Determination of Net
Asset Value" in the Portfolios' Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Revenue
Service (the "IRS").
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 Class Y
shares of a Portfolio, Class Y shares 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 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 investors. To use this
Privilege, investors should consult their account executive 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 exchange shares of a
Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously di d 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 shareholders may have to submit
exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own Class Y 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, un
less otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. 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 registered, 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
Authorized Dealer or the Transfer Agent. When establishing a new account by
exchange, the Class Y shares being exchanged must have a value of at least the
minimum initial investment required 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 exceed 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.
Class Y shares will be exchanged at the next determined net asset value. No fees
currently are charged shareholders 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 Class Y shares of one portfolio or fund for Class Y shares of
another is treated for Federal income tax purposes as a sale of the Class Y
shares given in exchange by the shareholder and, therefore, an exchanging
shareholder may realize 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 automatically
dividends and/or capital gain distributions, if any, paid by a Portfolio in
Class Y shares 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.
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.
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
request 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 investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor, the investor's Bear Stearns account executive or the
investor's Authorized Dealer. The Fund imposes no charges when shares are
redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within three
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
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 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 notice
period.
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
account 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
redemption 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 three days,
redemption proceeds will be paid by check or credited to the shareholder's
brokerage account at the election of the shareholder. Bear Stearns account
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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio]-Class Y, 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the Portfolio from which shares are
to be redeemed, and duly endorsed stock certificates, if previously issued, 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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 processed
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.
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 redirected
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 effective. 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
distribution 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
Class Y shares of the Portfolio at net asset value, unless payment in cash is
requested or dividends are redirected into another fund pursuant to the
Redirected Distribution Option. All expenses are accrued daily and deducted
before declaration of dividends to investors.
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized 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
redirected 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
distributions 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%. Dividends
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
disposition of certain market discount bonds, paid by a Portfolio to a foreign
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 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. nonresident
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.
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 distributions from
securities gains, if any, paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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.
Management of the Fund believes that each Portfolio has qualified for the fiscal
year ended March 31, 1996 as a "regulated investment company" under the Code.
Each Portfolio intends to continue to so qualify if 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 accordance 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 Class Y 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 assume
that any income dividends and/or capital gains distributions made by a Portfolio
during the measuring period were reinvested in Class Y shares.
Performance of the Bond Portfolio also may be advertised on the basis of current
yield. Current yield refers to the Bond Portfolio's annualized net investment
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 calculating
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.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the 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 redeemable
value of the investment at the end of the period. Advertisements of each
Portfolio's performance will include such Portfolio's average annual total
return for one, five and ten year periods, or for shorter periods depending upon
the length of time during which the Portfolio has operated. Computations of
average annual total return for periods of less than one year represent an
annualization of such 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 percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value per share at the beginning
of the period. Advertisements 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.
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
information, 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 advertising
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 operations 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 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 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
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which 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 Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the 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 shareholders 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
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: [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.
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 securities."
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 specific
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 Portfolio
also may purchase call options to enter into closing purchase transactions. Each
Portfolio also may write covered put option contracts to the extent 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 securities. 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 foreign
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 underlying 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
indexes 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 purchase 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 particular
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 predictions
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 engage in such transactions if the sum of
the amount of initial margin deposits 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 market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting 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 securities which
it has hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if the Portfolio has insufficient 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
Exchange Commission, each Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transactions
in an amount generally equal to the value of the underlying co mmodity. The
segregation of such assets will have the effect of limiting the Portfolio'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
commitment 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
purchase such securities only with the intention of actually acquiring the
securities, 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 ba sis 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
because 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 itself.
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 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
investments 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
opportunities 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 disclosure
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 331/3% of the value
of a Portfolio's total assets. In connection with such loans, a Portfolio 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 securities. 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 security and receives interest on
the amount of the loan. Such loans will be terminable 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 331/3% 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 assets,
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
Depositary Receipts ("EDRs"). 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. 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
securities. 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
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
shareholder 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.
Mortgage-Related Securities-(Bond Portfolio)
The Bond Portfolio may invest in mortgage-related securities which are
collateralized by pools of mortgage loans.
Mortgage-related securities are a form of derivative 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 organizations 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 insurance companies, and similar foreign
entities. The mortgage-related securities 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
securities are guaranteed by a third party or otherwise similarly secured, the
market 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
security, 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
interest rates. However, though the value of a mortgage-related security may
decline 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 experience gr
eater 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 recognized 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 investment 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 Securities" 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 which are a form of
derivative securities. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. These
securities include debt securities and securities 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 vehicle loans and hospital
account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-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
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of 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 payments
on these securities.
Convertible Securities-(All Portfolios)
Each Portfolio may invest in convertible securities.
Convertible securities 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 senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed-income 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 convertible security also affords an
investor the opportunity, through its conversion 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 common
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
believes 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
"conversion 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
generally 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
political 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 interest income received by it from municipal obligations generally will be
subject 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
intends to invest no more than 25% of its assets in municipal obligations.
However, this percentage may be varied from time to time without shareholder
approval.
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 interest
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 interest
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 interest 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 qualities.
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
subdivisions, 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 entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development 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
financial markets of the countries in which the investments are made and the
interest 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
instruments, each of which at the time of purchase must have or be deemed to
have under rules of the Securities and Exchange Commission remaining maturities
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
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, 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 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, since it is not so obligated by law.
Bank Obligations-(All Portfolios)
Each Portfolio may invest in bank obligations, including certificates of
deposit, 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
subsidiaries 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 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 controls 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.
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
uninsured, 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 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 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
Portfolio will consist only of direct obligations which, at the time of their
purchase, 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, except
that this limitation does not apply to warrants acquired in units or attached to
securities. Included in such amount, but not to exceed 2% of the value of 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 specified period of
time.
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 total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies 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 securities
as to which a liquid trading market does not exist, provided such investments
are consistent with the Portfolio's 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, 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
emphasized, 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, although 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 issuer. In this evaluation, BSFM will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, the quality of the issuer's management and regulatory matters. 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 circumstances
deemed relevant in determining whether such Portfolio should continue to hold
the security.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
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
investment company, known as a mutual fund. The STARS Portfolio's investment
objective is to provide investment results that exceed the total return of
publicly traded common stocks in the aggregate, as represented by the Standard &
Poor's 500 Stock Index (the "S&P 500").
As its investment strategy, the investment adviser principally uses Standard &
Poor's ("S&P") STock Appreciation Ranking System (or STARS) to identify 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 believes that this approach
will provide opportunities to achieve performance that exceeds the S&P 500's
total return.
The STARS Portfolio invests all of its assets in the S&P STARS Master Series
(the "Master Series") of S&P STARS Fund (the "Master Fund"), 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 Series' 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 imposed 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 investor
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 future
reference.
Part B (also known as the Statement of Additional Information), dated June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
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
FEE TABLE*
- -------------------------------------------------------------------------------
CLASS A CLASS 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
5 Years...................................................... $125 $108
10 Years...................................................... $218 $233
You would pay the following expenses
on the same investment, assuming no
emption:
1 Year....................................................... $ 62 $ 20
3 Years...................................................... $ 93 $ 63
5 Years...................................................... $125 $108
10 Years...................................................... $218 $233
- -----
* 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."
**** BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of the Master Series and the STARS Portfolio other than brokerage
commissions, extraordinary items, interest 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 1.14% for Class A and 1.17%
for Class C and Total STARS Portfolio Operating Expenses would be 2.39% for
Class A and 2.92% for Class C.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the STARS
Portfolio'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 costs
and expenses borne by the STARS Portfolio and investors, the payment of which
will reduce investors' annual return. 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 description of the expense reimbursement
or waiver arrangements in effect, see "Management of the STARS Portfolio."
Condensed Financial Information
The information in the table below covering the STARS Portfolio's investment
results for the period indicated has been audited by Deloitte & Touche. Further
financial data and related notes appear in the STARS Portfolio's Annual Report
for the fiscal year ended March 31, 1996 which is incorporated by reference into
the STARS Portfolio's Statement of Additional Information which is available
upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, 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
(commencement of investment operations of the Master Series) to March 31, 1996.
This information has been derived from information provided in the STARS
Portfolio's financial statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CLASS A CLASS C
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance*
Net asset value, beginning of period....................................... $12.00 $12.00
--------- ---------
Net investment income/(loss) (1)........................................... - (0.06)
Net realized and unrealized gain on investment (2)......................... 3.31 3.28
--------- ---------
Net increase in net assets resulting from operations....................... 3.31 3.22
--------- ---------
Distributions to shareholders from:
Net realized capital gains................................................. (0.39) (0.36)
--------- ---------
Net asset value, end of period............................................. $14.92 $14.86
========= =========
Total investment return (3)................................................ 27.68% 26.91%
========= =========
Ratios/Supplemental Data
Net assets, end of period (000's omitted).................................. $45,049 $28,081
Ratio of expenses to average net assets (1)(4)............................. 1.50% 2.00%
Ratio of net investment income/(loss) to average net assets (1)(4)......... (0.01)% (0.45%)
Decrease reflected in above expense ratios and net investment income/(loss)
due to waivers and reimbursements (4)(5)................................... 0.89% 0.92%
- -----
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of STARS
Portfolio shares in relation to fluctuating net asset value during the
period.
(3) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(4) Annualized.
(5) Includes the STARS Portfolio's share of Master Series' expenses.
</TABLE>
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 March 31, 1996. This information has been derived from
information provided in the Master Series' financial statements.
Ratios/Supplemental Data
Net assets, end of period (000's omitted)........................... $82,028
Ratio of expenses to average net assets (1)(2)...................... 0.19%
Ratio of net investment income/(loss) to average net assets (1)(2).. 1.36%
Decrease reflected in above expense ratios and net investment
income due to waivers and reimbursements (2)........................ 0.91%
Portfolio turnover rate (3)......................................... 295.97%
Average commission rate per share................................... $0.06
- -----
(1) Reflects waivers and reimbursements.
(2) Annualized.
(3) Not annualized.
Further information about performance is contained in the STARS Portfolio's
Annual Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
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
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 STARS Portfolio's
investment 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 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
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 average daily net
assets. See "Management of the Fund-Distribution and Shareholder 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 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 time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor'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 initial 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 expect
to maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distribution 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 Portfolio'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 offered.
From time to time, other portfolios may be established and sold pursuant 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 Portfolio,
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,
correspondingly, the returns of other investment options in the Master Fund may
differ from those of the STARS Portfolio.
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
institutional 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 limited
to circumstances in which both inadequate insurance existed and the Master Fund
itself was unable to meet its obligations. Accordingly, the Fund's Board of
Trustees believes that neither the STARS Portfolio nor its shareholders will be
adversely affected by reason of investing their assets in the Master 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 approval
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 consider 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 objective. In
the latter case, the STARS Portfolio's inability to find a substitute 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 Series, 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 aggregate, as
represented by the S&P 500. The STARS Portfolio's investment objective cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of its outstanding voting shares.
The Master Series' investment objective, which is the same as the STARS
Portfolio'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.
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 securities
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 1993, on average, the five
star category has consisted of approximately 95 stocks, the four star category
has consisted of approximately 375 stocks, the three star category has consisted
of approximately 525 stocks, the two star category has consisted of
approximately 100 stocks, and the one star category has consisted of between
approximately 14 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P
analysts.
For purposes of evaluating the performance of stocks in the various
categories-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 useful
in evaluating the capability of its analysts. Investors should recognize that
the pool of S&P analysts changes and their past performance is not necessarily
predictive of future results either of the model or of the STARS Portfolio.
From January 1, 1987 through March 31, 1996
The S&P 500 (measured on a total return basis, without dividend reinvestment)*
increased by 166.55%.
The ranked stocks, measured as described above, changed in value as follows*:
Five stars-+353.64%
Four stars-+220.18%
Three stars-+146.37%
Two stars-+116.87%
One star- -36.83%
- -----
* During this period, the average dividend yields on securities included in the
S&P 500 and the securities ranked five stars were approximately 3.1% and 1.9%,
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. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one 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 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 72,000
subscribers.
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 consider
what action should be taken, including investing all the STARS Portfolio'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 securities
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 temporary
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. The Master Series may invest up to 15% of its
assets in common stocks without regard to STARS ranking, if BSFM believes that
such securities offer opportunities for capital appreciation. BSFM will not seek
to replicate STARS performance and will not necessarily sell a security once it
has been downgraded 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 and, without limitation, for temporary defensive purposes, in money
market instruments 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.
Investment Techniques
The Master Series may engage in short selling, lending portfolio securities, and
options transactions, each of which involves risk.
The Master Series may engage in various investment techniques, such as short
selling, lending portfolio securities, and options transactions, each of which
involves risk. Options transactions 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.
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 security.
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
replacement. 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 dividend
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 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 the amount deposited in the account plus the amount deposited with the
broker as collateral always equals the current value of the security sold short;
or (b) otherwise cover its short position in accordance with positions taken by
the Staff of the 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
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 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 Series. See
"Appendix-Investment Techniques-Options Transactions."
The Master Series anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of 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 assets. 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
describes 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 Management
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 operations
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 assets;
(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.
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 associated
with such characteristics of the STARS Portfolio will correspond directly to
those of the Master Series, the following is a discussion of the risks
associated 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 supplement
to an overall investment program and only if investors are willing to undertake
the risks involved, including the potential loss of a significant portion 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
securities and engaging in options transactions, involves greater risk than
that incurred by many other funds with a similar objective. See
"Appendix-Investment 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
regulated 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 exceed
150%. However, the portfolio turnover rate may exceed this rate, when the BSFM
believes the anticipated benefits of short-term investments outweigh any
increase in transaction costs or increase in short-term gains. Higher portfolio
turnover rates are likely to result in comparatively 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 Additional 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 generally, 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 investment 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 securities 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 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 economic, 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
because 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 supervision
of the Fund's Board of Trustees. The STARS Portfolio's Statement of Additional
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 adviser 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 March 31, 1996 of over $1.9 billion.
BSFM serves as investment adviser of the Master Series under an Investment
Advisory Agreement between BSFM and the Master Fund, subject to the overall
authority 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
Chemical Analyst at C.J. Lawrence/Deutsche Bank Securities Corp. For six years
prior thereto, Mr. Reitzes was employed by Mabon, Nugent & Co. as Chief
Investment 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. From April 3, 1995 (commencement of operations)
through March 31, 1996, no fees were paid by the Master Fund pursuant to an
undertaking by BSFM.
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 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 assets. 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. $5,500 per month. In addition, the Master
Series will pay PFPC International Ltd. an annual fee, as set forth below:
- -------------------------------------------------------------------------------
MASTER SERIES' ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------------------
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%
The above-referenced fee is subject to a monthly minimum fee of $8,500.
From April 3, 1995 (commencement of operations) through March 31, 1996, the
Master Fund paid PFPC International Ltd. a monthly fee at the effective annual
rate of .12 of 1% of the Master Series' average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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 Additional
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
Advisory 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 Portfolio's Di
stribution 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 registrar
(the "Transfer Agent"). The Transfer Agent also provides certain administrative
services to the STARS Portfolio.
Master Series' Custodian and Transfer Agent
Custodial Trust Company also is the Master Series' custodian. PFPC
International 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 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 incurred. 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 addition to any amounts which may
be received by them from Bear Stearns under the Plan.
Expense Limitation
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, including
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 certificates 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. Investments 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
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 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 Transfer
Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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 directly
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
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 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
Portfolio, an investor must establish an account with the STARS Portfolio by
furnishing necessary information to the Fund. An account with the STARS
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., 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
(currently 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 determined.
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 accordance
with procedures established by, the Master Fund's Board of Trustees. For further
information regarding the methods employed in valuing the STARS Portfolio's
investments, see "Determination of Net Asset Value" in the STARS Portfolio's
Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Re
venue Service (the "IRS").
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
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> <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 further notice to the contrary, 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 Prospectus
entitled "How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares"
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 additional
payments or promotional incentives to dealers that sell Class A shares. In some
instances, these incentives may be offered only to certain dealers who have sold
or may sell significant amounts of Class A shares. Dealers may receive a larger
percentage of the sales load from Bear Stearns than they receive for selling
most other funds.
Through September 30, 1996,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 customers through September 26, 1995. The fee paid is based on the
aggregate net asset value of all shares of the STARS Portfolio and each other
investment company sponsored by Bear Stearns purchased by customers of the
Authorized Dealer during the period ended September 26, 1995, reduced for
redemptions during the year ending September 30, 1996. For amounts greater than
$1 million 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 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
affiliates 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
employee of McGraw-Hill, Inc. and its affiliates, or their respective spouses
and minor children; (d) any employee or registered representative of any
Authorized 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, department,
authority or agency thereof, which is prohibited by applicable investment 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 governments or funds,
Taft-Hartley plans and qualified non-profit organizations, foundations and
endowments; (i) trust institutions (including bank trust departments) investing
on their own behalf or on behalf of their clients; and (j) 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 of its employees in Class A shares of the STARS
Portfolio. Dividends 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 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. However,
if such investor redeems those shares within one year after purchase, a CDSC of
1.00% 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 1.00% of the net asset value of
shares purchased by the dealers' clients or customers in this manner.
In addition, 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 purchasing and redeeming, and otherwise providing shareholder
services in respect of Fund shares pursuant to agreements with the Fund or Bear
Stearns: (i) investment advisers and financial planners who place trades for
their own accounts or for the accounts of their clients and who charge a
management, consulting or other fee, (ii) clients of such investment advisers
and financial planners if such clients place trades through accounts linked to
master accounts of such investment advisers or financial planners on the books
and records of such broker and (iii) 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 Code, and "rabbi trusts",
provided, in each case, the purchase transaction is effected through such
broker. The broker may charge a fee for transactions in STARS Portfolio shares.
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
purchase 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
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
purchase 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 purchases
made by a company controlled by such individual(s); (b) individual purchases 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 benefit 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
applicable 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
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 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 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 escrow 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 the STARS
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
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 investments
of $100 per transaction) at regular intervals selected by the investor. Provided
the investor's bank or other financial institution allows automatic 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 Cl earing 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 involves the continuous investment in the
STARS Portfolio regardless of fluctuating 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
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
investors. To use this Privilege, investors should consult their account
executive 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 exchange 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 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 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 otherwise 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 account, however, an exchanging shareholder must file a specific
written request. 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 registered, 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
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the shares
being exchanged must have a value of at least the minimum initial investment
required 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 exceed
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, except
in the instances described below, a sales load may be charged with respect 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 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 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 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 confirmation 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 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 exchange by the
shareholder and, therefore, an exchanging shareholder may realize 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 automatically
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 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 STARS Portfolio shares at any time.
Redemption 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
determined 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
redeemed 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
receives further instructions 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.
The STARS Portfolio ordinarily will make payment for all shares redeemed within
three 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 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 notice
period. Shareholders who have redeemed Class A shares may reinstate their STARS
Portfolio account without a sales charge up to the dollar amount redeemed by
purchasing Class A shares of the STARS Portfolio within 60 days of the
redemption. To take advantage of this reinstatement privilege, shareholders 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
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 reinvestment
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 investor 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 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
acquired 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 5
additional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated 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 Code, of the shareholder, (b) redemptions by employees
participating in Eligible Benefit Plans, (c) redemptions as a result of a
combination of any investment 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 701/2 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 disclosure 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 executive 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 account 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 redemption 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 three days, redemption proceeds will be paid
by check or credited to the shareholder's brokerage account at the election of
the shareholder. Bear Stearns account 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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the portfolio from which shares
are to be redeemed, and duly endorsed stock certificates, if previously issued,
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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 fluctuate.
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 Automatic
Withdrawal. Purchases of additional shares concurrent with withdrawals 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
provisions 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 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. 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
realized 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
Portfolio or redirected into another portfolio or fund. Distributions from net
realized 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 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%.
Dividends 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
disposition of certain market discount bonds, paid by the STARS Portfolio to a
foreign 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 securities
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 investor 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 distributions 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 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
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 received on
the exchange.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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; although
investors should expect to be subject to Federal, state or local taxes in
respect of their investment in STARS Portfolio shares.
Management of the Fund believes that the STARS Portfolio has qualified for the
fiscal year ended March 31, 1996 as a "regulated investment company" under the
Code. The STARS Portfolio intends to continue to so qualify if such
qualification is in the best interests of its shareholders. Such qualification
relieves the STARS Portfolio of any liability for Federal income tax to the
extent its earnings are distributed 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
return figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the STARS 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.
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 redeemable
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 annualization
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 percentage
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 offering
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. Advertisements 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 applicable 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 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
information, 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 advertising
or marketing the STARS Portfolio's shares, including data from Lipper Analytical
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 operations 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
liability 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 possible,
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 ordinarily will not
hold shareholder meetings; however, shareholders under certain circumstances may
have the right to call a meeting of shareholders for the purpose of voting to
remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate 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 with Bear
Stearns and its affiliates in connection with the STARS Portfolio is the
licensing for a fee of certain S&P trademarks 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 terminable under circumstances generally
described in the STARS Portfolio's Statement of Additional Information under
"Information About the STARS Portfolio." 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 operating 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 Services
Group which publishes STARS, operates independently of, and has no access to
information obtained by, Standard & Poor's Ratings Services, which may in its
regular operations obtain information of a confidential nature.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: 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.
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 involve
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 extent
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 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.
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 option
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 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.
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 ability
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
securities.
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 331/3% 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 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 securities. The Master
Series can increase its income through the investment of such collateral. 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 experience 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 th
extent permitted under the 1940 Act. The 1940 Act permits an investment company
to borrow in an amount up to 331/3% of the value of such company's total assets.
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 assets, the Master
Series will not make any additional investments.
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
"sponsored" 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 shareholder
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 "Description
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 remaining
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
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. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
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, 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 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 controls or the
adoption of other foreign governmental restrictions wh ich 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.
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
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Repurchase Agreements
Repurchase agreements involve the acquisition by the Master Series of an
underlying debt instrument, subject to an obligation of the seller to
repurchase, and the Master Series to resell, the instrument at a fixed price
usually 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 Se ries 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 Services Group, which publishes STARS), F-1 by Fitch Investors Service
L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("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 Series. 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 companies
which are ranked by STARS. Under the 1940 Act, the Master Series' 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 the Master
Series' total assets with respect to any one investment company and (iii) 10% of
the Master Series' total 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
securities as to which a liquid trading market does not exist, provided such
investments 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 desire
to sell them when a ready buyer is not available at a price it deems
representative of their value, the value of its net assets could be adversely
affected.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche
Deloitte & Touche House
Earlsfort Terrace
Dublin 2, Ireland
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE STARS PORTFOLIO'S PROSPECTUS
AND IN THE STARS PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFER OF THE STARS PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THE STARS PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN
ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
BSF-P-001-04
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
PROSPECTUS
S&P STARS Portfolio
Class Y Shares Only
S&P STARS Portfolio (the "STARS Portfolio") is a separate non-diversified
portfolio of The Bear Stearns Funds (the "Fund"), an open-end management
investment company, known as a mutual fund. The STARS Portfolio's investment
objective is to provide investment results that exceed the total return of
publicly traded common stocks in the aggregate, as represented by the Standard &
Poor's 500 Stock Index (the "S&P 500").
As its investment strategy, the investment adviser principally uses
Standard & Poor's ("S&P") STock Appreciation Ranking System (or STARS) to
identify 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 believes that this approach
will provide opportunities to achieve performance that exceeds the S&P 500's
total return.
The STARS Portfolio invests all of its assets in the S&P STARS Master
Series (the "Master Series") of S&P STARS Fund (the "Master Fund"), 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
Series' investment experience. Master Series' shares may be purchased only by
other investment companies or similar accredited investors.
By this Prospectus, Class Y shares of the STARS Portfolio are being offered.
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. The STARS Portfolio issues other
Classes of shares which have sales charges and different expenses which would
affect performance. Investors desiring to obtain information about these other
Classes 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 future
reference.
Part B (also known as the Statement of Additional Information), dated June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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 AN
D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
Fee Table........................... 3
Condensed Financial Information..... 4
Description of the STARS Portfolio.. 5
Risk Factors........................ 9
Management of the STARS Portfolio... 10
How to Buy Shares................... 12
Shareholder Services................ 13
How to Redeem Shares................ 14
Dividends, Distributions and Taxes.. 16
Performance Information............. 17
General Information................. 17
Appendix............................ A-1
FEE TABLE*
- ----------------------------------------------------------------------------
CLASS Y
- -----------------------------------------------------------------------------
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)......................None
Annual STARS Portfolio Operating Expenses
(as a percentage of average daily net assets)
Master Series Management Fees (after fee waiver)*** .................... 0.00%
12b-1 Fees.............................................................. None
Other Expenses (after expense reimbursement)***........................ 1.00%
Total STARS Portfolio Operating Expenses
(after fee waiver and expense reimbursement)***.......................1.00%
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................................................................. $ 10
3 Years................................................................ $ 32
5 Years................................................................ $ 55
10 Years................................................................ $122
- -----
* 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.
*** BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of the Master Series and the STARS Portfolio other than brokerage
commissions, extraordinary items, interest and taxes to the extent Total STARS
Portfolio Operating Expenses exceed 1.00% for Class Y. Without such waiver and
expense reimbursement, Master Series Management Fees stated above would be
0.75%, Other Expenses would be 1.24% and Total STARS Portfolio Operating
Expenses would be 1.99% for Class Y.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the STARS
Portfolio'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 costs
and expenses borne by the STARS Portfolio and investors, the payment of which
will reduce investors' annual return. In addition to the expenses noted above,
the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares."
For a description of the expense reimbursement or waiver arrangements in effect,
see "Management of the STARS Portfolio."
Condensed Financial Information
The information in the table below covering the STARS Portfolio's investment
results for the period indicated has been audited by Deloitte & Touche. Further
financial data and related notes appear in the STARS Portfolio's Annual Report
for the fiscal year ended March 31, 1996 which is incorporated by reference into
the STARS Portfolio's Statement of Additional Information which is available
upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for a Class Y
share of the STARS Portfolio for the period August 7, 1995 (commencement of
initial public offering) to March 31,1996. This information has been derived
from information in the STARS Portfolio's financial statements.
- -------------------------------------------------------------------------------
CLASS Y
- -------------------------------------------------------------------------------
Per Share Operating Performance*
Net asset value, beginning of period....................................$14.13
-------
Net investment income (1)............................................... 0.07
Net realized and unrealized gain on investment (2)...................... 1.20
------
Net increase in net assets resulting from operations.................... 1.27
------
Dividends and distributions to shareholders from:
Net investment income.................................................... (0.03)
Net realized capital gains................................................(0.40)
------
(0.43)
-----
Net asset value, end of period...........................................$14.97
=======
Total investment return (3).............................................. 9.09%
======
Ratios/Supplemental Data
Net assets, end of period (000's omitted)................................$8,779
Ratio of expenses to average net assets (1)(4)........................... 1.00%
Ratio of net investment income/(loss) to average net assets (1)(4)....... 0.82%
Decrease reflected in above expense ratios and net investment
income/(loss) due to waivers and reimbursements (4)(5)................. 0.99%
- -----
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of STARS
Portfolio shares in relation to fluctuating net asset value during the
period.
(3) Total return is calculated assuming a purchase of shares on the first day
and a sale of shares on the last day of each period reported and includes
reinvestment of dividends and distributions, if any. Total return is not
annualized.
(4) Annualized.
(5) Includes the STARS Portfolio's share of Master Series' expenses.
Contained below are ratios to average net assets and other supplemental data for
the Master Series for the period April 5, 1995 (commencement of investment
operations) to March 31, 1996. This information has been derived from
information provided in the Master Series' financial statements.
Ratios/Supplemental Data
Net assets, end of period (000's omitted)...............................$82,028
Ratio of expenses to average net assets (1)(2).......................... 0.19%
Ratio of net investment income to average net assets (1)(2)............. 1.36%
Decrease reflected in above expense ratios and net investment
income due to waivers and reimbursements (2)........................... 0.91%
Portfolio turnover rate (3)..............................................295.97%
Average commission rate per share........................................ $0.06
- -----
(1) Reflects waivers and reimbursements.
(2) Annualized.
(3) Not annualized.
Further information about performance is contained in the STARS Portfolio's
Annual Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
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 offered.
From time to time, other portfolios may be established and sold pursuant 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 Portfolio,
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,
correspondingly, the returns of other investment options in the Master Fund may
differ from those of the STARS Portfolio.
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
institutional 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 limited
to circumstances in which both inadequate insurance existed and the Master Fund
itself was unable to meet its obligations. Accordingly, the Fund's Board of
Trustees believes that neither the STARS Portfolio nor its shareholders will be
adversely affected by reason of investing their assets in the Master 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 fi xed 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 approval
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 consider 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 objective. In
the latter case, the STARS Portfolio's inability to find a substitute 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 Series, 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 aggregate, as
represented by the S&P 500. The STARS Portfolio's investment objective cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of its outstanding voting shares.
The Master Series' investment objective, which is the same as the STARS
Portfolio'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.
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 securities
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 1993, on average, the five
star category has consisted of approximately 95 stocks, the four star category
has consisted of approximately 375 stocks, the three star category has consisted
of approximately 525 stocks, the two star category has consisted of
approximately 100 stocks, and the one star category has consisted of between
approximately 14 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P
analysts.
For purposes of evaluating the performance of stocks in the various
categories-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 useful
in evaluating the capability of its analysts. Investors should recognize that
the pool of S&P analysts changes and their past performance is not necessarily
predictive of future results either of the model or of the STARS Portfolio.
From January 1, 1987 through March 31, 1996:
The S&P 500 (measured on a total return basis, without dividend reinvestment)*
increased by 166.55%.
The ranked stocks, measured as described above, changed in value
as follows*:
Five stars -+353.64%
Four stars -+220.18%
Three stars -+146.37%
Two stars -+116.87%
One star - -36.83%
- -----
* During this period, the average dividend yields on securities included in the
S&P 500 and the securities ranked five stars were approximately 3.1% and 1.9%,
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 out-performed 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. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one 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-and will incur
transaction and other costs, including management 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 72,000
subscribers.
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 consider
what action should be taken, including investing all the STARS Portfolio'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 securities
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 temporary
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. The Master Series may invest up to 15% of its
assets in common stocks without regard to STARS ranking, if BSFM believes that
such securities offer opportunities for capital appreciation BSFM will not seek
to replicate STARS performance and will not necessarily sell a security once it
has been downgraded 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 and, without limitation, for termporary defensive purposes, in money
market instruments 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 ag
reements, as set forth in the Appendix.
Investment Techniques
The Master Series may engage in short selling, lending portfolio securities, and
options transactions, each of which involves risk.
The Master Series may engage in various investment techniques, such as short
selling, lending portfolio securities, and options transactions, each of which
involves risk. Options transactions 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.
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 security. 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
replacement. 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 dividend
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 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 the amount deposited in the account plus the amount deposited with the
broker as collateral always equals the current value of the security sold short;
or (b) otherwise cover its short position in accordance with positions taken by
the Staff of the 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
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 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 Series. See
"Appendix-Investment Techniques-Options Transactions."
The Master Series anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of 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 assets. 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 describes 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 Management 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 operations
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 assets;
(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.
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 associated
with such characteristics of the STARS Portfolio will correspond directly to
those of the Master Series, the following is a discussion of the risks
associated 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 supplement
to an overall investment program and only if investors are willing to undertake
the risks involved, including the potential loss of a significant portion 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
securities and engaging in options transactions, involves greater risk than
that incurred by many other funds with a similar objective. See
"Appendix-Investment 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
regulated 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 exceed
150%. However, the portfolio turnover rate may exceed this rate, when the BSFM
believes the anticipated benefits of short-term investments outweigh any
increase in transaction costs or increase in short-term gains. Higher
portfolio turnover rates are likely to result in comparatively 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 Additional 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
generally, 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
investment 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 securities
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 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 economic, 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
because 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 supervision
of the Fund's Board of Trustees. The STARS Portfolio's Statement of Additional
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 adviser 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 March 31, 1996 of over $1.9 billion.
BSFM serves as investment adviser of the Master Series under an Investment
Advisory Agreement between BSFM and the Master Fund, subject to the overall
authority 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
Chemical Analyst at C.J. Lawrence/Deutsche Bank Securities Corp. For six years
prior thereto, Mr. Reitzes was employed by Mabon, Nugent & Co. as Chief
Investment 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. From April 3, 1995 (commencement of operations)
through March 31, 1996, no fees were paid by the Master Fund pursuant to an
undertaking by BSFM.
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 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 assets. 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. $5,500 per month. In addition, the Master
Series will pay PFPC International Ltd. an annual fee, as set forth below:
- -------------------------------------------------------------------------------
MASTER SERIES' ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------------------
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%
The above-referenced fee is subject to a monthly minimum fee of $8,500.
From April 3, 1995 (commencement of operations) through March 31, 1996, the
Master Fund paid PFPC International Ltd. a monthly fee at the effective annual
rate of .12 of 1% of the Master Series' average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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 Additional
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
Advisory 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.
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 registrar
(the "Transfer Agent"). The Transfer Agent also provides certain administrative
services to the STARS Portfolio.
Master Series' Custodian and Transfer Agent
Custodial Trust Company also is the Master Series' custodian. PFPC
International 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.
Expense Limitation
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, including
the investment advisory fee, exceed 1% of Class Y'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
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request. 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. Investments by employees of Bear Stearns and
its affiliates are not subject to the minimum investment requirement. In
addition, accounts under the discretionary management of Bear Stearns and its
affiliates are not subject to the minimum investment requirement.
Purchases of the STARS 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 the
STARS Portfolio's shares also may be made directly through the Transfer Agent.
Investors must specify that Class Y is being purchased.
Purchases are effected at Class Y's net asset value per share next determined
after a purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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-Class Y" if purchased
directly from the STARS Portfolio, and should be directed to the Transfer Agent:
PFPC Inc., Attention: STARS Portfolio-Class Y, 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 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 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
Portfolio, an investor must establish an account with the STARS Portfolio by
furnishing necessary information to the Fund. An account with the STARS
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., Attention: STARS Portfolio-Class Y, 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
(currently 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 determined.
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 Class Y of the STARS Portfolio is computed
by dividing the value of the STARS Portfolio's net assets represented by Class Y
(i.e., the value of its assets less liabilities) by the total number of shares
of Class Y 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 accordance with procedures
established by, the Master Fund's Board of Trustees. For further information
regarding the methods employed in valuing the STARS Portfolio's investments, see
"Determination of Net Asset Value" in the STARS Portfolio's Statement of
Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Re
venue Service (the "IRS").
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 Class Y
shares of the STARS Portfolio, Class Y shares 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 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 investors. To use
this Privilege, investors should consult their account executive 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 exchange 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 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 shareholders may have to
submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own Class Y 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, un
less otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. 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 registered, 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
Authorized Dealer or the Transfer Agent. When establishing a new account by
exchange, the Class Y shares being exchanged must have a value of at least the
minimum initial investment required 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 exceed 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.
Class Y shares will be exchanged at the next determined net asset value. No fees
currently are charged shareholders 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 Class Y shares of one portfolio or fund for Class Y shares of
another is treated for Federal income tax purposes as a sale of the Class Y
shares given in exchange by the shareholder and, therefore, an exchanging
shareholder may realize 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 automatically
dividends and/or capital gain distributions, if any, paid by the STARS Portfolio
in Class Y shares 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.
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.
Investors may request redemption of STARS Portfolio shares at any time.
Redemption 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
determined 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
redeemed 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
receives further instructions from the investor, the investor's Bear Stearns
account executive or the investor's Authorized Dealer. The Fund imposes no
charges when shares are redeemed directly through Bear Stearns.
The STARS Portfolio ordinarily will make payment for all shares redeemed within
three 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 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 notice
period.
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 account
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 redemption 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 three days, redemption
proceeds will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. Bear Stearns account 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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: STARS Portfolio-Class Y, 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the portfolio from which shares
are to be redeemed, and duly endorsed stock certificates, if previously issued,
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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 fluctuate.
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
provisions 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 additional
Class Y shares of the STARS Portfolio at net asset value, unless payment in cash
is requested or dividends are redirected into another fund pursuant to the
Redirected Distribution Option. All expenses are accrued daily and deducted
before declaration of dividends to investors.
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized 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
Portfolio or redirected into another portfolio or fund. Distributions from net
realized 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 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%.
Dividends 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
disposition of certain market discount bonds, paid by the STARS Portfolio to a
foreign 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 securities
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 investor 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 distributions from
securities gains, if any, paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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; although
investors should expect to be subject to Federal, state or local taxes in
respect of their investment in STARS Portfolio shares.
Management of the Fund believes that the STARS Portfolio has qualified for the
fiscal year ended March 31, 1996 as a "regulated investment company" under the
Code. The STARS Portfolio intends to continue to so qualify if such
qualification is in the best interests of its shareholders. Such qualification
relieves the STARS Portfolio of any liability for Federal income tax to the
extent its earnings are distributed 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 Class Y 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 assume that any income
dividends and/or capital gains distributions made by the STARS Portfolio during
the measuring period were reinvested in Class Y shares.
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 redeemable
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 annualization
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 percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value per share at the beginning
of the period. Advertisements 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.
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
information, 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 advertising
or marketing the STARS Portfolio's shares, including data from Lipper Analytical
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 operations
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
liability 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 possible,
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 ordinarily will not
hold shareholder meetings; however, shareholders under certain circumstances may
have the right to call a meeting of shareholders for the purpose of voting to
remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate 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 with Bear
Stearns and its affiliates in connection with the STARS Portfolio is the
licensing for a fee of certain S&P trademarks 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 terminable under circumstances generally
described in the STARS Portfolio's Statement of Additional Information under
"Information About the STARS Portfolio." 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 operating 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 Services
Group, which publishes STARS, operates independently of, and has no access to
information obtained by, Standard & Poor's Ratings Services, which may in its
regular operations obtain information of a confidential nature.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: 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.
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 involve
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 extent
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 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.
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 option
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 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.
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 ability
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
securities.
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 331/3% 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 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 securities. The Master
Series can increase its income through the investment of such collateral. 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 experience 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
extent permitted under the 1940 Act. The 1940 Act permits an investment company
to borrow in an amount up to 331/3% of the value of such company's total assets.
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 assets, the Master
Series will not make any additional investments.
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
"sponsored" 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 shareholder
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 "Description
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 remaining
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
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. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
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, 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 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 controls or the
adoption of other foreign governmental restrictions wh ich 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.
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
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Repurchase Agreements
Repurchase agreements involve the acquisition by the Master Series of an
underlying debt instrument, subject to an obligation of the seller to
repurchase, and the Master Series to resell, the instrument at a fixed price
usually 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 Services Group, which publishes STARS), F-1 by
Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit
Ratings Co. ("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 Series. 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 companies
which are ranked by STARS. Under the 1940 Act, the Master Series' 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 the Master
Series' total assets with respect to any one investment company and (iii) 10% of
the Master Series' total 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
securities as to which a liquid trading market does not exist, provided such
investments 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 desire
to sell them when a ready buyer is not available at a price it deems
representative of their value, the value of its net assets could be adversely
affected.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche
Deloitte & Touche House
Earlsfort Terrace
Dublin 2, Ireland
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE STARS PORTFOLIO'S PROSPECTUS
AND IN THE STARS PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFER OF THE STARS PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THE STARS PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN
ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
BSF-P-008-03
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
PROSPECTUS
The Insiders Select Fund
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, shares of The Insiders Select Fund, a
non-diversified portfolio (the "Portfolio") are offered. The Portfolio's
investment objective is capital appreciation. The Portfolio's sub-investment
adviser uses its proprietary IntelliVest(TM) Model to analyze transactions by
corporate insiders, the behavior of financial analysts and the corporate finance
activities of the companies themselves to determine which securities to purchase
or sell short.
By this Prospectus, the 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
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 investor
expects to hold the shares and other circumstances. The 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 Portfolio's distributor.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM
has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc.,
as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day
investment activities. BSFM and Symphony are referred to herein collectively as
the "Advisers."
Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the
Portfolio's distributor.
----------------
This Prospectus sets forth concisely information about the 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 June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
Fee Table........................... 3
Condensed Financial Information..... 4
Alternative Purchase Methods........ 4
Description of the Fund............. 5
Risk Factors........................ 9
Management of the Fund.............. 10
How to Buy Shares................... 15
Shareholder Services................ 19
How to Redeem Shares................ 20
Dividends, Distributions and Taxes.. 23
Performance Information............. 24
General Information................. 25
Appendix............................ A-1
<TABLE>
<CAPTION>
Fee Table
- ---------------------------------------------------------------------------------------------
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 Portfolio Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waiver)**............................... 0.00%*** 0.00%***
12b-1 Fees......................................................... 0.50% 1.00%
Other Expenses (after expense reimbursement)**..................... 1.15% 1.15%
Total Portfolio Operating Expenses (after fee waiver and expense
reimbursement)**................................................... 1.65% 2.15%
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............................................................. $ 63 $ 32
3 Years............................................................ $ 97 $ 67
5 Years............................................................ $133 $115
10 Years........................................................... $234 $248
Example:
You would pay the following expenses
on the same investment, assuming no
redemption:
1 Year............................................................. $ 63 $ 22
3 Years............................................................ $ 97 $ 67
5 Years............................................................ $133 $115
10 Years........................................................... $234 $248
</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."
** BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of the Portfolio other than brokerage commissions, extraordinary items,
interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.65%
for Class A and 2.15% for Class C. Without such waiver and expense
reimbursement, Management Fees stated above would be 1.00%, Other Expenses would
be 2.02% for Class A and 2.07% for Class C, and Total Portfolio Operating
Expenses would be 3.52% for Class A and 4.07% for Class C.
*** The Management Fee is payable at an annual rate equal to 1% of the
Portfolio's average daily net assets, subject to increase or decrease by up to
0.50% annually depending on the Portfolio's performance. See "Management of the
Fund-Investment Adviser" and "-Sub-Investment Adviser."
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the
Portfolio'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 costs
and expenses borne by the Portfolio and investors, the payment of which will
reduce investors' annual return. 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 description of the expense reimbursement
or waiver arrangements in effect, see "Management of the Fund."
Condensed Financial Information
The information in the table below covering the Portfolio's investment results
for the period indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolio's Annual Report for the
fiscal year ended March 31, 1996 which is incorporated by reference into the
Portfolio's Statement of Additional Information which is available upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for a Class A
and Class C share of the Portfolio for the period June 16, 1995 (commencement of
investment operations) to March 31, 1996. This information has been derived from
information provided in the Portfolio's financial statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CLASS A CLASS C
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance*
Net asset value, beginning of period................................ $12.00 $12.00
-------- ---------
Net investment income/(loss) (1).................................... 0.03 (0.01)
Net realized and unrealized gain on investments and
securities sold short (2)........................................... 1.98 1.97
-------- ---------
Net increase in net assets resulting from operations................ 2.01 1.96
-------- ---------
Dividends to shareholders from:
Net investment income............................................... (0.01) -
-------- ---------
Net asset value, end of period...................................... $14.00 $13.96
======== =========
Total investment return (3)......................................... 16.75% 16.33%
======== =========
Ratios/Supplemental Data
Net assets, end of period (000's omitted)........................... $12,132 $9,928
Ratio of expenses to average net assets (1)(4)...................... 1.65% 2.15%
Ratio of net investment income/(loss) to average net assets (1)(4).. 0.38% (0.12)%
Decrease reflected in above expense ratios and net investment
income/(loss) due to waivers and reimbursements (4)................. 1.87% 1.92%
Portfolio turnover rate (5)......................................... 93.45% 93.45%
Average commission rate per share................................... $0.03 $0.03
- -----
</TABLE>
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
the actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of
Portfolio shares in relation to fluctuating net asset value during the
period.
(3) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(4) Annualized.
(5) Not annualized.
Further information about performance is contained in the Portfolio's Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
Alternative Purchase Methods
By this Prospectus, the Portfolio offers you two methods of purchasing its
shares.
By this Prospectus, the 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 portfolio.
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 4.75% 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
the Portfolio are subject to an annual distribution and shareholder servicing
fee at the rate of .50 of 1% of the value of the average daily net assets. See
"Management of the Fund-Distribution and Shareholder Servicing Plan."
Class C shares of the 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 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 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 time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor'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 initial 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 expect
to maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distribution 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 the Portfolio's shares, but will not
be appropriate for investors who invest less than $50,000 in the 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 Portfolio are being offered. From
time to time, other portfolios may be established and sold pursuant to other
offering documents. See "General Information."
Investment Objective
The Portfolio seeks to provide capital appreciation.
The Portfolio's investment objective is capital appreciation. The Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective wi
ll be achieved.
IntelliVest(TM) Model
The IntelliVest(TM) Model is Symphony's proprietary methodology for selecting a
company's securities by analyzing the behavior of corporate insiders, financial
analysts and the company itself.
Symphony has developed a proprietary methodology (the "IntelliVest(TM) Model")
for analyzing the behavior of (i) corporate insiders-officers, directors and
significant stockholders-through an analysis of their publicly filed reports of
their trading activities in the equity securities of the companies for which
they are insiders, (ii) financial analysts, through an analysis of their
published reports about covered companies, including predicted earnings and
revisions to predicted earnings, and (iii) the company itself, through an
analysis of its behavior as to corporate finance matters, such as stock
repurchase programs, dividend policies and new securities issuance.
Corporate insiders are believed by Symphony to be in the best position to
understand the near term prospects of their companies. Symphony believes that
insider behavior can be observed and analyzed since insiders are required to
disclose transactions in their company's equity securities to the Securities and
Exchange Commission generally no later than the tenth day of the month following
the transaction. Each month many thousands of these disclosures are received.
Symphony believes that the laborious process of collecting, classifying and
analyzing these transactions using the IntelliVest(TM) Model provides valuable
investment management information.
These Insiders may have many reasons for transacting in company stock and stock
options. Many of these are entirely incidental to the future of the company. For
example, an insider may sell stock to buy a home or finance a college education
for his or her child. Likewise a new management team may wish to signal
confidence in the company by making token purchases of the company's equity.
Many other transactions, however, are related directly to the insider's beliefs
about the near-term price expectations for the company's stock. An insider who
exercises long-term options early for small profits likely believes the stock
soon will decline. Insiders who exercise options, hold the stock, and buy in the
open market probably believe that the stock soon will rise. Clusters of insiders
making substantial buys or sells indicate broad agreement within a firm as to
the direction of the stock.
Financial analysts use a variety of means to learn more about the companies they
follow. Among these are visits to the company and in-depth discussions with
management. Successful analysts learn to interpret the words and actions of
management and the firm itself. Likewise, management uses its discussions with
certain analysts as a means of signaling their views to the marketplace.
Symphony has a computer model of analysts' predicted earnings and ratings. This
model tracks the behavior of analysts as they have revised predicted earnings
and the ratings of a company's prospects in the market. Symphony believes that
analysts' revisions can be a valuable indicator of future returns for the
company's stock.
Part of the normal activity of every public company is its financing decisions.
A company must routinely decide whether to maintain or change its dividend
policy, whether to buy its own stock in the open market or whether to issue new
securities. From time to time the firm may decide that its stock is undervalued.
Many firms see undervaluation as an opportunity to purchase the company's stock
in the open market. Symphony believes that by monitoring changes in shares
outstanding (in the hands of the public), a useful signal can be extracted
relating to the firm's beliefs about its prospects. Similarly, the company's
decision to sell securities to the public or another firm can be an indication
that the company believes that its stock has reached a near-term high, a
potentially useful sell signal.
Insiders, analysts and the company each send signals that can be analyzed using
the IntelliVest(TM) Model to produce valuable information about the prospects
for individual companies. Symphony believes that the most powerful analysis,
however, comes from the interaction of all three sources. While no one signal
alone determines whether a security will be purchased or sold, no security will
be considered for purchase or sale using the IntelliVest(TM) Model unless a
positive or negative signal, as the case may be, is received from insider
behavior. In its analysis, the IntelliVest(TM) Model uses only data that is
available to the public. Symphony obtains the data on insider trading activity
from CDA/Investnet, which compiles this information from publicly available
Securities and Exchange Commission filings. Symphony's research team has devoted
four years of research to developing the framework necessary to analyze the
behavior of each of these sources and the interaction among them.
Management Policies
The Portfolio seeks to invest primarily in equity securities that, at the time
of purchase, are believed by Symphony, using data from the IntelliVest(TM)
Model, to provide opportunities for capital appreciation or gains through short
selling.
Under normal market conditions, Symphony invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. Using data from the
IntelliVest(TM) Model, Symphony selects equity securities believed by it to
provide opportunities for capital appreciation or gains through short selling.
Issuers are selected without regard to market capitalization, although Symphony
anticipates that the issuers principally will be mid- to large capitalization
companies; that is, those with market capitalizations exceeding $1 billion.
Symphony seeks to use the IntelliVest(TM) Model to select all the Portfolio's
securities. The IntelliVest(TM) Model, however, should not be expected to
provide data sufficient to permit the Portfolio's entire portfolio to be
invested in its selections. For its remaining assets invested in equity
securities, Symphony will use an analytic valuation model created by the active
strategies group of BARRA, Inc., Symphony's parent, to select from the universe
of U.S. equity securities those securities it believes, in the aggregate, will
approximate or exceed the total return performance of the Standard & Poor's 500
Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange.
The composition of the S&P 500 Index is determined by Standard & Poor's based on
such factors as the market capitalization and trading activity of each stock and
its adequacy as a representative of stocks in a particular industry group, and
may be changed from time to time. The weightings of stocks in the S&P 500 Index
are based on each stock's relative total market capitalization; that is, its
market price per share times the number of shares outstanding. Because of this
weighting, as of March 31, 1996, approximately 47% of the S&P 500 Index was
composed of the 50 largest companies. The Portfolio will not invest in all or
substantially all of the common stocks included in the S&P 500 Index and may
invest in stocks that are not included in the S&P 500 index. The Portfolio
expects ordinarily to invest in approximately 60 to 150 stocks.
By investing in this manner-that is, using its IntelliVest(TM) Model and
purchasing other equity securities in a manner intended to approximate or exceed
the performance of the S&P 500 Index-Symphony seeks to exceed the total return
of the S&P 500 Index.
Equity securities consist of common stocks, convertible securities and preferred
stocks. The convertible securities and preferred stocks in which the Portfolio
may invest will be rated at least investment grade by a nationally recognized
statistical rating organization at the time of purchase. Convertible securities
rated in the lowest investment grade rating may be considered to have
speculative characteristics. Preferred stock generally receives dividends before
distributions are paid on common stock and ordinarily has a priority claim over
common stockholders if the issuer of the stock is liquidated. The Portfolio may
invest, in anticipation of investing cash positions, in money market instruments
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 ag reements, as set forth in
the Appendix. Under normal market conditions, the Portfolio expects to have less
than 15% of its assets invested in money market instruments. However, when
Symphony determines that adverse market conditions exist, the Portfolio may
adopt a temporary defensive posture and invest all of its assets in money market
instruments.
Investment Techniques
The Portfolio may engage in short selling, lending portfolio securities and
options and futures transactions, each of which involves risk.
The Portfolio may engage in various investment techniques, such as short
selling, lending portfolio securities and options and futures transactions, each
of which involves risk. Options and futures transactions involve "derivative
securities." Short selling and futures transactions are discussed below. For a
discussion of these other investment techniques and their related risks, see
"Appendix-Investment Techniques" and "Risk Factors" below.
Short Selling. Short sales are transactions in which the Portfolio sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Portfolio must borrow the
security to make delivery 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 during 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.
- -----
* "Standard & Poor's," "S&P(R)" and "S&P 500(R)" are trademarks of The
McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's or The McGraw-Hill Companies, Inc..
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 the
amount deposited in the account plus the amount deposited with the broker as
collateral always equals the current value of the security sold short; or (b)
otherwise cover its short position in accordance with positions taken by the
Staff of the Securities and Exchange Commission.
The 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. The 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. The Portfolio
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."
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets. The Portfolio 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 assets. The Portfolio 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 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
receives 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 Portfolio's
net assets.
Futures Contracts and Options on Futures Contracts. The Portfolio may enter into
stock index futures contracts, and options with respect thereto, in U.S.
domestic markets. See "Appendix-Investment Techniques-Options Transactions."
These transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes. Although the
Portfolio is not a commodity pool, it is subject to rules of the Commodity
Futures Trading Commission (the "CFTC") limiting the extent to which it may
engage in these transactions.
The Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the CFTC.
In addition, the Portfolio may not engage in such transactions if the sum of the
amount of initial margin deposits 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 the 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 the Portfolio which
could adversely affect the value of a shareholder's investment. Although the
Portfolio intends to purchase or sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subject- ing the Portfolio to
substantial losses. In addition, engaging in futures transactions in foreign
markets may involve greater risks than trading on domestic exchanges.
Successful use of futures by the Portfolio also is subject to Symphony's ability
to predict correctly movements in the direction of the market or foreign
currencies 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 the
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 securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient 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
Exchange Commission, the Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transactions
in an amount generally equal to the value of the underlying commodity. The
segregation of such assets will have the effect of limiting the Portfolio's
ability otherwise to invest those assets.
Future Developments. The Portfolio may take advantage of opportunities in the
area of options and futures contracts, options on futures contracts and any
other derivative investments which are not presently contemplated for use by the
Portfolio or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Portfolio's
investment objective and legally permissible for the Portfolio. Before entering
into such transactions or making any such investment, the Portfolio will provide
appropriate disclosure in its prospectus.
Certain Fundamental Policies
Certain of the Portfolio's investment policies are fundamental policies that can
be changed only by shareholder vote.
The Portfolio 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 describes fundamental policies
that cannot be changed as to the Portfolio without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies-Investment
Restrictions" in the Statement of Additional Information.
Certain Additional Non-Fundamental Policies
The Portfolio may (i) purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets; (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.
Risk Factors
No investment is free from risk. Investing in the Portfolio will subject
investors to certain risks which should be considered.
Net Asset Value Fluctuations
The 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 undertake the
risks involved.
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 equity
securities in the Portfolio's portfolio will result in changes in the value of
the Portfolio's shares and thus the Portfolio's yield and total return to
investors.
Certain Investment Techniques
The use of investment techniques such as short selling, lending portfolio
securities and engaging in options and futures transactions, involves greater
risk than that incurred by many other funds with a similar objective. Using
these techniques may produce higher than normal portfolio turnover and may
affect the degree to which the Portfolio's net asset value fluctuates. See
"Appendix-Investment Techniques."
The 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
securities 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
expiring 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 portfolio
decisions. Under normal market conditions, the Portfolio's portfolio turnover
rate generally will not exceed 150%. Higher portfolio turnover rates are likely
to result in comparatively 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 Portfolio's
Statement of Additional Information.
Non-Diversified Status
The 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 generally, 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 Portfolio intends to conduct its operations so as to
qualify as a "regulated investment 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
Portfolio's total assets be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Portfolio's
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 one issuer (other than U.S. Government securities or the
securities of other regulated investment companies). Since a relatively high
percentage of the Portfolio's 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 Portfolio's portfolio securities may be more susceptible to
any single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
Simultaneous Investments
Investment decisions for the Portfolio are made independently from those of
other investment companies or accounts advised by the Advisers. 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 Portfolio invests at the same
time as the Portfolio, 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 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 the
Portfolio's business.
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. The Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
Investment Adviser
The Portfolio's investment adviser is BSFM; Symphony provides day-to-day
management of the Portfolio's investments.
The Portfolio's 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 adviser 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 March 31, 1996 of over $1.9 billion.
BSFM supervises and assists in the overall management of the Portfolio's affairs
under an Investment Advisory Agreement between BSFM and the Fund, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the
Portfolio's average daily net assets which will be adjusted monthly depending on
the extent to which the investment performance of Portfolio shares exceeded or
was exceeded by the percentage change in the investment record of the S&P 500
Index.
Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average
daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly
Performance Adjustment") depending on the extent to which the investment
performance of the Class of shares (currently, Class C) expected to bear the
highest total Portfolio operating expenses, after expenses, exceeded or was
exceeded by the percentage change in the investment record of the S&P 500 Index.
The Monthly Performance Adjustment may increase or decrease the total advisory
fee payable to BSFM (the "Total Advisory Fee") by up to .50% per year of the
value of the Portfolio's average daily net assets.
The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of the
1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average daily
net assets over the most recent calendar month, giving a dollar amount which is
the Basic Fee for that month; (b) one-twelfth of the applicable performance
adjustment rate from the table below is applied to the Portfolio's average daily
net assets over the most recent calendar month, giving a dollar amount which is
the Monthly Performance Adjustment (for the first twelve-month period, no
performance adjustment will be made); and (c) the Monthly Performance Adjustment
is then added to or subtracted from the Basic Fee and the result is the amount
payable by the Portfolio to BSFM as the Total Advisory Fee for that month.
The full range of Total Advisory Fees on an annualized basis is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS'
PERFORMANCE (NET OF
EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE
AND PERCENTAGE CHANGE IN THE ADJUSTMENT
S&P 500 INDEX BASIC FEE (%) RATE (%) TOTAL FEE (%)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more.................... 1% .50% 1.50%
+2.75 percentage points or more but less than +3.00
percentage points.................................. 1% .40% 1.40%
+2.50 percentage points or more but less than +2.75
percentage points.................................. 1% .30% 1.30%
+2.25 percentage points or more but less than +2.50
percentage points.................................. 1% .20% 1.20%
+2.00 percentage points or more but less than +2.25
percentage points.................................. 1% .10% 1.10%
Less than +2.00 percentage points but more than
- -2.00 percentage points............................ 1% 0% 1.00%
- -2.00 percentage points or less but more than -2.25
percentage points.................................. 1% -.10% .90%
- -2.25 percentage points or less but more than -2.50
percentage points.................................. 1% -.20% .80%
- -2.50 percentage points or less but more than -2.75
percentage points.................................. 1% -.30% .70%
- -2.75 percentage points or less but more than -3.00
percentage points.................................. 1% -.40% .60%
- -3.00 percentage points or less.................... 1% -.50% .50%
</TABLE>
The period over which performance is measured is a rolling twelve-month period
and the performance of the S&P 500 Index is calculated as the sum of the change
in the level of the S&P 500 Index during the period, plus the value of any
dividends or distributions made by the companies whose securities comprise the
S&P 500 Index. From June 16, 1995 (commencement of operations) through March 31,
1996, no fees were paid by the Portfolio pursuant to an undertaking by BSFM.
The Portfolio's administrator is BSFM. The 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 Portfolio, subject to the overall
authority of the Fund's Board of Trustees in accordance with Massachusetts law.
For providing administrative services to the Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's
average daily net assets. Under the terms of an Administrative Services
Agreement with the Fund, PFPC Inc. provides certain administrative services to
the Portfolio. For providing these services, the Fund has agreed to pay PFPC
Inc. an annual fee, as set forth below:
- --------------------------------------------------------------------
PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------
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%
The above-referenced fee is subject to a monthly minimum fee of $11,000.
From June 16, 1995 (commencement of operations) through March 31, 1996, the
Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of .30 of 1%
of the Portfolio's average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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. The Portfolio will not pay
BSFM at a later time for any amounts it may waive, nor will the Portfolio
reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may
waive or a portion of its fee. Effective May 1, 1996, and until further notice,
PFPC Inc. will reduce its monthly minimum to $7,500 for net assets of less than
$25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for
net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this
voluntary fee waiver at any time.
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
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
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
Advisory Agreement is in effect.
Sub-Investment Adviser
The Portfolio's sub-investment adviser, Symphony, provides investment advisory
assistance and the day-to-day management of the Portfolio's investments.
BSFM has engaged Symphony, located at 555 California Street, San Francisco,
California 94104, to serve as the Fund's sub-investment adviser. Symphony, a
registered investment adviser, was formed in 1994. Symphony is a wholly-owned
subsidiary of BARRA, Inc., a leading supplier of analytical financial software.
Symphony's principals are Jeffrey Skelton, Praveen Gottipalli, Michael Henman
and Neil Rudolph. Messrs. Skelton, Henman and Rudolph joined Symphony in 1994
from Wells Fargo Nikko Investment Advisors where they were Managing Directors.
Mr. Gottipalli joined Symphony in 1994 from BARRA, Inc.
Symphony, subject to the supervision and approval of BSFM, provides investment
advisory assistance and the day-to-day management of the Portfolio's
investments, as well as investment research and statistical information, under a
Sub-Investment Advisory Agreement with BSFM, subject to the overall authority of
the Fund's Board of Trustees in accordance with Massachusetts law.
BSFM pays Symphony a sub-advisory fee at an annual rate equal to .45 of 1% of
the Portfolio's average daily net assets which will be adjusted monthly
depending on the extent to which the investment performance of Portfolio shares
exceeded or was exceeded by the percentage change in the investment record of
the S&P 500 Index.
Under the Sub-Investment Advisory Agreement, BSFM has agreed to pay Symphony a
monthly fee at the annual rate of .45 of 1% of the Portfolio's average daily net
assets (the "Symphony Basic Fee") which will be adjusted by a Monthly
Performance Adjustment calculated as described above. The Monthly Performance
Adjustment applicable to Symphony may increase or decrease the total advisory
fee payable to Symphony (the "Total Sub-Advisory Fee") by up to .25% per year of
the value of the Portfolio's average daily net assets. The monthly Total
Sub-Advisory fee is calculated in the same manner as the Total Advisory Fee.
The full range of Total Sub-Advisory Fees on an annualized basis is as follows:
- -------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE BETWEEN
DESIGNATED CLASS' PERFORMANCE PERFORMANCE
(NET OF EXPENSES INCLUDING ADVISORY FEES) BASIC ADJUSTMENT TOTAL
AND PERCENTAGE CHANGE IN THE S&P 500 INDEX FEE (%) RATE (%) FEE (%)
- --------------------------------------------------------------------------------
+3.00 percentage points or more...................... .45% .25% .70%
+2.75 percentage points or more but less than +3.00
percentage points.................................... .45% .20% .65%
+2.50 percentage points or more but less than +2.75
percentage points.................................... .45% .15% .60%
+2.25 percentage points or more but less than +2.50
percentage points.................................... .45% .10% .55%
+2.00 percentage points or more but less than +2.25
percentage points.................................... .45% .05% .50%
Less than +2.00 percentage points but more than -2.00
percentage points.................................... .45% 0% .45%
- -2.00 percentage points or less but more than -2.25
percentage points.................................... .45% -.05% .40%
- -2.25 percentage points or less but more than -2.50
percentage points.................................... .45% -.10% .35%
- -2.50 percentage points or less but more than -2.75
percentage points.................................... .45% -.15% .30%
- -2.75 percentage points or less but more than -3.00
percentage points.................................... .45% -.20% .25%
- -3.00 percentage points or less...................... .45% -.25% .20%
If for the 12-month period ended February 22, 1997, the Total Sub-Advisory Fee
exceeds .45%, without giving effect to any fee waivers by BSFM, then thereafter
BSFM has agreed to pay Symphony a Basic Fee equal to .50 of 1% on an annualized
basis. From June 16, 1995 (commencement of operations) through March 31, 1996,
no fees were paid to Symphony by BSFM pursuant to an undertaking by Symphony.
The Fund's primary investment officer is Praveen Gottipalli. Since May 1994, he
has been Symphony's Director of Investments. For more than five years prior
thereto, he was Director of the Active Strategies Group of BARRA, Inc.
Distributor
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the Portfolio's principal underwriter and distributor of the 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 Portfolio's Distribution and Shareholder Servicing Plan described below.
Custodian and Transfer Agent
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
Distribution and Shareholder Servicing Plan
The Portfolio has adopted a Rule 12b-1 Plan under which the Portfolio 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 Portfolio pays Bear Stearns for
distributing Portfolio shares and for providing personal services to, and/or
maintaining accounts of, Portfolio shareholders a fee 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 incurred. The Fund understands that these
third parties also may charge fees to their clients who are beneficial owners of
Portfolio shares in connection with their client accounts. These fees would be
in addition to any amounts which may be received by them from Bear Stearns under
the Plan.
Expense Limitation
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, including
the investment advisory fee and fees under the Plan, exceed 1.65% of Class A's
average daily net assets and 2.15% 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 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 the 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 the
Portfolio's shares also may be made directly through the Transfer Agent. When
purchasing Portfolio 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 Transfer
Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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-The Insiders
Select Fund" if purchased directly from the Portfolio, and should be directed to
the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-The Insiders
Select Fund, 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 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 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 Portfolio shares
through the Transfer Agent. To make an initial investment in the Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with the 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.,
Attention: The Bear Stearns Funds-The Insiders Select Fund, 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 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
(currently 4:00 p.m., New York time) on any day the 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 determined.
Net asset value is computed daily as of the close of regular trading on the New
York Stock Exchange.
Shares of the 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 Portfolio 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 number of shares
of such Class outstanding. The 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 accordance with procedures
established by, the Fund's Board of Trustees. For further information regarding
the methods employed in valuing the Portfolio's investments, see "Determination
of Net Asset Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Re
venue Service (the "IRS").
Class A Shares
The sales charge may vary depending on the dollar amount invested in the
Portfolio.
The public offering price for Class A shares of the 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 % OF
AMOUNT OF TRANSACTION PER SHARE PER SHARE 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
- -------------------
* Until further notice to the contrary, the full amount of the sales load will
be reallowed as a dealer concession.
</TABLE>
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 Prospectus
entitled "How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares"
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
additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares. Dealers
may receive a larger percentage of the sales load from Bear Stearns than they
receive for selling most other funds.
Through September 30, 1996, Bear Stearns, at its expense, has agreed to pay
Authorized Dealers a fee in respect of the aggregate of all shares of the
Portfolio and each other investment company sponsored by Bear Stearns sold to
their customers through September 26, 1995. The fee paid is based on the
aggregate net asset value of all shares of the Portfolio and each other
investment company sponsored by Bear Stearns purchased by customers of the
Authorized Dealer during the period ended September 26, 1995, reduced for
redemptions during the year ending September 30, 1996. For amounts greater than
$1 million 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 expected to be paid, on a pro rata basis, quarterly.
Class A shares may be sold at net asset value to (a) each Adviser, its
affiliates or their respective officers, directors or employees (including
retired employees), any partnership of which an Adviser 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 each Adviser; (c) any
employee or registered representative of any Authorized Dealer or their
respective spouses and minor children; (d) trustees or directors of investment
companies for which an Adviser or an affiliate acts as sponsor; (e) any state,
county or city, or any instrumentality, department, authority or agency thereof,
which is prohibited by applicable investment laws from paying a sales load or
commission in connection with the purchase of Portfolio shares; (f) any
institutional investment clients including corporate sponsored pension and
profit-sharing plans and other benefit plans (excluding Keogh Plans, IRAs and
SEP-IRAs), and insurance companies; (g) any pension funds (excluding Keogh
Plans, IRAs and SEP-IRAs), 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 the Portfolio of its employees.
Dividends and distributions reinvested in Class A shares of the Portfolio will
be made at the net asset value per share on the reinvestment date.
Class A shares of the 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. However, if such
investor redeems those shares within one year after purchase, a CDSC of 1.00%
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 1.00% of the net asset value of shares
purchased by the dealers' clients or customers in this manner.
In addition, 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) investment advisers and financial planners who place trades for their own
accounts or for the accounts of their clients and who charge a management,
consulting or other fee, (ii) clients of such investment advisers and financial
planners if such clients place trades through accounts linked to master accounts
of such investment advisers or financial planners on the books and records of
such broker and (iii) 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 Code and "rabbi trusts", provided, in
each case, the purchase transaction is effected through such broker. The broker
may charge a fee for transactions in Portfolio shares.
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-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
purchase Class A shares of the 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 Portfolio, 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 purchase
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 purchases made by a
company controlled by such individual(s); (b) individual purchases 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 benefit plans of a
single employer or of employers affiliated with each other.
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
applicable to the total number of Class A shares of the 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 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 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 escrow 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 the 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
The Portfolio offers shareholders convenient features and benefits, including
the Systematic Investment Plan.
The Systematic Investment Plan permits investors to purchase shares of the
Portfolio (minimum initial investment of $250 and minimum subsequent investments
of $100 per transaction) at regular intervals selected by the investor. Provided
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 designated
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 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 involves the continuous investment in the
Portfolio regardless of fluctuating price levels of the 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 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
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
investors. To use this Privilege, investors should consult their account
executive 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 exchange shares of
the Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously di d 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 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 otherwise
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
account, however, an exchanging shareholder must file a specific written
request. 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 registered, 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
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the shares
being exchanged must have a value of at least the minimum initial investment
required 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 exceed
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, except
in the instances described below, a sales load may be charged with respect 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 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 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 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 confirmation 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 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 exchange by the
shareholder and, therefore, an exchanging shareholder may realize 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 automatically
dividends and/or capital gain distributions, if any, paid by the 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
request 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 investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
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.
The Portfolio ordinarily will make payment for all shares redeemed within
three 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
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 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 notice
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
redemption. To take advantage of this reinstatement privilege, shareholders 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 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 reinvestment
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 investor 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
acquired 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 Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional
shares through dividend reinvestment. During the first year after the purchase
the investor decided to redeem $500 of his or her investment. Assuming at the
time of the redemption the net asset value had appreciated 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 Code, of the shareholder, (b) redemptions by employees
participating in Eligible Benefit Plans, (c) redemptions as a result of a
combination of any investment company with the Portfolio by merger, acquisition
of assets or otherwise, and (d) a distribution following retirement under a
tax-deferred retirement plan or upon attaining age 701/2 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
disclosure in the Portfolio's 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 executive 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 account 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 redemption 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 three days, redemption proceeds will be paid
by check or credited to the shareholder's brokerage account at the election of
the shareholder. Bear Stearns account 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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-The Insiders Select Fund, 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the Portfolio from which shares are
to be redeemed, and duly endorsed stock certificates, if previously issued, 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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 processed
at a later time than it would have been if telephone redemption had been used.
During the delay, the Portfolio's net asset value may fluctuate.
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 Automatic
Withdrawal. Purchases of additional shares concurrent with withdrawals
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 redirected
into another fund pursuant to the Redirected Distribution Option.
The Portfolio ordinarily pays dividends from its 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
provisions of the 1940 Act. The 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 additional
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. 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 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
realized from the sale or disposition of certain market discount bonds, paid by
the Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of the Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of the 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 shares and whether such
distributions 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%. Dividends
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
disposition of market discount bonds, paid by the Portfolio to a foreign
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 securities gains paid
by the 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 investor 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 distributions 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 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 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 charged 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 received on
the exchange.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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 Portfolio is not 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.
Management of the Fund believes that the Portfolio has qualified for the fiscal
year ended March 31, 1996 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. Such qualification relieves the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
in accordance with applicable provisions of the Code. In addition, the 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 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 return
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Portfolio du ring 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.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the 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 redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include the Portfolio's average annual total return
for one, five and ten year periods, or for shorter periods depending upon the
length of time during which the Portfolio has operated. Computations of average
annual total return for periods of less than one year represent an annualization
of the 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
percentage 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 offering 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.
Advertisements 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
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
applicable 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
information, 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 advertising
or marketing the 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.
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. The Fund commenced operations
on or about April 3, 1995 in connection with the offer of shares of certain of
its other portfolios. The Fund is authorized to issue an unlimited number of
shares of beneficial interest, par value $.001 per share. The 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 Portfolio. However, the Trust
Agreement disclaims shareholder liability for acts or obligations of the
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 indemnification from the Portfolio's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the 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 the Portfolio, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Portfolio. The Fund's
Trustees intend to conduct the operations of the Portfolio in a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Portfolio. As discussed under "Management of the Fund" in the
Portfolio's Statement of Additional Information, the Portfolio ordinarily will
not hold shareholder meetings; however, shareholders under certain circumstances
may have the right to call a meeting of shareholders for the purpose of voting
to remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: The Insiders Select Fund, 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.
Appendix
Investment Techniques
In connection with its investment objective and policies, the Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options transactions involve "derivative securities."
Options Transactions
The Portfolio may engage in options transactions.
The 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 specific
securities (or groups or "baskets" of specific securities) in which the
Portfolio may invest. The 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. The Portfolio also
may purchase call options to enter into closing purchase transactions. The
Portfolio also may write covered put option contracts to the extent 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 the Portfolio exposes the Portfolio during the term of the
option to a decline in price of the underlying security or securities. 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.
The Portfolio may purchase and sell call and put options on stock indexes 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 the Portfolio
will realize a gain or loss from the purchase 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 particular stock.
Successful use by the Portfolio of options will be subject to Symphony's ability
to predict correctly movements in the direction of individual stocks, the stock
market generally, foreign currencies or interest rates. To the extent Symphony's
predictions are incorrect, the Portfolio may incur losses which could adversely
affect the value of a shareholder's investment.
Lending Portfolio Securities
The Portfolio may earn additional income by lending its portfolio securities.
From time to time, the 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 331/3% of the value
of the Portfolio's total assets. In connection with such loans, the Portfolio
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 securities. The
Portfolio can increase its income through the investment of such collateral. The
Portfolio 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 Portfolio might experience risk of loss if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Portfolio.
Borrowing Money
The Portfolio may borrow money.
As a fundamental policy, the 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 331/3% of the value of such company's total assets.
However, the 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 the Portfolio's total assets,
the Portfolio will not make any additional investments.
Certain Portfolio Securities
Convertible Securities
The Portfolio may invest in convertible securities.
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar to both fixed-income
and equity securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and, therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that provide
for a stable stream of income with generally higher yields than common stocks.
Of course, like all fixed-income securities, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital ap
preciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Money Market Instruments
The Portfolio may invest in a variety of money market instruments.
The Portfolio may invest, in the circumstances described under "Description of
the Fund-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 remaining maturities
of 13 months or less.
U.S. Government Securities
The Portfolio 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
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. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
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, since it is not so obligated by law.
Bank Obligations
The Portfolio may invest in bank obligations, including certificates of deposit,
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 subsidiaries of
domestic banks, and domestic and foreign branches of foreign banks, the
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
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 controls 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.
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 Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio 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
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Repurchase Agreements
Repurchase agreements involve the acquisition by the Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more than one
week after its purchase. Certain costs may be incurred by the Portfolio 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 Portfolio 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 Portfolio 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 In c. ("Moody's"), A-1 by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff &
Phelps Credit Rating Co. ("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 the Advisers to be of
comparable quality to those rated obligations which may be purchased by the
Portfolio. The 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
The Portfolio may invest up to 5% of its net assets in warrants.
The Portfolio may invest up to 5% of its net assets in warrants, except
that this limitation does not apply to warrants acquired in units or attached to
securities. Included in such amount, but not to exceed 2% of the value of the
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 specified period of time.
Investment Company Securities
The Portfolio may invest in securities of other investment companies.
The Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, the 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 the Portfolio's total assets with respect
to any one investment company and (iii) 10% of the Portfolio's total 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 Portfolio may purchase illiquid securities.
The Portfolio may invest up to 15% of the value of its net assets in securities
as to which a liquid trading market does not exist, provided such investments
are consistent with the Portfolio's 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, repurchase
agreements providing for settlement in more than seven days after notice, and
options traded in the over-the-counter market and securities used to cover such
options. As to these securities, the Portfolio is subject to a risk that should
the 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 the Portfolio's
net assets could be adversely affected.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Sub-Investment Adviser
Symphony Asset Management
555 California Street, Suite 2975
San Francisco, CA 94104
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center New York, NY
10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE INSIDERS SELECT FUND'S
PROSPECTUS AND IN THE INSIDERS SELECT FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFER OF THE INSIDERS SELECT FUND'S SHARES, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND. THE INSIDERS SELECT FUND'S PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-005-03
<PAGE>
THE BEAR STEARNS FUNDS
245 PARK AVENUE
NEW YORK, NY 10167
1-800-766-4111
PROSPECTUS
The Insiders Select Fund
Class Y Shares Only
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, Class Y shares of The Insiders Select Fund, a
non-diversified portfolio (the "Portfolio"), are offered. The Portfolio's in
vestment objective is capital appreciation. The Portfolio's sub-investment
adviser uses its proprietary IntelliVest(TM) Model to analyze transactions by
corporate insiders, the behavior of financial analysts and the corporate finance
activities of the companies themselves to determine which securities to purchase
or sell short.
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. The Portfolio issues other Classes of
shares which have sales charges and different expenses which would affect
performance. Investors desiring to obtain information about these other Classes
of shares should call 1-800-766-4111 or ask their sales representative or the
Portfolio's distributor.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM
has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc.,
as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day
investment activities. BSFM and Symphony are referred to herein collectively as
the "Advisers."
Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the
Portfolio's distributor.
----------------
This Prospectus sets forth concisely information about the 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 June 20,
1996, which may be revised from time to time, provides a further discussion 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 Information" in this
Prospectus.
----------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
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 AN
D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
June 20, 1996
Table of Contents
PAGE
Fee Table........................... 3
Condensed Financial Information..... 4
Description of the Fund............. 4
Risk Factors........................ 9
Management of the Fund.............. 10
How to Buy Shares................... 14
Shareholder Services................ 15
How to Redeem Shares................ 16
Dividends, Distributions and Taxes.. 18
Performance Information............. 19
General Information................. 19
Appendix............................ A-1
<TABLE>
<CAPTION>
Fee Table
- ----------------------------------------------------------------------------------------
CLASS Y
- ----------------------------------------------------------------------------------------
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... None
Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the
amount subject to charge)......................................................... None
Annual Portfolio Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waiver)*............................................... 0.00%**
12b-1 Fees........................................................................ None
Other Expenses (after expense reimbursement)*..................................... 1.15%
Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)*.. 1.15%
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........................................................................... $ 12
3 Years.......................................................................... $ 37
5 Years.......................................................................... $ 63
10 Years.......................................................................... $140
- -----
* BSFM has undertaken to waive its investment advisory fee and assume certain
expenses of the Portfolio other than brokerage commissions, extraordinary items,
interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.15%
for Class Y. Without such waiver and expense reimbursement, Management Fees
stated above would be 1.00%, Other Expenses would be 2.19% and Total Portfolio
Operating Expenses would be 3.19% for Class Y.
** The Management Fee is payable at an annual rate equal to 1% of the
Portfolio's average daily net assets, subject to increase or decrease by up to
0.50% annually depending on the Portfolio's performance. See "Management of the
FundInvestment Adviser" and "-Sub-Investment Adviser."
</TABLE>
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the
Portfolio'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 costs
and expenses borne by the Portfolio and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of the Fund."
Condensed Financial Information
The information in the table below covering the Portfolio's investment results
for the period indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolio's Annual Report for the
fiscal year ended March 31, 1996 which is incorporated by reference into the
Portfolio's Statement of Additional Information which is available upon request.
Financial Highlights
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for a Class Y
share of the Portfolio for the period June 20, 1995 (commencement of initial
public offering) to March 31, 1996. This information has been derived from
information provided in the Portfolio's financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS Y
- ------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance*
Net asset value, beginning of period............................................... $12.12
-------
Net investment income (1).......................................................... 0.07
Net realized and unrealized gain on investments and securities sold short (2)...... 1.87
-------
Net increase in net assets resulting from operations............................... 1.94
-------
Dividends to shareholders from:
Net investment income.............................................................. (0.04)
-------
Net asset value, end of period..................................................... $14.02
=======
Total investment return (3)........................................................ 15.98%
=======
Ratios/Supplemental Data
Net assets, end of period (000's omitted).......................................... $1,293
Ratio of expenses to average net assets (1)(4)..................................... 1.15%
Ratio of net investment income to average net assets (1)(4)........................ 0.97%
Decrease reflected in above expense ratios and net investment income due to waivers
and reimbursements (4)............................................................. 2.04%
Portfolio turnover rate (5)........................................................ 93.45%
Average commission rate per share.................................................. $0.03
- -----
* Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distribution, if any, which are based on the
actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of
Portfolio shares in relation to fluctuating net asset value during the
period.
(3) Total return is calculated assuming a purchase of shares on the first day
and a sale of shares on the last day of each period reported and includes
reinvestment of dividends and distributions, if any. Total return is not
annualized.
(4) Annualized.
(5) Not annualized.
</TABLE>
Further information about performance is contained in the Portfolio's Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
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 Portfolio are being offered. From
time to time, other portfolios may be established and sold pursuant to other
offering documents. See "General Information."
Investment Objective
The Portfolio seeks to provide capital appreciation.
The Portfolio's investment objective is capital appreciation. The Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective
will be achieved.
IntelliVest(TM) Model
The IntelliVest(TM) Model is Symphony's proprietary methodology for selecting a
company's securities by analyzing the behavior of corporate insiders, financial
analysts and the company itself.
Symphony has developed a proprietary methodology (the "IntelliVest(TM) Model")
for analyzing the behavior of (i) corporate insiders-officers, directors and
significant stockholders-through an analysis of their publicly filed reports of
their trading activities in the equity securities of the companies for which
they are insiders, (ii) financial analysts, through an analysis of their
published reports about covered companies, including predicted earnings and
revisions to predicted earnings, and (iii) the company itself, through an
analysis of its behavior as to corporate finance matters, such as stock
repurchase programs, dividend policies and new securities issuance.
Corporate insiders are believed by Symphony to be in the best position to
understand the near term prospects of their companies. Symphony believes that
insider behavior can be observed and analyzed since insiders are required to
disclose transactions in their company's equity securities to the Securities and
Exchange Commission generally no later than the tenth day of the month following
the transaction. Each month many thousands of these disclosures are received.
Symphony believes that the laborious process of collecting, classifying and
analyzing these transactions using the IntelliVest(TM) Model provides valuable
investment management information.
These Insiders may have many reasons for transacting in company stock and stock
options. Many of these are entirely incidental to the future of the company. For
example, an insider may sell stock to buy a home or finance a college education
for his or her child. Likewise a new management team may wish to signal
confidence in the company by making token purchases of the company's equity.
Many other transactions, however, are related directly to the insider's beliefs
about the near-term price expectations for the company's stock. An insider who
exercises long-term options early for small profits likely believes the stock
soon will decline. Insiders who exercise options, hold the stock, and buy in the
open market probably believe that the stock soon will rise. Clusters of insiders
making substantial buys or sells indicate broad agreement within a firm as to
the direction of the stock.
Financial analysts use a variety of means to learn more about the companies they
follow. Among these are visits to the company and in-depth discussions with
management. Successful analysts learn to interpret the words and actions of
management and the firm itself. Likewise, management uses its discussions with
certain analysts as a means of signaling their views to the marketplace.
Symphony has a computer model of analysts' predicted earnings and ratings. This
model tracks the behavior of analysts as they have revised predicted earnings
and the ratings of a company's prospects in the market. Symphony believes that
analysts' revisions can be a valuable indicator of future returns for the
company's stock.
Part of the normal activity of every public company is its financing decisions.
A company must routinely decide whether to maintain or change its dividend
policy, whether to buy its own stock in the open market or whether to issue new
securities. From time to time the firm may decide that its stock is undervalued.
Many firms see undervaluation as an opportunity to purchase the company's stock
in the open market. Symphony believes that by monitoring changes in shares
outstanding (in the hands of the public), a useful signal can be extracted
relating to the firm's beliefs about its prospects. Similarly, the company's
decision to sell securities to the public or another firm can be an indication
that the company believes that its stock has reached a near-term high, a
potentially useful sell signal.
Insiders, analysts and the company each send signals that can be analyzed using
the IntelliVest(TM) Model to produce valuable information about the prospects
for individual companies. Symphony believes that the most powerful analysis,
however, comes from the interaction of all three sources. While no one signal
alone determines whether a security will be purchased or sold, no security will
be considered for purchase or sale using the IntelliVest(TM) Model unless a
positive or negative signal, as the case may be, is received from insider
behavior. In its analysis, the IntelliVest(TM) Model uses only data that is
available to the public. Symphony obtains the data on insider trading activity
from CDA/Investnet, which compiles this information from publicly available
Securities and Exchange Commission filings. Symphony's research team has devoted
four years of research to developing the framework necessary to analyze the
behavior of each of these sources and the interaction among them.
Management Policies
The Portfolio seeks to invest primarily in equity securities that, at the time
of purchase, are believed by Symphony, using data from the IntelliVest(TM)
Model, to provide opportunities for capital appreciation or gains through short
selling.
Under normal market conditions, Symphony invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. Using data from the
IntelliVest(TM) Model, Symphony selects equity securities believed by it to
provide opportunities for capital appreciation or gains through short selling.
Issuers are selected without regard to market capitalization, although Symphony
anticipates that the issuers principally will be mid- to large capitalization
companies; that is, those with market capitalizations exceeding $1 billion.
Symphony seeks to use the IntelliVest(TM) Model to select all the Portfolio's
securities. The IntelliVest(TM) Model, however, should not be expected to
provide data sufficient to permit the Portfolio's entire portfolio to be
invested in its selections. For its remaining assets invested in equity
securities, Symphony will use an analytic valuation model created by the active
strategies group of BARRA, Inc., Symphony's parent, to select from the universe
of U.S. equity securities those securities it believes, in the aggregate, will
approximate or exceed the total return performance of the Standard & Poor's 500
Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange.
The composition of the S&P 500 Index is determined by Standard & Poor's based on
such factors as the market capitalization and trading activity of each stock and
its adequacy as a representative of stocks in a particular industry group, and
may be changed from time to time. The weightings of stocks in the S&P 500 Index
are based on each stock's relative total market capitalization; that is, its
market price per share times the number of shares outstanding. Because of this
weighting, as of March 31, 1996, approximately 47% of the S&P 500 Index was
composed of the 50 largest companies. The Portfolio will not invest in all or
substantially all of the common stocks included in the S&P 500 Index and may
invest in stocks that are not included in the S&P 500 index. The Portfolio
expects ordinarily to invest in approximately 60 to 150 stocks.
By investing in this manner-that is, using its IntelliVest(TM) Model and
purchasing other equity securities in a manner intended to approximate or exceed
the performance of the S&P 500 Index-Symphony seeks to exceed the total return
of the S&P 500 Index.
Equity securities consist of common stocks, convertible securities and preferred
stocks. The convertible securities and preferred stocks in which the Portfolio
may invest will be rated at least investment grade by a nationally recognized
statistical rating organization at the time of purchase. Convertible securities
rated in the lowest investment grade rating may be considered to have
speculative characteristics. Preferred stock generally receives dividends before
distributions are paid on common stock and ordinarily has a priority claim over
common stockholders if the issuer of the stock is liquidated. The Portfolio may
invest, in anticipation of investing cash positions, in money market instruments
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 ag reements, as set forth in
the Appendix. Under normal market conditions, the Portfolio expects to have less
than 15% of its assets invested in money market instruments. However, when
Symphony determines that adverse market conditions exist, the Portfolio may
adopt a temporary defensive posture and invest all of its assets in money market
instruments.
Investment Techniques
The Portfolio may engage in short selling, lending portfolio securities and
options and futures transactions, each of which involves risk.
The Portfolio may engage in various investment techniques, such as short
selling, lending portfolio securities and options and futures transactions, each
of which involves risk. Options and futures transactions involve "derivative
securities." Short selling and futures transactions are discussed below. For a
discussion of these other investment techniques and their related risks, see
"Appendix-Investment Techniques" and "Risk Factors" below.
- -----
* "Standard & Poor's," "S&P(R)" and "S&P 500(R)" are trademarks of The
McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's or The McGraw-Hill Companies, Inc.
Short Selling. Short sales are transactions in which the Portfolio sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Portfolio must borrow the
security to make delivery 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 during 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.
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 the
amount deposited in the account plus the amount deposited with the broker as
collateral always equals the current value of the security sold short; or (b)
otherwise cover its short position in accordance with positions taken by the
Staff of the Securities and Exchange Commission.
The 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. The 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. The Portfolio
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."
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets. The Portfolio 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 assets. The Portfolio 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 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
receives 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 Portfolio's
net assets.
Futures Contracts and Options on Futures Contracts. The Portfolio may enter into
stock index futures contracts, and options with respect thereto, in U.S.
domestic markets. See "Appendix-Investment Techniques-Options Transactions."
These transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes. Although the
Portfolio is not a commodity pool, it is subject to rules of the Commodity
Futures Trading Commission (the "CFTC") limiting the extent to which it may
engage in these transactions.
The Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the CFTC.
In addition, the Portfolio may not engage in such transactions if the sum of the
amount of initial margin deposits 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 the 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 the Portfolio which
could adversely affect the value of a shareholder's investment. Although the
Portfolio intends to purchase or sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting the Portfolio to
substantial losses. In addition, engaging in futures transactions in foreign
markets may involve greater risks than trading on domestic exchanges.
Successful use of futures by the Portfolio also is subject to Symphony's ability
to predict correctly movements in the direction of the market or foreign
currencies 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 the
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 securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient 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
Exchange Commission, the Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transactions
in an amount generally equal to the value of the underlying commodity. The
segregation of such assets will have the effect of limiting the Portfolio's
ability otherwise to invest those assets.
Future Developments. The Portfolio may take advantage of opportunities in the
area of options and futures contracts, options on futures contracts and any
other derivative investments which are not presently contemplated for use by the
Portfolio or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Portfolio's
investment objective and legally permissible for the Portfolio. Before entering
into such transactions or making any such investment, the Portfolio will provide
appropriate disclosure in its prospectus.
Certain Fundamental Policies
Certain of the Portfolio's investment policies are fundamental policies that can
be changed only by shareholder vote.
The Portfolio 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 describes fundamental policies
that cannot be changed as to the Portfolio without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies-Investment Re
strictions" in the Statement of Additional Information.
Certain Additional Non-Fundamental Policies
The Portfolio may (i) purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets; (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.
Risk Factors
No investment is free from risk. Investing in the Portfolio will subject
investors to certain risks which should be considered.
Net Asset Value Fluctuations
The 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 undertake the
risks involved.
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 equity securities in
the Portfolio's portfolio will result in changes in the value of the Portfolio's
shares and thus the Portfolio's yield and total return to investors.
Certain Investment Techniques
The use of investment techniques such as short selling, lending portfolio
securities and engaging in options and futures transactions, involves greater
risk than that incurred by many other funds with a similar objective. Using
these techniques may produce higher than normal portfolio turnover and may
affect the degree to which the Portfolio's net asset value fluctuates. See
"Appendix-Investment Techniques."
The 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
securities 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
expiring 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 portfolio
decisions. Under normal market conditions, the Portfolio's portfolio turnover
rate generally will not exceed 150%. Higher portfolio turnover rates are likely
to result in comparatively 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 Portfolio's
Statement of Additional Information.
Non-Diversified Status
The 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 generally, 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 Portfolio intends to conduct its operations so as to
qualify as a "regulated investment 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
Portfolio's total assets be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Portfolio's
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 one issuer (other than U.S. Government securities or the
securities of other regulated investment companies). Since a relatively high
percentage of the Portfolio's 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 Portfolio's portfolio securities may be more susceptible to
any single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
Simultaneous Investments
Investment decisions for the Portfolio are made independently from those of
other investment companies or accounts advised by the Advisers. 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 Portfolio invests at the same
time as the Portfolio, 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 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 the
Portfolio's business.
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. The Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
Investment Adviser
The Portfolio's investment adviser is BSFM; Symphony provides day-to-day
management of the Portfolio's investments.
The Portfolio's 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 adviser 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 March 31, 1996 of over $1.9 billion.
BSFM supervises and assists in the overall management of the Portfolio's affairs
under an Investment Advisory Agreement between BSFM and the Fund, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the
Portfolio's average daily net assets which will be adjusted monthly depending on
the extent to which the investment performance of Portfolio shares exceeded or
was exceeded by the percentage change in the investment record of the S&P 500
Index.
Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average
daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly
Performance Adjustment") depending on the extent to which the investment
performance of the Class of shares (currently, Class C) expected to bear the
highest total Portfolio operating expenses, after expenses, exceeded or was
exceeded by the percentage change in the investment record of the S&P 500 Index.
The Monthly Performance Adjustment may increase or decrease the total advisory
fee payable to BSFM (the "Total Advisory Fee") by up to .50% per year of the
value of the Portfolio's average daily net assets.
The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of the
1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average daily
net assets over the most recent calendar month, giving a dollar amount which is
the Basic Fee for that month; (b) one-twelfth of the applicable performance
adjustment rate from the table below is applied to the Portfolio's average daily
net assets over the most recent calendar month, giving a dollar amount which is
the Monthly Performance Adjustment (for the first twelve-month period, no
performance adjustment will be made); and (c) the Monthly Performance Adjustment
is then added to or subtracted from the Basic Fee and the result is the amount
payable by the Portfolio to BSFM as the Total Advisory Fee for that month.
The full range of Total Advisory Fees on an annualized basis is as follows:
- -------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS'
PERFORMANCE (NET OF
EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE
AND PERCENTAGE CHANGE IN THE BASIC ADJUSTMENT TOTAL
S&P 500 INDEX FEE (%) RATE (%) FEE (%)
- -------------------------------------------------------------------------------
+3.00 percentage points or more.................... 1% .50% 1.50%
+2.75 percentage points or more but less than +3.00
percentage points.................................. 1% .40% 1.40%
+2.50 percentage points or more but less than +2.75
percentage points.................................. 1% .30% 1.30%
+2.25 percentage points or more but less than +2.50
percentage points.................................. 1% .20% 1.20%
+2.00 percentage points or more but less than +2.25
percentage points.................................. 1% .10% 1.10%
Less than +2.00 percentage points but more than
- -2.00 percentage points............................ 1% 0% 1.00%
- -2.00 percentage points or less but more than -2.25
percentage points.................................. 1% -.10% .90%
- -2.25 percentage points or less but more than -2.50
percentage points.................................. 1% -.20% .80%
- -2.50 percentage points or less but more than -2.75
percentage points.................................. 1% -.30% .70%
- -2.75 percentage points or less but more than -3.00
percentage points.................................. 1% -.40% .60%
- -3.00 percentage points or less.................... 1% -.50% .50%
The period over which performance is measured is a rolling twelve-month period
and the performance of the S&P 500 Index is calculated as the sum of the change
in the level of the S&P 500 Index during the period, plus the value of any
dividends or distributions made by the companies whose securities comprise the
S&P 500 Index. From June 16, 1995 (commencement of operations) through March 31,
1996, no fees were paid by the Portfolio pursuant to an undertaking by BSFM.
The Portfolio's administrator is BSFM. The 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 Portfolio, subject to the overall
authority of the Fund's Board of Trustees in accordance with Massachusetts law.
For providing administrative services to the Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's
average daily net assets. Under the terms of an Administrative Services
Agreement with the Fund, PFPC Inc. provides certain administrative services to
the Portfolio. For providing these services, the Fund has agreed to pay PFPC
Inc. an annual fee, as set forth below:
- -------------------------------------------------------------------------------
PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------------------
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%
The above-referenced fee is subject to a monthly minimum fee of $11,000.
From June 16, 1995 (commencement of operations) through March 31, 1996, the
Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of .30 of 1%
of the Portfolio's average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
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. The Portfolio will not pay
BSFM at a later time for any amounts it may waive, nor will the Portfolio
reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may
waive a portion of its fee. Effective May 1, 1996, and until further notice,
PFPC Inc. will reduce its monthly minimum to $7,500 for net assets of less than
$25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for
net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this
voluntary fee waiver at any time.
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
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
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
Advisory Agreement is in effect.
Sub-Investment Adviser
The Portfolio's sub-investment adviser, Symphony, provides investment advisory
assistance and the day-to-day management of the Portfolio's investments.
BSFM has engaged Symphony, located at 555 California Street, San Francisco,
California 94104, to serve as the Fund's sub-investment adviser. Symphony, a
registered investment adviser, was formed in 1994. Symphony is a wholly-owned
subsidiary of BARRA, Inc., a leading supplier of analytical financial software.
Symphony's principals are Jeffrey Skelton, Praveen Gottipalli, Michael Henman
and Neil Rudolph. Messrs. Skelton, Henman and Rudolph joined Symphony in 1994
from Wells Fargo Nikko Investment Advisors where they were Managing Directors.
Mr. Gottipalli joined Symphony in 1994 from BARRA, Inc.
Symphony, subject to the supervision and approval of BSFM, provides investment
advisory assistance and the day-to-day management of the Portfolio's
investments, as well as investment research and statistical information, under a
Sub-Investment Advisory Agreement with BSFM, subject to the overall authority of
the Fund's Board of Trustees in accordance with Massachusetts law.
BSFM pays Symphony a sub-advisory fee at an annual rate equal to .45 of 1% of
the Portfolio's average daily net assets which will be adjusted monthly
depending on the extent to which the investment performance of Portfolio shares
exceeded or was exceeded by the percentage change in the investment record of
the S&P 500 Index.
Under the Sub-Investment Advisory Agreement, BSFM has agreed to pay Symphony a
monthly fee at the annual rate of .45 of 1% of the Portfolio's average daily net
assets (the "Symphony Basic Fee") which will be adjusted by a Monthly
Performance Adjustment calculated as described above. The Monthly Performance
Adjustment applicable to Symphony may increase or decrease the total advisory
fee payable to Symphony (the "Total Sub-Advisory Fee") by up to .25% per year of
the value of the Portfolio's average daily net assets. The monthly Total
Sub-Advisory fee is calculated in the same manner as the Total Advisory Fee.
<TABLE>
<CAPTION>
The full range of Total Sub-Advisory Fees on an annualized basis is as follows:
- -------------------------------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS'
PERFORMANCE (NET OF
EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE
AND PERCENTAGE CHANGE IN THE ADJUSTMENT
S&P 500 INDEX BASIC FEE (%) RATE (%) TOTAL FEE (%)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more...................... .45% .25% .70%
+2.75 percentage points or more but less than +3.00
percentage points.................................... .45% .20% .65%
+2.50 percentage points or more but less than +2.75
percentage points.................................... .45% .15% .60%
+2.25 percentage points or more but less than +2.50
percentage points.................................... .45% .10% .55%
+2.00 percentage points or more but less than +2.25
percentage points.................................... .45% .05% .50%
Less than +2.00 percentage points but more than -2.00
percentage points.................................... .45% 0% .45%
- -2.00 percentage points or less but more than -2.25
percentage points.................................... .45% -.05% .40%
- -2.25 percentage points or less but more than -2.50
percentage points.................................... .45% -.10% .35%
- -2.50 percentage points or less but more than -2.75
percentage points.................................... .45% -.15% .30%
- -2.75 percentage points or less but more than -3.00
percentage points.................................... .45% -.20% .25%
- -3.00 percentage points or less...................... .45% -.25% .20%
</TABLE>
If for the 12-month period ended February 22, 1997, the Total Sub-Advisory Fee
exceeds .45%, without giving effect to any fee waivers by BSFM, then thereafter
BSFM has agreed to pay Symphony a Basic Fee equal to .50 of 1% on an annualized
basis. From June 16, 1995 (commencement of operations) through March 31, 1996,
no fees were paid to Symphony by BSFM pursuant to an undertaking by Symphony.
The Fund's primary investment officer is Praveen Gottipalli. Since May 1994, he
has been Symphony's Director of Investments. For more than five years prior
thereto, he was Director of the Active Strategies Group of BARRA, Inc.
Distributor
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the Portfolio's principal underwriter and distributor of the Portfolio's shares
pursuant to an agreement which is renewable annually.
Custodian and Transfer Agent
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
Expense Limitation
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, including
the investment advisory fee, exceed 1.15% of Class Y'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
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request. The
Fund reserves the right to re-ject 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 the minimum investment requirement. In addition, accounts under the
discretionary management of Bear Stearns and its affiliates or Symphony and its
affiliates are not subject to the minimum investment requirement.
Purchases of the 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 the
Portfolio's shares also may be made directly through the Transfer Agent.
Investors must specify that Class Y is being purchased.
Purchases are effected at Class Y's net asset value next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer
Agent (the "trade date"). Payment for 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 designated, 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
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage 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-The Insiders
Select Fund-Class Y" if purchased directly from the Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-The
Insiders Select Fund-Class Y, 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 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
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 Portfolio shares through
the Transfer Agent. To make an initial investment in the Portfolio, an investor
must establish an account with the Portfolio by furnishing necessary information
to the Fund. An account with the 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., Attention: The Bear
Stearns Funds-The Insiders Select Fund-Class Y, 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 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
(currently 4:00 p.m., New York time) on any day the 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 determined.
Net asset value is computed daily as of the close of regular trading on the New
York Stock Exchange.
Shares of the 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 Class Y of the Portfolio is computed by
dividing the value of the Portfolio's net assets represented by Class Y (i.e.,
the value of its assets less liabilities) by the total number of shares of Class
Y outstanding. The 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 accordance with procedures established by,
the Fund's Board of Trustees. For further information regarding the methods
employed in valuing the Portfolio's investments, see "Determination of Net Asset
Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to a $50 penalty imposed by the Internal Re
venue Service (the "IRS").
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 Class Y
shares of the Portfolio, Class Y shares 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 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 investors. To use this
Privilege, investors should consult their account executive 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 exchange shares of
the Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously di d 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 shareholders may have to submit
exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own Class Y 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, un
less otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. 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 registered, 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
Authorized Dealer or the Transfer Agent. When establishing a new account by
exchange, the Class Y shares being exchanged must have a value of at least the
minimum initial investment required 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 exceed 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.
Class Y Shares will be exchanged at the next determined net asset value. No fees
currently are charged shareholders 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 Class Y shares of one portfolio or fund for Class Y shares of
another is treated for Federal income tax purposes as a sale of the Class Y
shares given in exchange by the shareholder and, therefore, an exchanging
shareholder may realize 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 automatically
dividends and/or capital gain distributions, if any, paid by the Portfolio in
Class Y shares 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.
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.
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
request 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 investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor, the investor's Bear Stearns account executive or the
investor's Authorized Dealer. The Fund imposes no charges when shares are
redeemed directly through Bear Stearns.
The Portfolio ordinarily will make payment for all shares redeemed within three
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
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 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 notice
period.
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 account 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 redemption 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 three days, redemption proceeds will be paid
by check or credited to the shareholder's brokerage account at the election of
the shareholder. Bear Stearns account 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 believed
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 reasonably
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
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-The Insiders Select Fund-Class Y, 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
shareholder'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 Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
Written redemption instructions, indicating the Portfolio from which shares are
to be redeemed, and duly endorsed stock certificates, if previously issued, 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-guarantees 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
participants 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 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.
Redemption 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 Transfer
Agent forms of resolutions and other documentation which have been prepared 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 experience
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 processed
at a later time than it would have been if telephone redemption had been used.
During the delay, the Portfolio's net asset value may fluctuate.
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 redirected
into another fund pursuant to the Redirected Distribution Option.
The Portfolio ordinarily pays dividends from its 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
provisions of the 1940 Act. The 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 additional
Class Y shares of the Portfolio at net asset value, unless payment in cash is
requested or dividends are redirected into another fund pursuant to the
Redirected Distribution Option. All expenses are accrued daily and deducted
before declaration of dividends to investors.
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid by
the Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of the Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of the 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 shares and whether such
distributions 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%. Dividends
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
disposition of market discount bonds, paid by the Portfolio to a foreign
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 securities gains paid
by the 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 investor 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 distributions from
securities gains, if any, paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") 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 Portfolio is not 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.
Management of the Fund believes that the Portfolio has qualified for the fiscal
year ended March 31, 1996 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. Such qualification relieves the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
in accordance with applicable provisions of the Code. In addition, the 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 Portfolio may advertise its performance in a number of ways.
For purposes of advertising, performance for Class Y 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 assume that any income
dividends and/or capital gains distributions made by the Portfolio during the
measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the 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 redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include the Portfolio's average annual total return
for one, five and ten year periods, or for shorter periods depending upon the
length of time during which the Portfolio has operated. Computations of average
annual total return for periods of less than one year represent an annualization
of the 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 percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value per share at the beginning
of the period. Advertisements 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.
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
information, 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 advertising
or marketing the 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.
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. The Fund commenced operations
on or about April 3, 1995 in connection with the offer of shares of certain of
its other portfolios. The Fund is authorized to issue an unlimited number of
shares of beneficial interest, par value $.001 per share. The 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 Portfolio. However, the Trust
Agreement disclaims shareholder liability for acts or obligations of the
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 indemnification from the Portfolio's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the 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 the Portfolio, the shareholder paying such liability
will be entitled to reimbursement from the general assets of the Portfolio. The
Fund's Trustees intend to conduct the operations of the Portfolio in a way so as
to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Portfolio. As discussed under "Management of the Fund" in the
Portfolio's Statement of Additional Information, the Portfolio ordinarily will
not hold shareholder meetings; however, shareholders under certain circumstances
may have the right to call a meeting of shareholders for the purpose of voting
to remove Trustees.
To date, the Fund's Board has authorized the creation of five portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios 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 submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Fund, will not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by such matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of such
portfolio in the matter are identical or that the matter does not affect any
interest of such portfolio. However, the Rule exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: The Insiders Select Fund, 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.
Appendix
Investment Techniques
In connection with its investment objective and policies, the Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options transactions involve "derivative securities."
Options Transactions
The Portfolio may engage in options transactions.
The 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 specific
securities (or groups or "baskets" of specific securities) in which the
Portfolio may invest. The 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. The Portfolio also
may purchase call options to enter into closing purchase transactions. The
Portfolio also may write covered put option contracts to the extent 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 the Portfolio exposes the Portfolio during the term of the
option to a decline in price of the underlying security or securities. 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.
The Portfolio may purchase and sell call and put options on stock indexes 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 the Portfolio
will realize a gain or loss from the purchase 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 particular stock.
Successful use by the Portfolio of options will be subject to Symphony's ability
to predict correctly movements in the direction of individual stocks or the
stock market generally, foreign currencies or interest rates. To the extent
Symphony's predictions are incorrect, the Portfolio may incur losses which could
adversely affect the value of a shareholder's investment.
Lending Portfolio Securities
The Portfolio may earn additional income by lending its portfolio securities.
From time to time, the 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 331/3% of the value
of the Portfolio's total assets. In connection with such loans, the Portfolio
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 securities. The
Portfolio can increase its income through the investment of such collateral. The
Portfolio 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 Portfolio might experience risk of loss if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Portfolio.
Borrowing Money
The Portfolio may borrow money.
As a fundamental policy, the 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 331/3% of the value of such company's total assets.
However, the 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 the Portfolio's
total assets, the Portfolio will not make any additional investments.
Certain Portfolio Securities
Convertible Securities
The Portfolio may invest in convertible securities.
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar to both fixed-income
and equity securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and, therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that provide
for a stable stream of income with generally higher yields than common stocks.
Of course, like all fixed-income securities, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital ap
preciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Money Market Instruments
The Portfolio may invest in a variety of money market instruments.
The Portfolio may invest, in the circumstances described under "Description of
the Fund-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 remaining maturities
of 13 months or less.
U.S. Government Securities
The Portfolio 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
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. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
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, since it is not so obligated by law.
Bank Obligations
The Portfolio may invest in bank obligations, including certificates of deposit,
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 subsidiaries of
domestic banks, and domestic and foreign branches of foreign banks, the
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
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 controls 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.
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 Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio 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
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Repurchase Agreements
Repurchase agreements involve the acquisition by the Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more than one
week after its purchase. Certain costs may be incurred by the Portfolio 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 Portfolio 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 Portfolio 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 In c. ("Moody's"), A-1 by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff &
Phelps Credit Rating Co. ("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 the Advisers to be of
comparable quality to those rated obligations which may be purchased by the
Portfolio. The 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
The Portfolio may invest up to 5% of its net assets in warrants.
The Portfolio may invest up to 5% of its net assets in warrants, except that
this limitation does not apply to warrants acquired in units or attached to
securities. Included in such amount, but not to exceed 2% of the value of the
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 specified period of time.
Investment Company Securities
The Portfolio may invest in securities of other investment companies.
The Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, the 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 the Portfolio's total assets with respect
to any one investment company and (iii) 10% of the Portfolio's total 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 Portfolio may purchase illiquid securities.
The Portfolio may invest up to 15% of the value of its net assets in securities
as to which a liquid trading market does not exist, provided such investments
are consistent with the Portfolio's 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, repurchase
agreements providing for settlement in more than seven days after notice, and
options traded in the over-the-counter market and securities used to cover such
options. As to these securities, the Portfolio is subject to a risk that should
the 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 the Portfolio's
net assets could be adversely affected.
The Bear Stearns Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Sub-Investment Adviser
Symphony Asset Management
555 California Street, Suite 2975
San Francisco, CA 94104
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004-2696
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE INSIDERS SELECT FUND'S
PROSPECTUS AND IN THE INSIDERS SELECT FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFER OF THE INSIDERS SELECT FUND'S SHARES, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND. THE INSIDERS SELECT FUND'S PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-007-03
<PAGE>
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JUNE 20, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated June 20, 1996 of The Bear Stearns Funds (the "Fund"), as each
may be revised from time to time, offering shares of three diversified
portfolios (each, a "Portfolio"): the Large Cap Value Portfolio and the Small
Cap Value Portfolio (together, the "Equity Portfolios") and the Total Return
Bond Portfolio (the "Bond Portfolio"). To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio],
P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 (in Delaware
call collect 302-791-1031) or call Bear, Stearns & Co.
Inc. ("Bear Stearns") at 1-800-766-4111.
Bear Stearns Funds Management Inc. ("BSFM"), a
wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as each
Portfolio's investment adviser.
Bear Stearns, an affiliate of BSFM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies.............. B-2
Management of the Fund.................................... B-14
Management Arrangements................................... B-18
Purchase and Redemption of Shares......................... B-22
Determination of Net Asset Value.......................... B-24
Dividends, Distributions and Taxes........................ B-26
Portfolio Transactions.................................... B-28
Performance Information................................... B-30
Information About the Fund................................ B-32
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.......................... B-35
Financial Statements...................................... B-36
Appendix.................................................. B-37
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Description
of the Fund."
Portfolio Securities
Bank Obligations. (All Portfolios) Domestic commercial banks
organized under Federal law are supervised and examined by the Comptroller of
the Currency and are required to be members of the Federal Reserve System and to
have their deposits insured by the Federal Deposit Insurance Corporation (the
"FDIC"). Domestic banks organized under state law are supervised and examined by
state banking authorities but are members of the Federal Reserve System only if
they elect to join. In addition, state banks whose certificates of deposit
("CDs") may be purchased by each Portfolio are insured by the FDIC (although
such insurance may not be of material benefit to a Portfolio, depending on the
principal amount of the CDs of each bank held by such Portfolio) and are subject
to Federal examination and to a substantial body of Federal law and regulation.
As a result of Federal or state laws and regulations, domestic branches of
domestic banks whose CDs may be purchased by each Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation or by Federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, Federal branches licensed by the Comptroller of
the Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, by foreign branches of foreign banks or by
domestic branches of foreign banks, BSFM carefully evaluates such investments on
a case-by-case basis.
Mortgage-Related Securities
Government Agency Securities. (Bond Portfolio)
Mortgage-related securities issued by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within the
department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee.
Government Related Securities. (Bond Portfolio)
Mortgage-related securities issued by the Federal National Mortgage Association
("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA and are not
backed by or entitled to the full faith and credit of the United States. The
FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of principal and
interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate
instrumentality of the United States created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Bank and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Repurchase Agreements. (All Portfolios) Each Portfolio's
custodian or sub-custodian will have custody of, and will hold in a
segregated account, securities acquired by the Portfolio under a repurchase
agreement. Repurchase agreements are considered by the staff of the Securities
and Exchange Commission to be loans by the Portfolio. In an attempt to reduce
the risk of incurring a loss on a repurchase agreement, each Portfolio will
enter into repurchase agreements only with domestic banks with total assets in
excess of one billion dollars, or primary government securities dealers
reporting to the Federal Reserve Bank of New York, with respect to securities of
the type in which each Portfolio may invest, and will require that additional
securities be deposited with it if the value of the securities purchased should
decrease below the resale price. BSFM will monitor on an ongoing basis the value
of the collateral to assure that it always equals or exceeds the repurchase
price. Each Portfolio will consider on an ongoing basis the creditworthiness of
the institutions with which it enters into repurchase agreements.
Municipal Obligations. (Bond Portfolio) Municipal obligations
are classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds and generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. The Bond Portfolio will
invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Bond Portfolio investments.
Commercial Paper and Other Short-Term Corporate Obligations.
(All Portfolios) Variable rate demand notes include variable amount master
demand notes, which are obligations that permit each Portfolio to invest
fluctuating amounts at varying rates of interest pursuant to direct arrangements
between a Portfolio, as lender, and the borrower. These notes permit daily
changes in the amounts borrowed. As mutually agreed between the parties, a
Portfolio may increase the amount under the notes at any time up to the full
amount provided by the note agreement, or decrease the amount, and the borrower
may repay up to the full amount of the note without penalty. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value, plus accrued interest, at any time.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, a Portfolio's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with floating and variable rate demand obligations, BSFM will
consider, on an ongoing basis, earning power, cash flow and other liquidity
ratios of the borrower, and the borrower's ability to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies,
and an Equity Portfolio may invest in them only if at the time of an investment
the borrower meets the criteria set forth in the Equity Portfolios' Prospectus
for other commercial paper issuers.
Illiquid Securities. (All Portfolios) When purchasing
securities that have not been registered under the Securities Act of 1933, as
amended, and are not readily marketable, each Portfolio will endeavor to obtain
the right to registration at the expense of the issuer. Generally, there will be
a lapse of time between a Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops for certain
unregistered securities purchased by a Portfolio pursuant to Rule 144A under the
Securities Act of 1933, as amended, such Portfolio intends to treat them as
liquid securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees has directed BSFM to monitor carefully each Portfolio's investments
in such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, a Portfolio's investing in such securities may
have the effect of increasing the level of illiquidity in such Portfolio during
such period.
Ratings of Debt. (Bond Portfolio) Subsequent to its purchase
by the Bond Portfolio, a debt issue may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Bond Portfolio. Neither
event will require the sale of such securities by the Bond Portfolio, but BSFM
will consider such event in determining whether the Bond Portfolio should
continue to hold the securities. To the extent that the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division
of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, L.P.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") may change as a result of
changes in such organizations or their rating systems, the Bond Portfolio will
attempt to use comparable ratings as standards for its investments in accordance
with the investment policies contained in the Portfolio's Prospectus and this
Statement of Additional Information.
Management Policies
Each Portfolio engages in the following practices in
furtherance of its objective.
Options Transactions. (All Portfolios) Each Portfolio may
engage in options transactions, such as purchasing or writing covered call or
put options. The principal reason for writing covered call options, which are
call options with respect to which a Portfolio owns the underlying security or
securities, is to realize, through the receipt of premiums, a greater return
than would be realized on a Portfolio's securities alone. In return for a
premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Portfolio may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
Options written ordinarily will have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the time the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-
money," respectively. Each Portfolio may write (a) in-the-money call options
when BSFM expects that the price of the underlying security will remain stable
or decline moderately during the option period, (b) at-the-money call options
when BSFM expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the- money call
options when BSFM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at- the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as a Portfolio's obligation as the writer of an option
continues, such Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or a Portfolio effects a closing purchase
transaction. A Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, each Portfolio generally
will purchase or write only those options for which BSFM believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer a Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. (Equity Portfolios) Each Equity Portfolio
may purchase and write put and call options on stock indexes listed on U.S. or
foreign securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock
except that (a) the expiration cycles of stock index options are generally
monthly, while those of stock options are currently quarterly, and (b) the
delivery requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts.
(All Portfolios) Each Portfolio may trade futures contracts and
options on futures contracts in U.S. domestic markets, such as the Chicago Board
of Trade and the International Monetary Market of the Chicago Mercantile
Exchange, or, to the extent permitted under applicable law, on exchanges located
outside the United States, such as the London International Financial Futures
Exchange and the Sydney Futures Exchange Limited. Foreign markets may offer
advantages such as trading in commodities that are not currently traded in the
United States or arbitrage possibilities not available in the United States.
Initially, when purchasing or selling futures contracts a
Portfolio will be required to deposit with the Fund's custodian in the broker's
name an amount of cash or cash equivalents up to approximately 10% of the
contract amount. This amount is subject to change by the exchange or board of
trade on which the contract is traded and members of such exchange or board of
trade may impose their own higher requirements. This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Portfolio upon termination of the futures
position, assuming all contractual obligations have been satisfied. Subsequent
payments, known as "variation margin," to and from the broker will be made daily
as the price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Portfolio may elect to close the position
by taking an opposite position, at the then prevailing price, which will operate
to terminate the Portfolio's existing position in the contract.
Although each Portfolio intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting a Portfolio to substantial losses. If it is not possible, or the
Portfolio determines not, to close a futures position in anticipation of adverse
price movements, the Portfolio will be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may offset partially or completely losses
on the futures contract. However, no assurance can be given that the price of
the securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
In addition, to the extent a Portfolio is engaging in a
futures transaction as a hedging device, due to the risk of an imperfect
correlation between securities owned by the Portfolio that are the subject of a
hedging transaction and the futures contract used as a hedging device, it is
possible that the hedge will not be fully effective in that, for example, losses
on the portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. In futures contracts based on
indexes, the risk of imperfect correlation increases as the composition of an
Equity Portfolio's investments varies from the composition of the index. In an
effort to compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of futures contracts, the
Portfolio may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect a
Portfolio's net investment results if market movements are not as anticipated
when the hedge is established.
Upon exercise of an option, the writer of the option will
deliver to the holder of the option the futures position and the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of options on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of each Portfolio.
Foreign Currency Transactions. (Equity Portfolios) If an
Equity Portfolio enters into a currency transaction, it will deposit, if so
required by applicable regulations, with its custodian cash, U.S. government
securities or other high grade debt obligations, in a segregated account of the
Equity Portfolio in an amount at least equal to the value of the Equity
Portfolio's total assets committed to the consummation of the forward contract.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Equity Portfolio's commitment with
respect to the contract.
At or before the maturity of a forward contract, the Equity
Portfolio either may sell a security and make delivery of the currency, or
retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the Equity Portfolio
will obtain, on the same maturity date, the same amount of the currency which it
is obligated to deliver. If the Equity Portfolio retains the portfolio security
and engages in an offsetting transaction, such Equity Portfolio, at the time of
execution of the offsetting transaction, will incur a gain or loss to the extent
movement has occurred in forward contract prices. Should forward prices decline
during the period between the Equity Portfolio's entering into a forward
contract for the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, the Equity Portfolio will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Equity Portfolio will suffer a loss to the extent the price of the currency
it has agreed to purchase exceeds the price of the currency it has agreed to
sell.
The cost to each Equity Portfolio of engaging in currency
transactions varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing. Because
transactions in currency exchange usually are conducted on a principal basis, no
fees or commissions are involved. The use of forward currency exchange contracts
does not eliminate fluctuations in the underlying prices of the securities, but
it does establish a rate of exchange that can be achieved in the future. If a
devaluation generally is anticipated, an Equity Portfolio may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The requirements for qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), may
cause the Fund to restrict the degree to which each Equity Portfolio engages in
currency transactions. See "Dividends, Distributions and Taxes."
Lending Portfolio Securities. (All Portfolios) To a limited
extent, each Portfolio may lend its portfolio securities to brokers, dealers and
other financial institutions, provided it receives cash collateral which at all
times is maintained in an amount equal to at least 100% of the current market
value of the securities loaned. By lending its portfolio securities, a Portfolio
can increase its income through the investment of the cash collateral. For
purposes of this policy, a Portfolio considers collateral consisting of U.S.
Government securities or irrevocable letters of credit issued by banks whose
securities meet the standards for investment by such Portfolio to be the
equivalent of cash. From time to time, a Portfolio may return to the borrower or
a third party which is unaffiliated with such Portfolio, and which is acting as
a "placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The Securities and Exchange Commission currently requires that
the following conditions must be met whenever portfolio securities are loaned:
(1) each Portfolio must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) each Portfolio must be
able to terminate the loan at any time; (4) each Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) each Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
Investment Restrictions. Each Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to a Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of such Portfolio's outstanding voting shares. Investment
restrictions numbered 11 through 16 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. No Portfolio may:
1. Invest more than 25% of the value of its total assets in
the securities of issuers in any single industry, provided that there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Invest more than 5% of its assets in the obligations of any
single issuer, except that up to 25% of the value of the Portfolio's total
assets may be invested, and securities issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities may be purchased, without
regard to any such limitation.
3. Hold more than 10% of the outstanding voting securities of
any single issuer. This Investment Restriction applies only with respect to 75%
of the Portfolio's total assets.
4. Invest in commodities, except that each Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
5. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but each Portfolio may purchase and sell securities that
are secured by real estate or issued by companies that invest or deal in real
estate or real estate investment trusts.
6. Borrow money, except to the extent permitted under the 1940
Act. The 1940 Act permits an investment company to borrow in an amount up to
33-1/3% of the value of such company's total assets. For purposes of this
Investment Restriction, the entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing.
7. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Trustees.
8. Act as an underwriter of securities of other issuers,
except to the extent each Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities.
9. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act).
10. Purchase securities on margin, but each Portfolio may make
margin deposits in connection with transactions in options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
12. Purchase, sell or write puts, calls or combinations
thereof, except as described in the Portfolio's Prospectus and Statement of
Additional Information.
13. Enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment
companies, except to the extent permitted under the 1940 Act.
The following investment restrictions numbered 15 and 16,
which are not a fundamental policy, apply only to the Equity Portfolios. Neither
of these Portfolios may:
15. Purchase securities of any company having less than three
years' continuous operations (including operations of any predecessor) if such
purchase would cause the value of the Equity Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
16. Invest in the securities of a company for the purpose of
exercising management or control, but each Equity Portfolio will vote the
securities it owns in its portfolio as a shareholder in accordance with its
views.
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of a Portfolio's shares in
certain states. Should the Fund determine that a commitment is no longer in the
best interest of the Portfolio and its shareholders, the Fund reserves the right
to revoke the commitment by terminating the sale of Fund shares in the state
involved.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information
as to their principal business occupations during at least the last five years,
are shown below. Each Trustee who is an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Position Principal Occupation
(and age) with Fund During Past Five Years
<S> <C> <C>
Peter M. Bren (62) Trustee President of The Bren Co.;
2 East 70th Street President of Cole, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties prior thereto.
Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United
Belleville, IL 62223 States Senator of Illinois
from 1981 to 1993.
John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive
114 Nottingham Road Officer of McKernan
Auburn, ME 04210 Enterprises since January
1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy &
5300 Albemarle Street Associates since February
Bethesda, MD 20816 1996; Senior Vice President of
RJR Nabisco, Inc. from April
1989 to February 1996; Former
Deputy Chief of Staff-White
House from 1988 to January
1989.
Robert S. Reitzes* (51) Chairman Director of Mutual Funds-
245 Park Avenue of the Board Bear Stearns Asset
New York, NY 10167 Management and Senior Managing
Director of Bear Stearns since
March 1994; Co-Director of
Research and Senior Chemical
Analyst of C.J. Lawrence/
Deutsche Bank Securities Corp.
from January 1991 to March
1994.
Neil T. Eigen (53) President Chief Investment Officer
245 Park Avenue and Director of Equity
New York, NY 10167 Investments--Bear Stearns
Asset Management since 1992 and
Senior Managing Director of Bear
Stearns since 1990.
Peter B. Fox (44) Executive Vice Senior Managing Director,
Three First National President Bear Stearns, Public
Plaza Finance.
Chicago, IL 60602
William J. Montgoris (49) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (52) Vice President Managing Director, Legal
245 Park Avenue Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (37) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Associate Director of
Bear Stearns from September 1993
to September 1994;
Executive Vice President of BSFM
since March 1992; Vice President
of Bear Stearns from March 1992
to September 1993; First Vice
President of Mitchell Hutchins Asset
Management Inc. ("Mitchell
Hutchins") from June 1988 to
March 1992; and Director of Funds
Administration Division of Mitchell
Hutchins from November 1991
to March 1992.
Raymond D. DeAngelo (35) Vice President Associate Director of Bear
245 Park Avenue Stearns since November 1994;
New York, NY 10167 Vice President and Manager--
Mutual Fund Sales Support Group of
Kidder, Peabody & Co.
Incorporated ("Kidder Peabody") from
August 1994 to November
1994; Vice President and Manager--Unit
Investment Trust
Department of Kidder Peabody
from August 1992 to August 1994;
Vice President and Wholesaler
of Nike Securities, L.P. (formerly
Clayton Brown & Associates)
from September 1991 to August 1992;
Assistant Vice President and
Wholesaler of Clayton Brown &
Associates prior thereto.
Ellen T. Arthur (43) Secretary Associate Director of Bear
245 Park Avenue Stearns since January 1996;
New York, NY 10167 Senior Counsel and Corporate
Vice President of PaineWebber
Incorporated from April
1989 to September 1995.
Vincent L. Pereira (30) Assistant Associate Director of
245 Park Avenue Treasurer Bear Stearns since September
New York, NY 10167 1995 and Vice President of BSFM
since May 1993; Vice President
of Bear Stearns from May 1993
to September 1995; Assistant
Vice President of Mitchell
Hutchins from October 1992
to May 1993; Senior
Relationship Manager of
Mitchell Hutchins from June
1988 to October 1992.
Eileen M. Coyle (30) Assistant Vice President of Bear Stearns
245 Park Avenue Secretary since September 1995;
New York, NY 10167 Accounting Supervisor and
Senior Accountant for Bear
Stearns since 1990.
</TABLE>
The Fund pays its non-affiliated Board members an annual
retainer of $5,000 and a per meeting fee of $500 and reimburses them for their
expenses. The Fund does not compensate its officers. The aggregate amount of
compensation paid to each Board member by the Fund and by all other funds in the
Bear Stearns Family of Funds for which such person is a Board member (the number
of which is set forth in parenthesis next to each Board member's total
compensation) for the fiscal year ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund * Fund's Expenses Retirement Board Members
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $12,000 (2)
Alan J. Dixon $7,000 None None $ 7,000 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None (2)
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $10,100 for Board members of the Fund, as a group.
</TABLE>
Board members and officers of the Fund, as a group, owned less
than 1% of each Portfolio's shares outstanding on May 31, 1996.
For so long as the Plan described in the section captioned
"Management Arrangements--Distribution and Shareholder Servicing Plan" remains
in effect, the Fund's Trustees who are not "interested persons" of the Fund, as
defined in the 1940 Act, will be selected and nominated by the Trustees who are
not "interested persons" of the Fund.
No meetings of shareholders of the Fund will be held for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Under the 1940 Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Fund's Agreement and Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Management
of the Fund."
Investment Advisory Agreement. BSFM provides investment
advisory services to each Portfolio pursuant to the Investment Advisory
Agreement (the "Agreement") dated February 22, 1995, with the Fund. As to each
Portfolio, the Agreement is subject to annual approval by (i) the Fund's Board
of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Portfolio, provided that in either event
the continuance also is approved by a majority of the Board of Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by
vote cast in person at a meeting called for the purpose of voting on such
approval. The Board of Trustees, including a majority of the Trustees who are
not "interested persons" of any party to the Agreement, last approved the
Agreement at a meeting held on February 22, 1995. The Agreement is terminable,
as to each Portfolio, without penalty, on 60 days' notice, by the Fund's Board
of Trustees or by vote of the holders of a majority of the Portfolio's shares,
or, on not less than 90 days' notice, by BSFM. As to the relevant Portfolio, the
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
BSFM is a wholly owned subsidiary of The Bear Stearns
Companies Inc. The following persons are directors and/or
senior officers of BSFM: Mark A. Kurland, Chief Executive Officer,
President, Chairman of the Board and Director; Robert S.
Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice
Chairman of the Board; Frank J. Maresca, Executive Vice
President; Neil T. Eigen, Executive Vice President; Vincent L.
Pereira, Treasurer and Secretary; and Michael Minikes, Warren J.
Spector and Robert M. Steinberg, Directors.
BSFM provides investment advisory services to each Portfolio
in accordance with its stated policies, subject to the approval of the Fund's
Board of Trustees. BSFM provides each Portfolio with portfolio managers who are
authorized by the Board of Trustees to execute purchases and sales of
securities. The portfolio managers of the Equity Portfolios are Neil T. Eigen
and Richard S. Rosen. The portfolio managers of the Bond Portfolio are Peter E.
Mahoney and Mark R. Valkenburgh. All purchases and sales are reported for the
Board's review at the meeting subsequent to such transactions.
As compensation for BSFM's advisory services, each Equity
Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1%
of the value of such Equity Portfolio's average daily net assets. The Bond
Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .45 of 1%
of the value of the Bond Portfolio's average daily net assets. For the period
from April 3, 1995 (commencement of operations) through March 31, 1996, the
investment advisory fees payable by the Large Cap Value Portfolio, Small Cap
Value Portfolio and Bond Portfolio amounted to $45,531, $88,955 and $51,869,
respectively. These amounts were waived pursuant to an undertaking by BSFM,
resulting in no fees being paid by the Large Cap Value Portfolio, the Small Cap
Value Portfolio and the Bond Portfolio.
Administration Agreement. BSFM provides certain
administrative services to the Fund pursuant to the
Administration Agreement dated February 22, 1995, with the Fund.
As to each Portfolio, the Administration Agreement will continue until February
22, 1998 and thereafter will be subject to annual approval by (i) the Fund's
Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Portfolio, provided that in either event its
continuance also is approved by a majority of the Fund's Board members who are
not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by
vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement is terminable, as to each Portfolio,
without penalty, on 60 days' notice, by the Fund's Board or by vote of the
holders of a majority of the Portfolio's shares or, upon not less than 90 days'
notice, by BSFM. As to the relevant Portfolio, the Administration Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
As compensation for BSFM's administrative services, 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. For the period from April 3, 1995
(commencement of operations) through March 31, 1996, the administration fees
accrued, but not paid, by the Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio amounted to $9,106, $17,782 and $17,290,
respectively.
Administrative Services Agreement. PFPC provides certain
administrative services to the Fund pursuant to the Administrative Services
Agreement dated February 22, 1995, with the Fund. The Administrative Services
Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC
may assign its rights or delegate its duties under the Administrative Services
Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30
days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to
comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such
delegate (or assignee) promptly provide information requested by the Fund in
connection with such delegation.
As compensation for PFPC's administrative services, the Fund
has agreed to pay PFPC a monthly fee at the rate set forth in the Portfolios'
Prospectus. For the period from April 3, 1995 (commencement of operations)
through March 31, 1996, the administrative fees payable by the Large Cap Value
Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to $126,000
$127,500 and $124,500, respectively. These amounts were reduced to $62,405,
$62,532 and $63,913, respectively, as a result of a waiver of fees by PFPC.
Distribution and Shareholder Servicing Plan. Rule 12b-1 (the
"Rule") adopted by the Securities and Exchange Commission under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Fund's Trustees have adopted such a plan with respect to Class A and
Class C shares (the "Plan"). The Fund's Trustees believe that there is a
reasonable likelihood that the Plan will benefit each Portfolio and the holders
of its Class A and Class C shares.
A quarterly report of the amounts expended under the Plan, and
the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the Plan provides that it may not be
amended to increase materially the costs which holders of a Class of shares may
bear pursuant to the Plan without approval of such shareholders and that other
material amendments of the Plan must be approved by the Board of Trustees, and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or in the related Plan agreements, by vote cast in person
at a meeting called for the purpose of considering such amendments. The Plan and
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan was so approved
on January 23, 1996. The Plan is terminable at any time, as to each Class of
each Portfolio, by vote of a majority of the Trustees who are not "interested
persons" and who have no direct or indirect financial interest in the operation
of the Plan or in the Plan agreements or by vote of holders of a majority of the
relevant Class' shares. A Plan agreement is terminable, as to each Class of each
Portfolio, without penalty, at any time, by such vote of the Trustees, upon not
more than 60 days' written notice to the parties to such agreement or by vote of
the holders of a majority of the relevant Class' shares. A Plan agreement will
terminate automatically, as to the relevant Class of a Portfolio, in the event
of its assignment (as defined in the 1940 Act).
For the period from April 3, 1995 (commencement of operations)
through March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio
and Bond Portfolio paid Bear Stearns $13,300, $22,762 and $14,093, respectively,
with respect to Class A shares and $23,333, $37,577 and $11,638, respectively,
with respect to Class C shares under the Plan. Of such amounts, the following
amounts were paid as indicated for Class A and Class C shares of each Portfolio:
<TABLE>
<CAPTION>
Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio
------------------------- ------------------------ ---------------------------
Class A Class C Class A Class C Class A Class C
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Payments to
Brokers or Dealers $7,620 $10,955 $17,815 $26,976 $11,713 $4,734
Payments for 5,680 12,378 4,947 10,601 2,380 6,904
Advertising
</TABLE>
Expenses. All expenses incurred in the operation of the Fund
are borne by the Fund, except to the extent specifically assumed by BSFM. The
expenses borne by the Fund 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 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 expenses, costs of maintaining the Fund's existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a particular portfolio are charged against
the assets of that portfolio; other expenses of the 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.
Expense Limitation. BSFM agreed that if, in any fiscal year,
the aggregate expenses of a Portfolio, exclusive of taxes, brokerage, interest
on borrowings and (with the prior written consent of the necessary state
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSFM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the Portfolios' Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolios'
distributor on a best efforts basis pursuant to an agreement dated February 22,
1995 which is renewable annually. For the period April 3, 1995 (commencement of
operations) through March 31, 1996, Bear Stearns retained $72, $388 and $10,549
from the sales loads on Class A shares of the Large Cap Value Portfolio, Small
Cap Value Portfolio and Bond Portfolio, respectively, and $110, $583 and $185
from contingent deferred sales charges ("CDSC") on Class C shares of the Large
Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively.
In some states, banks or other institutions effecting transactions in Portfolio
shares may be required to register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order
may be delayed if PFPC, the Portfolios' transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the
method of computing the offering price of the Class A shares of each Portfolio.
The example assumes a purchase of Class A shares aggregating less than $50,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of the Class A shares on March 31, 1996.
EQUITY PORTFOLIOS: Large Cap Value Small Cap Value
------------------ --------------- ---------------
Net Asset Value per Share $15.13 $15.87
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.75 $ 0.79
Per Share Offering Price to
the Public $15.88 $16.66
BOND PORTFOLIO:
Net Asset Value per Share $12.26
Per Share Sales Charge - 3.75%
of offering price (3.90% of
net asset value per share) $ 0.48
Per Share Offering Price to
the Public $12.74
Redemption Commitment. Each Portfolio has committed itself to
pay in cash all redemption requests by any shareholder of record, limited in
amount during any 90-day period to the lesser of $250,000 or 1% of the value of
the Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (b) when trading in the markets each Portfolio ordinarily utilizes is
restricted, or when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of a Portfolio's investments or
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
to protect Portfolio shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "How to Buy
Shares."
Valuation of Portfolio Securities. Equity Portfolio securities,
including covered call options written by an Equity Portfolio, are valued at the
last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. Any
assets or liabilities initially expressed in terms of foreign currency will be
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value. Because of the need to obtain prices as of the
close of trading on various exchanges throughout the world for such foreign
securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Forward
currency contracts will be valued at the current cost of offsetting the
contract. Short-term investments are carried at amortized cost, which
approximates value. Any securities or other assets for which recent market
quotations are not readily available are valued at fair value as determined in
good faith by the Fund's Board of Trustees. Expenses and fees, including the
management fee and distribution and service fees, are accrued daily and taken
into account for the purpose of determining the net asset value of an Equity
Portfolio's shares. Because of the differences in operating expenses incurred by
each Class, the per share net asset value of each Class will differ.
Substantially all of the Bond Portfolio's investments
(including short-term investments) are valued each business day by one or more
independent pricing services (the "Service") approved by the Fund's Board of
Trustees. Securities valued by the Service for which quoted bid prices in the
judgment of the Service are readily available and are representative of the bid
side of the market are valued at the mean between the quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as
calculated by the Service based upon its evaluation of the market for such
securities). Any assets or liabilities initially expressed in terms of foreign
currency will be converted into U.S. dollars at the prevailing market rates for
purposes of calculating net asset value. Because of the need to obtain prices as
of the close of trading on various exchanges throughout the world for such
foreign securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Other
investments valued by the Service are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short- term investments are
not valued by the Service and are carried at amortized cost, which approximate
value. Other investments that are not valued by the Service are valued at the
average of the most recent bid and asked prices in the market in which such
investments are primarily traded, or at the last sales price for securities
traded primarily on an exchange or the national securities market. In the
absence of reported sales of investments traded primarily on an exchange or the
national securities market, the average of the most recent bid and asked prices
is used. Bid price is used when no asked price is available. Expenses and fees
are accrued daily and taken into account for the purpose of determining the net
asset value of the Bond Portfolio's shares. Because of the differences in
operating expenses incurred by each Class, the per share net asset value of each
Class will differ.
Each Portfolio's restricted securities, as well as securities
or other assets for which market quotations are not readily available, or are
not valued by a pricing service approved by the Board of Trustees, are valued at
fair value as determined in good faith by the Board of Trustees. The Board of
Trustees will review the method of valuation on a current basis.
In making their good faith valuation of restricted securities, the Trustees
generally will take the following factors into consideration: restricted
securities which are, or are convertible into, securities of the same class of
securities for which a public market exists usually will be valued at market
value less the same percentage discount at which purchased. This discount will
be revised periodically by the Board of Trustees if the Trustees believe that it
no longer reflects the value of the restricted securities. Restricted securities
not of the same class as securities for which a public market exists usually
will be valued initially at cost. Any subsequent adjustment from cost will be
based upon considerations deemed relevant by the Board of Trustees.
New York Stock Exchange Closings. The holidays (as
observed) on which the New York Stock Exchange is closed
currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Dividends,
Distributions and Taxes."
Management of the Fund believes that each Portfolio has qualified for
the fiscal year ended March 31, 1996 as a "regulated investment company" under
the Code. Each Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. Qualification as a regulated
investment company relieves the Portfolio from any liability for Federal income
taxes on net investment income and net realized securities gains to the extent
that such income and gains are distributed to shareholders in accordance with
applicable provisions of the Code. The term "regulated investment company" does
not imply the supervision of management or investment practices or policies by
any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of the shares below the cost
of the investment. Such a dividend or distribution would be a return of
investment in an economic sense, although taxable as stated above. In addition,
the Code provides that if a shareholder holds shares of a regulated investment
company for six months or less and has received a capital gain distribution with
respect to such shares, any loss incurred on the sale of such shares will be
treated as long-term capital loss to the extent of the capital gain distribution
received.
Depending on the composition of a regulated investment
company's income, dividends paid by the regulated investment company from net
investment income may qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders ("dividends received deduction"). In
general, dividend income of the regulated investment company distributed to
qualifying corporate shareholders will be eligible for the dividends received
deduction only to the extent that (i) the regulated investment company's income
consists of dividends paid by U.S. corporations and (ii) the regulated
investment company would have been entitled to the dividends received deduction
with respect to such dividend income if the regulated investment company were
not a regulated investment company under the Code. The dividends received
deduction for qualifying corporate shareholders may be further reduced if the
shares of the regulated investment company held by such shareholders with
respect to which dividends are received are treated as debt-financed or deemed
to have been held for less than 46 days. In addition, the Code provides other
limitations with respect to the ability of a qualifying corporate shareholder to
claim the dividends received deduction in connection with holding shares of a
regulated investment company.
Ordinarily, gains and losses realized from portfolio
transactions will be treated as capital gain and loss. However, a portion of the
gain or loss from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial forward futures and option
contracts and certain preferred stock) may be treated as ordinary income or loss
under Section 988 of the Code. In addition, all or a portion of any gain
realized from the sale or other disposition of certain market discount bonds
will be treated as ordinary income under Section 1276. Finally, all or a portion
of the gain realized from engaging in "conversion transactions" may be treated
as ordinary income under Section 1258. "Conversion transactions" are defined to
include certain forward, futures, option and straddle transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by a
regulated investment company from certain futures and forward contracts and
options transactions will be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. Gain or loss will arise upon exercise or
lapse of such contracts and options as well as from closing transactions.
In addition, any such contracts or options remaining unexercised at the end of
a regulated investment company's taxable year will be treated as sold for their
then fair market value, resulting in additional gain or loss to such regulated
investment company characterized in the manner described above.
Offsetting positions held by a regulated investment company
involving certain contracts or options may constitute "straddles." "Straddles"
are defined to include "offsetting positions" in actively traded personal
property. The tax treatment of "straddles" is governed by Sections 1092 and 1258
of the Code, which, in certain circumstances, overrides or modifies the
provisions of Section 1256 and 988. If a regulated investment company were
treated as entering into "straddles" by reason of its engaging in certain
contracts or options transactions, such "straddles" would be characterized as
"mixed straddles" if the contracts or options transactions comprising a part of
such "straddles" were governed by Section 1256 of the Code. A regulated
investment company may make one or more elections with respect to "mixed
straddles." Depending on which election is made, if any, the results to a
regulated investment company may differ. If no election is made to the extent
the "straddle" and conversion transactions rules apply to positions established
by a regulated investment company, losses realized by the regulated investment
company will be deferred to the extent of unrealized gain in the offsetting
position. Moreover, as a result of the "straddle" rules, short-term capital loss
on "straddle" positions may be recharacterized as long-term capital loss, and
long-term capital gains may be treated as short-term capital gains or ordinary
income.
Investment by a regulated investment company in securities
issued or acquired at a discount, or providing for deferred interest or for
payment of interest in the form of additional obligations could under special
tax rules affect the amount, timing and character of distributions to
shareholders by causing a regulated investment company to recognize income prior
to the receipt of cash payments. For example, a regulated investment company
could be required to accrue a portion of the discount (or deemed discount) at
which the securities were issued and to distribute such income in order to
maintain its qualification as a regulated investment company. In such case, a
regulated investment company may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
If a regulated investment company invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the regulated
investment company. Under Proposed Treasury Regulation Section 1.1291-8(a), the
Fund can elect to mark-to-market gains (but not losses) from PFIC securities in
lieu of paying taxes on gain or distributions therefrom. Such gains will be
treated as ordinary income under Proposed Treasury Regulation Section
1.1291-8(b)(2).
PORTFOLIO TRANSACTIONS
BSFM assumes general supervision over placing orders on behalf
of each Equity Portfolio for the purchase or sale of investment securities.
Allocation of brokerage transactions, including their frequency, is made in
BSFM's best judgment and in a manner deemed fair and reasonable to shareholders.
The primary consideration is prompt execution of orders at the most favorable
net price. Subject to this consideration, the brokers selected will include
those that supplement BSFM's research facilities with statistical data,
investment information, economic facts and opinions. Information so received is
in addition to and not in lieu of services required to be performed by BSFM and
BSFM's fees are not reduced as a consequence of the receipt of such supplemental
information.
BSFM assumes general supervision over placing orders on behalf
of the Bond Portfolio for the purchase or sale of investment securities.
Purchases and sales of portfolio securities usually are principal transactions.
Bond Portfolio securities ordinarily are purchased directly from the issuer or
from an underwriter or a market maker for the securities. Usually no brokerage
commissions are paid by the Fund for such purchases. Purchases of portfolio
securities from underwriters include a commission or concession paid by the
issuer to the underwriter and the purchase price paid to market makers for the
securities may include the spread between the bid and asked price. Bond
Portfolio transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment.
Such information may be useful to BSFM in serving each
Portfolio and other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to BSFM in carrying out its obligations to the Portfolios. Sales of Portfolio
shares by a broker may be taken into consideration, and brokers also will be
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more funds advised or administered by BSFM being engaged simultaneously in
the purchase or sale of the same security. Certain of BSFM's transactions in
securities of foreign issuers may not benefit from the negotiated commission
rates available to an Equity Portfolio for transactions in securities of
domestic issuers. When transactions are executed in the over-the-counter market,
each Portfolio will deal with the primary market makers unless a more favorable
price or execution otherwise is obtainable. Foreign exchange transactions of
each Equity Portfolio are made with banks or institutions in the interbank
market at prices reflecting a mark-up or mark-down and/or commission.
Portfolio turnover may vary from year to year as well as
within a year. The turnover rate for the Large Cap Value Portfolio, Small Cap
Value Portfolio and Bond Portfolio for the period April 3, 1995 (commencement of
operations) through March 31, 1996 was 45%, 41% and 107%, respectively. In
periods in which extraordinary market conditions prevail, BSFM will not be
deterred from changing investment strategy as rapidly as needed, in which case
higher turnover rates can be anticipated which would result in greater brokerage
expenses. The overall reasonableness of brokerage commissions paid is evaluated
by BSFM based upon its knowledge of available information as to the general
level of commissions paid by other institutional investors for comparable
services.
To the extent consistent with applicable provisions of the
1940 Act and the rules and exemptions adopted by the Securities and Exchange
Commission thereunder, the Board of Trustees has determined that transactions
for each Portfolio may be executed through Bear Stearns if, in the judgment of
BSFM, the use of Bear Stearns is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for each
Portfolio on the floor of any national securities exchange, provided (i) the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees of
the aggregate compensation it earned on such transactions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
For the period April 3, 1995 (commencement of operations)
through March 31, 1996, the Large Cap Value Portfolio and Small Cap Value
Portfolio paid total brokerage commissions of $26,576 and $64,825, respectively,
of which approximately $1,200 and $1,700 was paid to Bear Stearns. The Large Cap
Value Portfolio and Small Cap Value Portfolio paid 4.52% and 2.62%,
respectively, of its commissions to Bear Stearns, and, with respect to all the
securities transactions for each Equity Portfolio, 1.95% and 0.72% of the
transactions, respectively, involved commissions being paid to Bear Stearns. No
brokerage commissions were paid by the Bond Portfolio.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Performance
Information."
Current yield for the 30-day period ended March 31, 1996 for
Class A, Class C and Class Y of the Bond Portfolio was 5.12%, 4.94% and 5.68%,
respectively. The current yield for each Class reflects the waiver or
reimbursement of certain fees and expenses by the investment adviser, without
which the Portfolio's current yield for such period would have been 2.65% for
Class A, 2.37% for Class C and 3.11% for Class Y. Current yield of the Bond
Portfolio is computed pursuant to a formula which operates as follows: The
amount of the Bond Portfolio's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Bond Portfolio during the period. That result is then divided by
the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Average annual total return of each Portfolio is calculated by
determining the ending redeemable value of an investment purchased at net asset
value (maximum offering price in the case of Class A) per share with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result. A Class'
average annual total return figures calculated in accordance with such formula
assume that in the case of Class A the maximum sales load has been deducted from
the hypothetical initial investment at the time of purchase or in the case of
Class C the maximum applicable CDSC has been paid upon redemption at the end of
the period.
Total return of each Portfolio is calculated by subtracting
the amount of the Portfolio's net asset value (maximum offering price in the
case of Class A) per share at the beginning of a stated period from the net
asset value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period and any applicable
CDSC), and dividing the result by the net asset value (maximum offering price in
the case of Class A) per share at the beginning of the period. Total return also
may be calculated based on the net asset value per share at the beginning of the
period instead of the maximum offering price per share at the beginning of the
period for Class A shares or without giving effect to any applicable CDSC at the
end of the period for Class C shares. In such cases, the calculation would not
reflect the deduction of the sales load with respect to Class A shares or any
applicable CDSC with respect to Class C shares, which, if reflected would reduce
the performance quoted.
The total return for each Portfolio for the period from
commencement of investment operations of the Portfolio or Class thereof through
March 31, 1996 for the indicated Class was as follows:
<TABLE>
<CAPTION>
Class A Class C Class Y
-------------------------------- ------------------------------- --------
Based on Maximum Based on Net Based on Net Based on
Name of Portfolio Offering Price Asset Value Asset Value Maximum CDSC
<S> <C> <C> <C> <C> <C>
Large Cap Value Portfolio(1) 20.34% 26.35% 25.71% 24.71% 8.75%
Small Cap Value Portfolio(2) 27.97% 34.36% 33.59% 32.59% 23.52%
Total Return Bond Portfolio(3) 4.47% 8.54% 8.13% 7.13% 2.92%
- ------------------------
(1) From April 4, 1995 for Class A and Class C, and from August 11, 1995 for Class Y, to March 31, 1996.
(2) From April 3, 1995 for Class A and Class C, and from June 22, 1995 for Class Y, to March 31, 1996.
(3) From April 5, 1995 for Class A and Class C, and from September 8, 1995 for Class Y, to March 31, 1996.
</TABLE>
INFORMATION ABOUT THE FUND
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of May 31, 1996, the following shareholders owned, directly or
indirectly, 5% or more of the indicated Class of the Portfolio's shares.
Percent of Large Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 19.6%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.1%
FBO 086-15297-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 19.8%
FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 26.4%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 5.8%
FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 67.1%
FBO 049-41108-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 10.8%
FBO 049-41109-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 12.9%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 14.4%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 01201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 8.4%
FBO 049-41065-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.0%
FBO 049-40625-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 13.4%
FBO 049-41108-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 12.9%
FBO 049-41109-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Custodial Trust Company 13.3%
101 Carnegie Center
Princeton, NJ 08540
Percent of Total
Return Bond Portfolio
Name and Address Class A Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 16.5%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 17.1%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class C Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 40.5%
FBO 001-00269-20
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 15.0%
FBO 498-00001-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 7.2%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 7.2%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.7%
FBO 027-43204-23
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 5.3%
FBO 050-34543-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class Y Shares Outstanding
- ----------------- --------------------------
Bear Stearns Securities Corp. 54.4%
FBO 049-41095-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 35.7%
FBO 049-41110-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
A shareholder who beneficially owns, directly or indirectly,
more than 25% of a Portfolio's voting Securities may be deemed a "control
person" (as defined in the 1940 Act) of a Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center,
Princeton, New Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's
custodian. Under a custody agreement with each Portfolio, CTC holds each
Portfolio's securities and keeps all necessary accounts and records. For its
services, CTC receives from each Portfolio an annual fee of the greater of .015%
of the value of the domestic assets held in custody or $5,000, such fee to be
payable monthly based upon the total market value of such assets, as determined
on the last business day of the month. In addition, CTC receives certain
securities transactions charges which are payable monthly. PFPC, Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each
Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC
nor PFPC has any part in determining the investment policies of any Portfolio or
which securities are to be purchased or sold by any Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New
York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of beneficial interest being sold pursuant to the Portfolios' Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York,
New York 10281-1434, independent auditors, have been selected as auditors of the
Fund.
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal
year ended March 31, 1996 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
into this Statement of Additional Information.
APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch
and Duff:
S&P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus
(+) or minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long- term risks appear somewhat larger than in Aaa
securities.
A
Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 to show
relative standing within the major rating categories, except in the Aaa
category. The modifier 1 indicates a ranking for the security in the higher end
of a rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high rates
of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2
(P-2) have a strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's
ability to meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its relationship
to other obligations of the issuer, the current financial condition and
operative performance of the issuer and of any guarantor, as well as the
political and economic environment that might affect the issuer's future
financial strength and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
A
Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the margin of safety
is not as great as the F-1+ and F-1 categories.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for risk- free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A
Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB
Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol
(except AAA) to indicate the relative position of a credit within the rating
category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty
of timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
BSF-S-002-06
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JUNE 20, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated June 20, 1996 of S&P STARS Portfolio (the "STARS Portfolio"), a
portfolio of The Bear Stearns Funds (the "Fund"), as each may be revised from
time to time. To obtain a free copy of such Prospectus, please write to the Fund
at PFPC Inc. ("PFPC"), Attention: STARS Portfolio, P.O. Box 8960, Wilmington,
Delaware 19899-8960, call 1-800-447- 1139 (in Delaware call collect
302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at
1-800-766-4111.
As described in the Prospectus, the STARS Portfolio invests all of its
assets in the S&P STARS Master Series (the "Master Series") of S&P STARS Fund
(the "Master Fund").
Bear Stearns Funds Management Inc. ("BSFM"), a
wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the
Master Series' investment adviser.
Bear Stearns, an affiliate of BSFM, serves as distributor of the STARS
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies.................. B-2
Management of the STARS Portfolio............................. B-10
Management Arrangements....................................... B-15
Purchase and Redemption of Shares............................. B-19
Determination of Net Asset Value.............................. B-20
Dividends, Distributions and Taxes............................ B-21
Portfolio Transactions........................................ B-23
Performance Information....................................... B-25
Information About the STARS Portfolio......................... B-26
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors............................ B-27
Financial Statements.......................................... B-28
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the STARS Portfolio's Prospectus entitled "Description of
STARS Portfolio."
General
The STARS Portfolio seeks to achieve its investment objective
by investing all of its assets in the Master Series. The STARS Portfolio may
withdraw its investment from the Master Series at any time if the Fund's Board
of Trustees determines that it is in the best interests of the STARS Portfolio
to do so. Since the investment characteristics of the STARS Portfolio will
correspond directly to those of the Master Series, the following is a discussion
of the various investment policies and techniques employed by the Master Series.
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Master Series are insured by the FDIC (although such
insurance may not be of material benefit to the Master Series, depending on the
principal amount of the CDs of each bank held by the Master Series) and are
subject to Federal examination and to a substantial body of Federal law and
regulation. As a result of Federal or state laws and regulations, domestic
branches of domestic banks whose CDs may be purchased by the Master Series
generally are required, among other things, to maintain specified levels of
reserves, are limited in the amounts which they can loan to a single borrower
and are subject to other regulation designed to promote financial soundness.
However, not all of such laws and regulations apply to the foreign branches of
domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation or by Federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, Federal branches licensed by the Comptroller of
the Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, by foreign branches of foreign banks or by
domestic branches of foreign banks, BSFM carefully evaluates such investments on
a case-by-case basis.
Repurchase Agreements. The Master Series' custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by the Master Series under a repurchase agreement.
Repurchase agreements are considered by the staff of the Securities and Exchange
Commission to be loans by the Master Series. In an attempt to reduce the risk of
incurring a loss on a repurchase agreement, the Master Series will enter into
repurchase agreements only with domestic banks with total assets in excess of
one billion dollars, or primary government securities dealers reporting to the
Federal Reserve Bank of New York, with respect to securities of the type in
which the Master Series may invest, and will require that additional securities
be deposited with it if the value of the securities purchased should decrease
below the resale price. BSFM will monitor on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price. The
Master Series will consider on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations.
Variable rate demand notes include variable amount master demand notes, which
are obligations that permit the Master Series to invest fluctuating amounts at
varying rates of interest pursuant to direct arrangements between the Master
Series, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. As mutually agreed between the parties, the Master Series may
increase the amount under the notes at any time up to the full amount provided
by the note agreement, or decrease the amount, and the borrower may repay up to
the full amount of the note without penalty. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Master Series' right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. In connection with
floating and variable rate demand obligations, BSFM will consider, on an ongoing
basis, earning power, cash flow and other liquidity ratios of the borrower, and
the borrower's ability to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and the Master Series may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the STARS Portfolio's Prospectus for other commercial
paper issuers.
Illiquid Securities. When purchasing securities that have not
been registered under the Securities Act of 1933, as amended, and are not
readily marketable, the Master Series will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between the Master Series' decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops for certain
unregistered securities purchased by the Master Series pursuant to Rule 144A
under the Securities Act of 1933, as amended, it intends to treat them as liquid
securities in accordance with procedures approved by the Master Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Master Fund's
Board of Trustees has directed BSFM to monitor carefully the Master Series'
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information. To
the extent that, for a period of time, qualified institutional buyers cease
purchasing restricted securities pursuant to Rule 144A, the Master Series'
investing in such securities may have the effect of increasing the level of
illiquidity in the Master Series during such period.
Management Policies
Options Transactions. The Master Series may engage in options transactions
of the type described in the STARS Portfolio's Prospectus.
The principal reason for writing covered call options, which
are call options with respect to which the Master Series owns the underlying
security or securities, is to realize, through the receipt of premiums, a
greater return than would be realized on the Master Series' securities alone.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. In return for a premium, the writer of a covered
call option forfeits the right to any appreciation in the value of the
underlying security above the strike price for the life of the option (or until
a closing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security. The size
of the premiums that the Master Series may receive may be adversely affected as
new or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between one and nine
months from the date written. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the time the
options are written. In the case of call options, these exercise prices are
referred to as "in-the-money," "at-the-money" and "out-of-the- money,"
respectively. The Master Series may write (a) in-the-money call options when
BSFM expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
BSFM expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when BSFM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Master Series' obligation as the writer of an
option continues, it may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Master Series to deliver, in
the case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Master Series effects a closing purchase transaction.
The Master Series can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, the Master Series
generally will purchase or write only those options for which BSFM believes
there is an active secondary market so as to facilitate closing transactions.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that otherwise may interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If as a
covered call option writer the Master Series is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or it otherwise covers its position.
Stock Index Options. The Master Series may engage in stock
index option transactions of the type described in the STARS Portfolio's
Prospectus. A stock index fluctuates with changes in the market values of the
stocks included in the index.
Options on stock indexes are similar to options on stock
except that (a) the expiration cycles of stock index options are generally
monthly, while those of stock options are currently quarterly, and (b) the
delivery requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Lending Portfolio Securities. To a limited extent, the Master
Series may lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Master Series
can increase its income through the investment of the cash collateral. For
purposes of this policy, the Master Series considers collateral consisting of
U.S. Government securities or irrevocable letters of credit issued by banks
whose securities meet the standards for investment by the Master Series to be
the equivalent of cash. From time to time, the Master Series may return to the
borrower or a third party which is unaffiliated with the Master Series, and
which is acting as a "placing broker," a part of the interest earned from the
investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that
the following conditions must be met whenever portfolio securities are loaned:
(1) the Master Series must receive at least 100% cash collateral from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (3) the Master
Series must be able to terminate the loan at any time; (4) the Master Series
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions payable on the loaned securities, and any increase in
market value; (5) the Master Series may pay only reasonable custodian fees in
connection with the loan; and (6) while voting rights on the loaned securities
may pass to the borrower, the Master Fund's Board of Trustees must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification.
Investments in Warrants. The Master Series does not presently
intend to invest in warrants. However, any future investment in warrants will be
limited to 5% of its net assets, except that this limitation does not apply to
warrants acquired in units or attached to securities. Included in such amount,
but not to exceed 2% of the value of its net assets, may be warrants which are
not listed on the New York or American Stock Exchange.
Investment Restrictions. The STARS Portfolio and the Master
Series have adopted investment restrictions numbered 1 through 10 as fundamental
policies. These restrictions cannot be changed, as to the STARS Portfolio or
Master Series, without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the outstanding
voting securities of the STARS Portfolio or Master Series, as the case may be.
Investment restrictions numbered 11 through 14 are not fundamental policies and
may be changed by vote of a majority of the Trustees of the Fund or Master Fund
at any time. Neither the STARS Portfolio nor the Master Series may:
1. Invest more than 25% of the value of its total assets in
the securities of issuers in any single industry, provided that there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Invest in commodities, except that each may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
3. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but each may purchase and sell securities that are secured
by real estate or issued by companies that invest or deal in real estate or real
estate investment trusts.
4. Borrow money, except to the extent permitted under the 1940
Act. The 1940 Act permits an investment company to borrow in an amount up to
33-1/3% of the value of such company's total assets. For purposes of this
Investment Restriction, the entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each may lend its
portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the Board
of Trustees of the Fund and Master Fund, as the case may be.
6. Act as an underwriter of securities of other issuers,
except to the extent each may be deemed an underwriter under the Securities Act
of 1933, as amended, by virtue of disposing of portfolio securities.
7. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act).
8. Purchase securities on margin, but each may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
9. Purchase securities of any company having less than three
years' continuous operations (including operations of any predecessor) if such
purchase would cause the value of the STARS Portfolio's or the Master Series'
investments, as the case may be, in all such companies to exceed 5% of the value
of its total assets.
10. Invest in the securities of a company for the purpose of
exercising management or control, but each will vote the securities it owns in
its portfolio as a shareholder in accordance with its views.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
12. Purchase, sell or write puts, calls or combinations
thereof, except as described in the STARS Portfolio's Prospectus and Statement
of Additional Information.
13. Enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment
companies, except to the extent permitted under the 1940 Act.
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of STARS Portfolio's shares
in certain states. Should the Fund determine that a commitment is no longer in
the best interest of the STARS Portfolio and its shareholders, the Fund reserves
the right to revoke the commitment by terminating the sale of STARS Portfolio
shares in the state involved.
MANAGEMENT OF THE STARS PORTFOLIO
Trustees and officers of the Fund, together with information
as to their principal business occupations during at least the last five years,
are shown below. Each Trustee who is an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Position Principal Occupation
(and age) with Fund During Past Five Years
- ---------------- --------- ----------------------
Peter M. Bren (62) Trustee President of The Bren Co.;
2 East 70th Street President of Cole, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United
Belleville, IL 62223 States Senator of Illinois
from 1981 to 1993.
John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive
114 Nottingham Road Officer of McKernan
Auburn, ME 04210 Enterprises since
January 1995; Governor
of Maine prior thereto.
M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy &
5300 Albemarle Street Associates since February
Bethesda, MD 20816 1996; Senior Vice President
of RJR Nabisco, Inc. from April
1989 to February 1996; Former
Deputy Chief of Staff-White
House from 1988 to January
1989.
Robert S. Reitzes* (51) Chairman Director of Mutual Funds-
245 Park Avenue of the Board Bear Stearns Asset
New York, NY 10167 Management and Senior
Managing Director of Bear
Stearns since March 1994; Co-
Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from January
1991 to March 1994.
Neil T. Eigen (53) President Chief Investment Officer and
245 Park Avenue Director of Equity
New York, NY 10167 Investments--Bear Stearns
Asset Management since
1992 and Senior
Managing Director
of Bear Stearns
since 1990.
Peter B. Fox (44) Executive Vice Senior Managing Director,
Three First National President Bear Stearns, Public
Plaza Finance.
Chicago, IL 60602
William J. Montgoris (49) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (52) Vice President Managing Director, Legal
245 Park Avenue Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (37) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Associate Director
of Bear Stearns from September
1993 to September 1994; Executive
Vice Presidentof BSFM since
March 1992; Vice President
of Bear Stearns from March 1992
to September 1993; First Vice
President of Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins")
from June 1988 to March 1992; and
Director of Funds Administration Division
of Mitchell Hutchins from November 1991 to
March 1992.
Raymond D. DeAngelo (35) Vice President Associate Director of Bear
245 Park Avenue Stearns since November 1994;
New York, NY 10167 Vice President and Manager--
Mutual Fund Sales Support
Group of Kidder, Peabody & Co.
Incorporated ("Kidder Peabody") from
August 1994 to November 1994;
Vice President and Manager--Unit
Investment Trust Department of Kidder
Peabody from August 1992 to
August 1994; Vice President
and Wholesaler of Nike Securities,
L.P. formerly Clayton Brown &
Associates) from September 1991 to
August 1992; Assistant Vice
President and Wholesaler of
Clayton Brown & Associates prior
thereto.
Ellen T. Arthur (43) Secretary Associate Director of Bear
245 Park Avenue Stearns since January
New York, NY 10167 1996; Senior Counsel and
Corporate Vice President
of PaineWebber Incorporated
from April 1989 to September
1995.
Vincent L. Pereira (30) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September 1995
New York, NY 10167 and Vice President of BSFM
since May 1993; Vice President
of Bear Stearns from May 1993 to
September 1995; Assistant Vice
President of Mitchell Hutchins
from October 1992 to May 1993;
Senior Relationship Manager of Mitchell
Hutchins from June 1988 to October 1992.
Eileen M. Coyle (30) Assistant Vice President of Bear Stearns
245 Park Avenue Secretary since September 1995;
New York, NY 10167 Accounting Supervisor and
Senior Accountant for Bear
Stearns since 1990.
</TABLE>
Information pertaining to the Trustees and officers of the
Master Fund is set forth below together with their respective positions and a
brief statement of their principal occupations during the past five years.
Trustees deemed to be "interested persons" of the Master Fund for purposes of
the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Position with Principal Occupation
(and age) Master Fund During Past Five Years
<S> <C> <C>
John J. Danilovich (45) Trustee Chairman and Principal of
32 Blomfield Road Danilovich & Company,
London, W9 1AA merchants bankers.
England
Robert S. Reitzes* (51) Chairman of Described above.
245 Park Avenue the Board
New York, NY 10167
Vincent Anthony Walsh (69) Trustee Consultant of Arthur Cox,
41-45 St. Stephen's a law firm in Dublin,
Green since 1993, Senior Partner
Dublin 2 of Arthur Cox prior thereto.
Ireland
Barry Nix (36) President Senior Managing Director of
1 Canada Square Fixed Income Sales of
London E14 58D Bear, Stearns
England International Limited since
1991; Managing Director of
Bear, Stearns International
Limited prior thereto.
James Fergus McKeon (36) Treasurer General Manager of PFPC
Jordanstown and Secretary International Ltd. since
Oldtown September 1993; Chief
Dublin Accountant of Swiss
Ireland Bank Corporation Ireland from
1990 to 1993.
</TABLE>
The Fund pays its non-affiliated Board members an annual
retainer of $5,000 and a per meeting fee of $500 and reimburses them for their
expenses. The Fund does not compensate its officers. The aggregate amount of
compensation paid to each Board member by the Fund and by all other funds in the
Bear Stearns Family of Funds for which such person is a Board member (the number
of which is set forth in parenthesis next to each Board member's total
compensation) for the fiscal year ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
(3) (5)
(2) (4) Total
Pension or Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund * Fund's Expenses Retirement Board Members
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $12,000(2)
Alan J. Dixon $7,000 None None $ 7,000(1)
John R. McKernan, Jr. $7,000 None None $12,000(2)
M.B. Oglesby, Jr. $7,000 None None $12,000(2)
Robert S. Reitzes None None None None(2)
</TABLE>
The Master Fund pays its non-affiliated Board members an
annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for
their expenses. The Master Fund does not compensate its officers. The aggregate
amount of compensation paid to each Board member by the Master Fund and by all
other funds in the Bear Stearns Family of Funds for which such person is a Board
member (the number of which is set forth in parenthesis next to each Board
member's total compensation) for the fiscal year ended March 31, 1996 is as
follows:
<TABLE>
<CAPTION>
(2) (3) (5)
Total
Aggregate Pension or (4) Compensation from
(1) Compensation Retirement Benefits Estimated Annual Master Fund and Fund
Name of Board from Master Accrued as Part of Benefits Upon Complex Paid to
Member Fund* Master Fund's Expenses Retirement Board Members
<S> <C> <C> <C> <C>
John J. Danilovich $7,000 None None $7,000(1)
Vincent Anthony Walsh $7,000 None None $7,000(1)
Robert S. Reitzes None None None None(2)
- --------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $10,100 for Board members of the Fund and
$2,113 for Board members of the Master Fund, as a group.
</TABLE>
Board members and officers of the Fund, as a group, owned less
than 1% of the STARS Portfolio's shares outstanding on May 31, 1996.
No Board member or officer of the Master Fund owned any of the
Master Series' shares outstanding on May 31, 1996.
For so long as the Plan described in the section captioned
"Management Arrangements--Distribution and Shareholder Servicing Plan" remains
in effect, the Fund's Trustees who are not "interested persons" of the Fund, as
defined in the 1940 Act, will be selected and nominated by the Trustees who are
not "interested persons" of the Fund.
No meetings of shareholders of the STARS Portfolio will be
held for the purpose of electing Trustees unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Under the 1940 Act,
shareholders of record of not less than two-thirds of the outstanding shares of
the Fund may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. Under the Fund's
Agreement and Declaration of Trust, the Trustees are required to call a meeting
of shareholders for the purpose of voting upon the question of removal of any
such Trustee when requested in writing to do so by the shareholders of record of
not less than 10% of the Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the STARS Portfolios' Prospectus entitled
"Management of STARS Portfolio."
Investment Advisory Agreement. BSFM provides investment
advisory services to the Master Series pursuant to the Investment Advisory
Agreement (the "Agreement") dated February 23, 1995, with the Fund. The
Agreement is subject to annual approval by (i) the Master Fund's Board of
Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Master Series, provided that in either
event the continuance also is approved by a majority of the Master Fund's Board
of Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Master Fund or BSFM, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Master Fund's Board of Trustees, including a
majority of the Trustees who are not "interested persons" of any party to the
Agreement, last approved the Agreement at a meeting held on February 23, 1995.
The Agreement is terminable, on 60 days' notice, by the Master Fund's Board of
Trustees or by vote of the holders of a majority of the Master Series' shares,
or, on not less than 90 days' notice, by BSFM. The Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
BSFM is a wholly owned subsidiary of The Bear Stearns
Companies Inc. The following persons are directors and/or
senior officers of BSFM: Mark A. Kurland, Chief Executive Officer,
President, Chairman of the Board and Director; Robert S.
Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice
Chairman of the Board; Frank J. Maresca, Executive Vice
President; Neil T. Eigen, Executive Vice President; Vincent L.
Pereira, Treasurer and Secretary; and Michael Minikes, Warren J.
Spector and Robert M. Steinberg, Directors.
BSFM provides investment advisory services to the Master
Series in accordance with its stated policies, subject to the approval of the
Master Fund's Board of Trustees. BSFM provides the Master Series with portfolio
managers who are authorized by the Master Fund's Board of Trustees to execute
purchases and sales of securities. The portfolio managers are Robert S. Reitzes
and Gayle M. Sprute. All purchases and sales are reported for the Board's review
at the meeting subsequent to such transactions.
As compensation for BSFM's advisory services, the Master Fund
has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the
value of the Master Series' average daily net assets. For the period from April
3, 1995 (commencement of operations) through March 31, 1996, the investment
advisory fees payable amounted to $384,779. This amount was waived pursuant to
an undertaking by BSFM, resulting in no fees being paid by the Master Fund.
Administration Agreement. BSFM provides certain administrative
services to the Fund pursuant to the Administration Agreement dated February 22,
1995, with the Fund. The Administration Agreement will continue until February
22, 1998 and thereafter will be subject to annual approval by (i) the Fund's
Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the STARS Portfolio, provided that in either event its
continuance also is approved by a majority of the Fund's Board members who are
not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by
vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement is terminable without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
STARS Portfolio's shares or upon not less than 90 days' notice by BSFM. The
Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
As compensation for BSFM's administrative services, 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 assets. For the period from April 3, 1995
(commencement of operations) through March 31, 1996, the administration fee
accrued amounted to $78,090 and the amount paid was $74,227.
Administrative Services Agreements. PFPC provides certain
administrative services to the Fund pursuant to the Administrative Services
Agreement dated February 22, 1995, with the Fund. The Administrative Services
Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC
may assign its rights or delegate its duties under the Administrative Services
Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30
days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to
comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such
delegate (or assignee) promptly provide information requested by the Fund in
connection with such delegation.
As compensation for PFPC's administrative services, the Fund
has agreed to pay PFPC $5,500 per month. For the period from April 3, 1995
(commencement of operations) through March 31, 1996, the administrative fee
payable by the STARS Portfolio amounted to $60,000. This amount was reduced to
$58,660 as a result of a waiver of fees by PFPC.
PFPC International Ltd. provides certain
administrative services to the Master Fund pursuant to the Administrative
Services Agreement dated February 23, 1995, with the Fund. PFPC
International Ltd. may delegate any of its functions and duties
under the Administrative Services Agreement to any person,
provided that such appointment shall first be approved in
writing by the Master Fund.
As compensation for PFPC International Ltd.'s administrative
services, the Master Fund has agreed to pay PFPC International Ltd. a monthly
fee at the rate set forth in the STARS Portfolio's Prospectus. For the period
from April 3, 1995 (commencement of operations) through March 31, 1996, the
administrative fee payable by the Master Series amounted to $102,000. This
amount was reduced to $61,620 as a result of a waiver of fees by PFPC
International Ltd.
Distribution and Shareholder Servicing Plan. Rule 12b-1 (the
"Rule") adopted by the Securities and Exchange Commission under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Fund's Trustees have adopted such a plan with respect to Class A and
Class C Shares (the "Plan"). The Fund's Trustees believe that there is a
reasonable likelihood that the Plan will benefit the STARS Portfolio and the
holders of its Class A and Class C shares.
A quarterly report of the amounts expended under the Plan, and
the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the Plan provides that it may not be
amended to increase materially the costs which holders of a Class of shares may
bear pursuant to the Plan without approval of such shareholders and that other
material amendments of the Plan must be approved by the Board of Trustees, and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or in the related Plan agreements, by vote cast in person
at a meeting called for the purpose of considering such amendments. The Plan and
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan was so approved
on January 23, 1995. The Plan is terminable at any time, as to the STARS
Portfolio, without penalty, by vote of a majority of the Trustees who are not
"interested persons" and who have no direct or indirect financial interest in
the operation of the Plan or in the Plan agreements or by vote of holders of a
majority of the STARS Portfolio's relevant Class of shares. A Plan agreement is
terminable without penalty, at any time, by such vote of the Trustees, upon not
more than 60 days' written notice to the parties to such agreement or by vote of
the holders of a majority of the STARS Portfolio's shares. A Plan agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
For the period from April 3, 1995 (commencement of operations)
through March 31, 1996, the STARS Portfolio paid Bear Stearns $152,980 with
respect to Class A shares and $176,445 with respect to Class C shares under the
Plan. All such amounts were paid to brokers or dealers.
Expenses. The Fund and the Master Fund 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 Commission fees, state Blue Sky qualification fees, administrative and
fund accounting fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, outside
auditing and legal expenses, costs of maintaining the existence of the Fund and
the Master Fund, 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
assets 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.
The Master Series also bears the following expenses: advisory
and administrative 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.
Expense Limitation. BSFM agreed that if, in any fiscal year,
the aggregate expenses of the STARS Portfolio, exclusive of taxes, brokerage,
interest on borrowings and (with the prior written consent of the necessary
state securities commissions) extraordinary expenses, exceed the expense
limitation of any state having jurisdiction over the STARS Portfolio, the Fund
may deduct from the payment to be made to BSFM, such excess expense to the
extent required by state law. Such deduction or payment, if any, will be
estimated daily, and reconciled and effected or paid, as the case may be, on a
monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the STARS Portfolio's Prospectus entitled "How
to Buy Shares" and "How to Redeem Shares."
The Distributor. Bear Stearns serves as the STARS Portfolio's
distributor on a best efforts basis pursuant to an agreement dated February 22,
1995 which is renewable annually. For the period from April 3, 1995
(commencement of operations) through March 31, 1996, Bear Stearns retained
$32,434 from the sales loads on Class A shares and $25,670 from contingent
deferred sales charges ("CDSC") on Class C shares. In some states, banks or
other institutions effecting transactions in STARS Portfolio shares may be
required to register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order
may be delayed if PFPC, the STARS Portfolio's transfer agent, is unable to
process the purchase order because of an interruption of services at its
processing facilities. In such event, the purchase order would become effective
at the purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the
method of computing the offering price of the Class A shares of the STARS
Portfolio. The example assumes a purchase of Class A shares aggregating less
than $50,000 subject to the schedule of sales charges set forth in the
Prospectus at a price based upon the net asset value of the Class A shares on
March 31, 1996.
Net Asset Value per Share $14.92
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.74
Per Share Offering Price to
the Public $15.66
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (b) when trading in the markets the Master Series ordinarily utilizes
is restricted, or when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of the Master Series' investments or
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
to protect the STARS Portfolio's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the STARS Portfolio's Prospectus entitled "How
to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Master Series, are valued at the last sale
price on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by the Fund's
Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of STARS Portfolio's and Master
Series' shares. Because of the differences in operating expenses incurred by
each Class, the per share net asset value of each Class will differ.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in
conjunction with the section in the STARS Portfolio's Prospectus entitled
"Dividends, Distributions and Taxes."
Management of the Fund believes that the STARS Portfolio has
qualified for the fiscal year ended March 31, 1996 as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). The STARS Portfolio intends to continue to so qualify if such
qualification is in the best interests of its shareholders. Qualification as a
regulated investment company relieves the STARS Portfolio from any liability for
Federal income taxes on net investment income and net realized securities gains
to the extent that such income and gains are distributed to shareholders in
accordance with applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's
purchase of shares in a regulated investment company may have the effect of
reducing the aggregate net asset value of his shares below the cost of his
investment. Such a distribution would be a return on investment in an economic
sense although taxable as stated in "Dividends, Distributions and Taxes" in the
Prospectus. In addition, the Code provides that if a shareholder holds shares of
a regulated investment company for six months or less and has received a capital
gain dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Depending on the composition of a regulated investment
company's income, dividends paid by the regulated investment company from net
investment income may qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders ("dividends received deduction"). In
general, dividend income of the regulated investment company distributed to
qualifying corporate shareholders will be eligible for the dividends received
deduction only to the extent that (i) the regulated investment company's income
consists of dividends paid by U.S. corporations and (ii) the regulated
investment company would have been entitled to the dividends received deduction
with respect to such dividend income if the regulated investment company were
not a regulated investment company under the Code. The dividends received
deduction for qualifying corporate shareholders may be further reduced if the
shares of the regulated investment company held by such shareholders with
respect to which dividends are received are treated as debt-financed or deemed
to have been held for less than 46 days. In addition, the Code provides other
limitations with respect to the ability of a qualifying corporate shareholder to
claim the dividends received deduction in connection with holding shares of a
regulated investment company.
Ordinarily, gains and losses realized from portfolio
transactions will be treated as capital gain or loss. However, all or a portion
of the gain or loss from the disposition of non- U.S. dollar denominated
securities (including debt instruments, certain financial forward, futures and
option contracts, and certain preferred stock) may be treated as ordinary income
or loss under Section 988 of the Code (relating to the taxation of foreign
currency transactions). In addition, all or a portion of the gain realized from
the disposition of certain market discount bonds will be treated as ordinary
income under Section 1276. Finally, all or a portion of the gain realized from
engaging in "conversion transactions" may be treated as ordinary income under
Section 1258. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in Treasury regulations to be
issued in the future.
Under Section 1256 of the Code, gain or loss realized by the
regulated investment company from certain financial forward, futures and options
transactions (other than those taxed under Section 988 of the Code) will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Gain or loss will arise upon the exercise or lapse of such forward
contracts, futures and options as well as from closing transactions. In
addition, any such forward contracts, futures or options remaining unexercised
at the end of the regulated investment company's taxable year will be treated as
sold for their then fair market value, resulting in additional gain or loss to
the regulated investment company characterized in the manner described above.
Offsetting positions held by a regulated investment company
involving certain financial forward, futures or option contracts may be
considered, for tax purposes to constitute "straddles." "Straddles" are defined
to include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code
which, in certain circumstances, overrides or modifies the provisions of
Sections 988 or 1256.
If a regulated investment company were treated as entering
into "straddles" by reason of its engaging in certain financial forward, futures
or option contracts, such straddles will be characterized as "mixed straddles"
if the futures, forwards, or options comprising a part of such straddles were
governed by Section 1256 of the Code. The regulated investment company may make
one or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, results with respect to the regulated investment
company may differ. If no election is made, to the extent the straddle rules
apply to positions established by the regulated investment company, losses
realized by the regulated investment company will be deferred to the extent of
unrealized gain in any offsetting positions. Moreover, as a result of the
straddle and the conversion transaction rules, short-term capital loss on
straddle positions may be recharacterized as long-term capital loss and
long-term capital gain may be characterized as short-term capital gain or
ordinary income.
Investment by a regulated investment company in securities
issued or acquired at a discount, or providing for deferred interest or for
payment of interest in the form of additional obligations could under special
tax rules affect the amount, timing and character of distributions to
shareholders by causing the regulated investment company to recognize income
prior to the receipt of cash payments. For example, the regulated investment
company could be required to accrue a portion of the discount (or deemed
discount) at which the securities were issued each year and to distribute such
income in order to maintain its qualification as a regulated investment company.
In such case, the regulated investment company may have to dispose of securities
which it might otherwise have continued to hold in order to generate cash to
satisfy these distribution requirements.
PORTFOLIO TRANSACTIONS
BSFM assumes general supervision over placing orders on behalf
of the Master Series for the purchase or sale of investment securities.
Allocation of brokerage transactions, including their frequency, is made in
BSFM's best judgment and in a manner deemed fair and reasonable to shareholders.
The primary consideration is prompt execution of orders at the most favorable
net price. Subject to this consideration, the brokers selected will include
those that supplement BSFM's research facilities with statistical data,
investment information, economic facts and opinions. Information so received is
in addition to and not in lieu of services required to be performed by BSFM and
BSFM's fees are not reduced as a consequence of the receipt of such supplemental
information.
Such information may be useful to BSFM in serving both the
Master Series and other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to BSFM in carrying out their obligations to the Master Series. Sales of STARS
Portfolio shares by a broker may be taken into consideration, and brokers also
will be selected because of their ability to handle special executions such as
are involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more funds advised or administered by BSFM being engaged simultaneously in
the purchase or sale of the same security. When transactions are executed in the
over-the-counter market, the Master Series will deal with the primary market
makers unless a more favorable price or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as
within a year. The turnover rate for the Master Series for the period April 3,
1995 (commencement of operations) through March 31, 1996 was 296%. The portfolio
turnover rate differed from the anticipated portfolio turnover rate because of
market volatility in the last quarter of 1995 and first month of 1996. BSFM
repositioned the Master Series' portfolio by selling some of its technology
stocks and purchasing stocks that were believed to be more defensive in nature,
such as healthcare, consumer non- durables, and growth stocks. In periods in
which extraordinary market conditions prevail, BSFM will not be deterred from
changing investment strategy as rapidly as needed, in which case higher turnover
rates can be anticipated which would result in greater brokerage expenses. The
overall reasonableness of brokerage commissions paid is evaluated by BSFM based
upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
To the extent consistent with applicable provisions of the
1940 Act and the rules and exemptions adopted by the Securities and Exchange
Commission thereunder, the Board of Trustees has determined that transactions
for the Master Series may be executed through Bear Stearns if, in the judgment
of BSFM, the use of Bear Stearns is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Master Series a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for the Master
Series on the floor of any national securities exchange, provided (i) the Board
of Trustees has expressly authorized Bear Stearns to effect such transactions,
and (ii) Bear Stearns annually advises the Board of Trustees of the aggregate
compensation it earned on such transactions. Over- the-counter purchases and
sales are transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere.
For the period April 3, 1995 (commencement of operations)
through March 31, 1996, the Master Series paid total brokerage commissions of
$415,246 of which $378,353 was paid to Bear Stearns. The Master Series paid
91.10% of its commissions to Bear Stearns, and, with respect to all the
securities transactions for the Master Series, 90.60% of the transactions
involved commissions being paid to Bear Stearns.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the STARS Portfolio's Prospectus entitled
"Performance Information."
Average annual total return is calculated by determining the
ending redeemable value of an investment purchased at net asset value (maximum
offering price in the case of Class A) per share with a hypothetical $1,000
payment made at the beginning of the period (assuming the reinvestment of
dividends and distributions), dividing by the amount of the initial investment,
taking the "n"th root of the quotient (where "n" is the number of years in the
period) and subtracting 1 from the result. A Class' average annual total return
figures calculated in accordance with such formula assume that in the case of
Class A the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or in the case of Class C the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The total return for Class A for the period April 5, 1995
(commencement of investment operations of the Master Series) to March 31, 1996
was 21.62%. Based on net asset value per share, the total return for Class A was
27.68% for this period. The total return for Class C for the same period was
25.91%. Without giving effect to the applicable CDSC, the total return for Class
C was 26.91% for this period. The total return for Class Y for the period August
7, 1995 (commencement of initial public offering) to March 31, 1996 was 9.09%.
Total return is calculated by subtracting the amount of the
STARS Portfolio's net asset value (maximum offering price in the case of Class
A) per share at the beginning of a stated period from the net asset value per
share at the end of the period (after giving effect to the reinvestment of
dividends and distributions during the period and any applicable CDSC), and
dividing the result by the net asset value (maximum offering price in the case
of Class A) per share at the beginning of the period. Total return also may be
calculated based on the net asset value per share at the beginning of the period
instead of the maximum offering price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class C shares. In such cases, the calculation would not reflect
the deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class C shares, which, if reflected would reduce the
performance quoted.
INFORMATION ABOUT THE STARS PORTFOLIO
The following information supplements and should be read in
conjunction with the section in the STARS Portfolio's Prospectus entitled
"General Information."
Bear Stearns and S&P entered into a License Agreement dated
October 1, 1994 that provides for, among other matters: (i) the grant by S&P to
Bear Stearns of the exclusive right until March 31, 2001, and the non-exclusive
right thereafter, to use certain of S&P's proprietary trade names and trademarks
for investment companies based, in whole or in part, on the STARS System, (ii)
such right to become non-exclusive at an earlier date, if the STARS Portfolio
and certain other investment companies which, in the future, may be sponsored by
Bear Stearns fail to reach certain aggregate asset sizes, measured annually
commencing on April 1, 1996, (iii) such right to terminate at S&P's option upon
certain events, such as breach by Bear Stearns of the material terms of the
License Agreement, S&P ceasing to publish STARS, the adoption of adverse
legislation or regulation (none of which currently is foreseen) affecting S&P's
ability to license its trade names or trademarks as contemplated by the License
Agreement, or the existence of certain litigation (none of which is known to
exist or to be threatened), (iv) the payment by Bear Stearns of annual license
fees in amounts equal to a range of .30% to .375% of the net assets of the STARS
Portfolio and other investment companies subject to the License Agreement and
(v) a partial reduction of the license fees to offset certain marketing expenses
incurred by Bear Stearns in connection with the STARS Portfolio.
STARS is the centerpiece of the OUTLOOK, S&P's flagship
investment newsletter that has a high net worth readership of 25,000 weekly
subscribers. STARS reaches more than 72,000 brokers and investment professionals
on their desktop computers through MarketScope, S&P's on-line, real-time equity
evaluation service, which is accessed more than one million times daily.
S&P has more than 130 years' experience in providing financial
information and analysis, offers more than 60 products and employs more than 50
experienced equity analysts. These analysts consider fundamental factors that
are expected to impact growth. These factors include company operations and
industry and macroeconomic conditions. Among the fundamental factors are the
company's balance sheet, ability to finance growth, competitive market
advantages, earnings per share growth and strength of management.
Each STARS Portfolio share has one vote and, when issued and
paid for in accordance with the terms of the offering, is fully paid and
non-assessable. STARS Portfolio shares have no preemptive, subscription or
conversion rights and are freely transferable.
The Fund will send annual and semi-annual financial statements
to all its shareholders.
As of May 31, 1996, the following shareholders owned, directly
or indirectly, 5% or more of the indicated Class of the STARS Portfolio's
outstanding shares.
Percent of Class Y
Name and Address Shares Outstanding
Bear Stearns Securities Corp. 11.4%
FBO 048-93405-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Custodial Trust Company 40.1%
101 Carnegie Center
Princeton, NJ 08540
A shareholder who beneficially owns, directly or indirectly,
more than 25% of the STARS Portfolio's voting securities may be deemed a
"control person" (as defined in the 1940 Act) of the STARS Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center,
Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the STARS
Portfolio's custodian. Under the custody agreement with the STARS Portfolio, CTC
holds the STARS Portfolio's securities and keeps all necessary accounts and
records. For its services, CTC receives an annual fee of the greater of .01% of
the value of the domestic assets held in custody or $5,000, such fee to be
payable monthly based upon the total market value of such assets, as determined
on the last business day of the month. In addition, CTC receives certain
securities transactions charges which are payable monthly. PFPC, Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the STARS
Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC
nor PFPC has any part in determining the investment policies of the Master
Series or which securities are to be purchased or sold by the Master Series.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New
York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of beneficial interest being sold pursuant to the STARS Portfolio's Prospectus.
Deloitte & Touche, Deloitte & Touche House, Earlsfort
Terrace, Dublin 2, Ireland, independent auditors, have been
selected as auditors of the Fund.
FINANCIAL STATEMENTS
The STARS Portfolio's Annual Report to Shareholders for the
fiscal year ended March 31, 1996 is a separate document supplied with this
Statement of Additional Information, and the financial statements, accompanying
notes and reports of independent auditors appearing therein are incorporated by
reference into this Statement of Additional Information.
BSF-S-001-07
<PAGE>
THE BEAR STEARNS FUNDS
THE INSIDERS SELECT FUND
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JUNE 20, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated June 20, 1996 of The Insiders Select Fund (the "Portfolio") of
The Bear Stearns Funds (the "Fund"), as each may be revised from time to time.
To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc.
("PFPC"), Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington,
Delaware 19899-8960, call 1-800-447-1139 (in Delaware call collect
302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at
1-800-766-4111.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., serves as the Portfolio's investment
adviser. BSFM has engaged Symphony Asset Management ("Symphony"), a subsidiary
of BARRA, Inc., as the Portfolio's sub-investment adviser to manage the
Portfolio's day-to-day investment activities. BSFM and Symphony are referred to
herein collectively as the "Advisers."
Bear Stearns, an affiliate of BSFM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies........... B-2
Management of the Fund................................. B-12
Management Arrangements................................ B-16
Purchase and Redemption of Shares...................... B-20
Determination of Net Asset Value....................... B-21
Dividends, Distributions and Taxes..................... B-22
Portfolio Transactions................................. B-25
Performance Information................................ B-26
Information About the Fund............................. B-27
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors..................... B-28
Financial Statements................................... B-29
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Description
of the Fund."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Portfolio are insured by the FDIC (although such
insurance may not be of material benefit to the Portfolio, depending on the
principal amount of the CDs of each bank held by the Portfolio) and are subject
to Federal examination and to a substantial body of Federal law and regulation.
As a result of Federal or state laws and regulations, domestic branches of
domestic banks whose CDs may be purchased by the Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank or about a foreign bank than about a domestic bank.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation or by Federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, Federal branches licensed by the Comptroller of
the Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, by foreign branches of foreign banks or by
domestic branches of foreign banks, BSFM carefully evaluates such investments on
a case-by-case basis.
Repurchase Agreements. The Portfolio's custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by the Portfolio under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Portfolio. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, the Portfolio will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars, or primary government securities dealers reporting to the Federal
Reserve Bank of New York, with respect to securities of the type in which the
Portfolio may invest, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below the
resale price. The Advisers will monitor on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price. The
Portfolio will consider on an ongoing basis the credit worthiness of the
institutions with which it enters into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations.
Variable rate demand notes include variable amount master demand notes, which
are obligations that permit the Portfolio to invest fluctuating amounts at
varying rates of interest pursuant to direct arrangements between the Portfolio,
as lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the Portfolio may increase the
amount under the notes at any time up to the full amount provided by the note
agreement, or decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with floating and variable rate
demand obligations, the Advisers will consider, on an ongoing basis, earning
power, cash flow and other liquidity ratios of the borrower, and the borrower's
ability to pay principal and interest on demand. Such obligations frequently are
not rated by credit rating agencies, and the Portfolio may invest in them only
if at the time of an investment the borrower meets the criteria set forth in the
Portfolio's Prospectus for other commercial paper issuers.
Illiquid Securities. When purchasing securities that have not
been registered under the Securities Act of 1933, as amended, and are not
readily marketable, the Portfolio will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between the Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops for certain
unregistered securities purchased by the Portfolio pursuant to Rule 144A under
the Securities Act of 1933, as amended, the Portfolio intends to treat them as
liquid securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees has directed the Advisers to monitor carefully the Portfolio's
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information. To
the extent that, for a period of time, qualified institutional buyers cease
purchasing restricted securities pursuant to Rule 144A, the Portfolio's
investing in such securities may have the effect of increasing the level of
illiquidity in the Portfolio during such period.
Management Policies
The Portfolio engages in the following practices in
furtherance of its objective.
Options Transactions. The Portfolio may engage in options
transactions, such as purchasing or writing covered call or put options. The
principal reason for writing covered call options, which are call options with
respect to which the Portfolio owns the underlying security or securities, is to
realize, through the receipt of premiums, a greater return than would be
realized on the Portfolio's securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the premiums that the Portfolio may receive may be adversely affected as new
or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the time the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-
money," respectively. The Portfolio may write (a) in-the-money call options when
Symphony expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
Symphony expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when Symphony expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an
option continues, the Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Portfolio effects a closing purchase
transaction. The Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally
will purchase or write only those options for which Symphony believes there is
an active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. The Portfolio may purchase and
write put and call options on stock indexes listed on U.S. or
foreign securities exchanges or traded in the over-the-counter
market. A stock index fluctuates with changes in the market
values of the stocks included in the index.
Options on stock indexes are similar to options on stock
except that (a) the expiration cycles of stock index options are generally
monthly, while those of stock options are currently quarterly, and (b) the
delivery requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts. The
Portfolio may trade futures contracts and options on futures contracts in U.S.
domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange.
Initially, when purchasing or selling futures contracts the
Portfolio will be required to deposit with the Fund's custodian in the broker's
name an amount of cash or cash equivalents up to approximately 10% of the
contract amount. This amount is subject to change by the exchange or board of
trade on which the contract is traded and members of such exchange or board of
trade may impose their own higher requirements. This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Portfolio upon termination of the futures
position, assuming all contractual obligations have been satisfied. Subsequent
payments, known as "variation margin," to and from the broker will be made daily
as the price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Portfolio may elect to close the position
by taking an opposite position, at the then prevailing price, which will operate
to terminate the Portfolio's existing position in the contract.
Although the Portfolio intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Portfolio to substantial losses. If it is not possible, or the
Portfolio determines not, to close a futures position in anticipation of adverse
price movements, the Portfolio will be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may offset partially or completely losses
on the futures contract. However, no assurance can be given that the price of
the securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
In addition, to the extent the Portfolio is engaging in a
futures transaction as a hedging device, due to the risk of an imperfect
correlation between securities owned by the Portfolio that are the subject of a
hedging transaction and the futures contract used as a hedging device, it is
possible that the hedge will not be fully effective in that, for example, losses
on the portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. In futures contracts based on
indexes, the risk of imperfect correlation increases as the composition of the
Portfolio's investments varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, the
Portfolio may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect the
Portfolio's net investment results if market movements are not as anticipated
when the hedge is established.
Upon exercise of an option, the writer of the option will
deliver to the holder of the option the futures position and the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of options on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of each Portfolio.
Lending Portfolio Securities. To a limited extent, the
Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions, provided it receives cash collateral which at all times
is maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the Portfolio considers collateral consisting of U.S. Government
securities or irrevocable letters of credit issued by banks whose securities
meet the standards for investment by the Portfolio to be the equivalent of cash.
From time to time, the Portfolio may return to the borrower or a third party
which is unaffiliated with the Portfolio, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The Securities and Exchange Commission currently requires that
the following conditions must be met whenever portfolio securities are loaned:
(1) the Portfolio must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 8 as fundamental policies. These restrictions
cannot be changed, as to a Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting shares. Investment
restrictions numbered 9 through 14 are not
fundamental policies and may be changed by vote of a majority
of the Trustees at any time. The Portfolio may not:
1. Invest more than 25% of the value of its total assets in
the securities of issuers in any single industry, provided that there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Invest in commodities, except that the Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
3. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but the Portfolio may purchase and sell securities that
are secured by real estate or issued by companies that invest or deal in real
estate or real estate investment trusts.
4. Borrow money, except to the extent permitted under the 1940
Act. The 1940 Act permits an investment company to borrow in an amount up to
33-1/3% of the value of such company's total assets. For purposes of this
Investment Restriction, the entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the Portfolio may
lend its portfolio securities in an amount not to exceed 33-1/3% of the value of
its total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the Fund's
Board of Trustees.
6. Act as an underwriter of securities of other issuers,
except to the extent the Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities.
7. Issue any senior security (as such term is
defined in Section 18(f) of the 1940 Act).
8. Purchase securities on margin, but the Portfolio may make
margin deposits in connection with transactions in options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
9. Purchase securities of any company having less than three
years' continuous operations (including operations of any predecessor) if such
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
10. Invest in the securities of a company for the purpose of
exercising management or control, but the Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
12. Purchase, sell or write puts, calls or combinations
thereof, except as described in the Portfolio's Prospectus and Statement of
Additional Information.
13. Enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment compan-
ies, except to the extent permitted under the 1940 Act.
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of the Portfolio's shares in
certain states. Should the Fund determine that a commitment is no longer in the
best interest of the Portfolio and its shareholders, the Fund reserves the right
to revoke the commitment by terminating the sale of Fund shares in the state
involved.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information
as to their principal business occupations during at least the last five years,
are shown below. Each Trustee who is an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Position Principal Occupation
(and age) with Fund During Past Five Years
- ---------------- --------- -----------------------
<S> <C> <C>
Peter M. Bren (62) Trustee President of The Bren Co.;
2 East 70th Street President of Cole, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United
Belleville, IL 62223 States Senator of Illinois
from 1981 to 1993.
John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive
114 Nottingham Road Officer of McKernan
Auburn, ME 04210 Enterprises since January
1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy &
5300 Albemarle Street Associates since February
Bethesda, MD 20816 1996; Senior Vice President
of RJR Nabisco, Inc. from April
1989 to February 1996; Former
Deputy Chief of Staff-White
House from 1988 to January
1989.
Robert S. Reitzes* (51) Chairman Director of Mutual Funds-
245 Park Avenue of the Board Bear Stearns Asset
New York, NY 10167 Management and Senior
Managing Director of Bear Stearns
since March 1994; Co-Director
of Research and Senior
Chemical Analyst of C.J.
Lawrence/Deutsche Bank
Securities Corp. from January
1991 to March 1994.
Neil T. Eigen (53) President Chief Investment Officer and
245 Park Avenue Director of Equity Investments-
New York, NY 10167 Bear Stearns Asset Management
since 1992 and Senior
Managing Director of Bear Stearns
since 1990.
Peter B. Fox (44) Executive Senior Managing Director,
Three First National Vice President Bear Stearns, Public
Plaza Finance.
Chicago, IL 60602
William J. Montgoris (49) Executive Chief Financial Officer and
245 Park Avenue Vice President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (52) Vice President Managing Director, Legal
245 Park Avenue Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (37) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Associate Director of
Bear Stearns from September 1993
to September 1994; Executive Vice
President of BSFM since March 1992;
Vice President of Bear Stearns from
March 1992 to September 1993;
First Vice President of Mitchell
Hutchins Asset Management
Inc. ("Mitchell Hutchins") from
June 1988 to March 1992; and
Director of Funds Administration
Division of Mitchell Hutchins
from November 1991 to March 1992.
Raymond D. DeAngelo (35) Vice President Associate Director of Bear
245 Park Avenue Stearns since November 1994;
New York, NY 10167 Vice President and Manager--Mutual
Fund Sales Support Group of Kidder,
Peabody & Co. Incorporated ("Kidder
Peabody") from August 1994 to November
1994; Vice President and Manager--Unit
Investment Trust Department of Kidder
Peabody from August 1992 to August
1994; Vice President and Wholesaler of
Nike Securities, L.P.(formerly
Clayton Brown & Associates) from
September 1991 to August 1992;
Assistant Vice President and Wholesaler of
Clayton Brown & Associates prior thereto.
Ellen T. Arthur (43) Secretary Associate Director of Bear
245 Park Avenue Stearns since January 1996;
New York, NY 10167 Senior Counsel and Corporate
Vice President of PaineWebber
Incorporated from April
1989 to September 1995.
Vincent L. Pereira (30) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September 1995
New York, NY 10167 and Vice President of BSFM
since May 1993; Vice President
to September 1995; Assistant
Vice President of Mitchell
Hutchins from October 1992 to
May 1993; Senior Relationship
Manager of Mitchell Hutchins from
June 1988 to October 1992.
Eileen M. Coyle (30) Assistant Vice President of Bear Stearns
245 Park Avenue Secretary since September 1995;
New York, NY 10167 Accounting Supervisor and
Senior Accountant for Bear
Stearns since 1990.
</TABLE>
The Fund pays its non-affiliated Board members an annual
retainer of $5,000 and a per meeting fee of $500 and reimburses them for their
expenses. The Fund does not compensate its officers. The aggregate amount of
compensation paid to each Board member by the Fund and by all other funds in the
Bear Stearns Family of Funds for which such person is a Board member (the number
of which is set forth in parenthesis next to each Board member's total
compensation) for the fiscal year ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund* Fund's Expenses Retirement Board Members
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $12,000(2)
Alan J. Dixon $7,000 None None $7,000(1)
John R. McKernan, Jr. $7,000 None None $12,000(2)
M.B. Oglesby, Jr. $7,000 None None $12,000(2)
Robert S. Reitzes None None None None(2)
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $10,100 for Board members of the Fund, as a group.
</TABLE>
Board members and officers of the Fund, as a group, owned less
than 1% of the Portfolio's shares outstanding on May 31, 1996.
For so long as the Plan described in the section captioned
"Management Arrangements- Servicing Plan" remains
in effect, the Fund's Trustees who are not "interested persons" of the Fund, as
defined in the 1940 Act, will be selected and nominated by the Trustees who are
not "interested persons" of the Fund.
No meetings of shareholders of the Fund will be held for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Under the 1940 Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Fund's Agreement and Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Management
of the Fund."
Investment Advisory Agreement. BSFM provides investment
advisory services to the Portfolio pursuant to the Investment Advisory Agreement
(the "Agreement") dated February 22, 1995, with the Fund. The Agreement is
subject to annual approval by (i) the Fund's Board of Trustees or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event the continuance also is approved by
a majority of the Board of Trustees who are not "interested persons" (as defined
in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Board of Trustees, including a
majority of the Trustees who are not "interested persons" of any party to the
Agreement, last approved the Agreement at a meeting as to the Portfolio, held on
February 22, 1995. The Agreement is terminable, as to the Portfolio, without
penalty, on 60 days' notice, by the Fund's Board of Trustees or by vote of the
holders of a majority of the Portfolio's shares, or, on not less than 90 days'
notice, by BSFM. As to the Portfolio, the Agreement will terminate automatically
in the event of its assignment (as defined in the 1940 Act).
BSFM is a wholly owned subsidiary of The Bear Stearns
Companies Inc. The following persons are directors and/or
senior officers of BSFM: Mark A. Kurland, Chief Executive Officer,
President, Chairman of the Board and Director; Robert S.
Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice
Chairman of the Board; Frank J. Maresca, Executive Vice
President; Neil T. Eigen, Executive Vice President; Vincent L.
Pereira, Treasurer and Secretary; and Michael Minikes, Warren J.
Spector and Robert M. Steinberg, Directors.
As compensation for BSFM's advisory services, the Fund has
agreed to pay BSFM a monthly fee at the annual rate of 1% of value of the
Portfolio's average daily net assets which will be adjusted monthly ("Monthly
Performance Adjustment") depending on the extent to which the Portfolio's
investment performance exceeded or was exceeded by the percentage change in the
investment record of the S&P 500 Index. The Monthly Performance Adjustment may
increase or decrease the total advisory fee payable to BSFM by up to .50% per
year of the value of the Portfolio's average daily net assets. For the period
from June 16, 1995 (commencement of operations) through March 31, 1996, the
investment advisory fees payable amounted to $116,606. This amount was waived
pursuant to an undertaking by BSFM, resulting in no fees being paid by the
Portfolio.
Sub-Investment Advisory Agreement. Symphony provides
investment advisory assistance and day-to-day management of the Fund's portfolio
pursuant to the Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement")
dated February 22, 1995 between Symphony and BSFM. The Sub-Advisory Agreement is
subject to annual approval by (i) the Fund's Board of Trustees or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event the continuance also is approved by
a majority of the Board of Trustees who are not "interested persons" (as defined
in the 1940 Act) of the Fund or Symphony, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Board of Trustees,
including a majority of the Trustees who are not "interested persons" of any
party to the Sub-Advisory Agreement, last approved the Sub-Advisory Agreement at
a meeting held on February 22, 1995. The Sub-Advisory Agreement is terminable
without penalty (i) by BSFM on 60 days' notice, (ii) by the Fund's Board of
Trustees, on 60 days' notice, or by vote of the holders of a majority of the
Fund's shares or (iii) on not less than 90 days' notice, by Symphony. The Sub-
Advisory Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act) or upon termination of the Agreement for any
reason.
Symphony provides day-to-day management of the Portfolio's
portfolio of investments in accordance with the stated policies of the Fund,
subject to the supervision of BSFM and the approval of the Fund's Board of
Trustees. BSFM and Symphony provide the Fund with Investment Officers who are
authorized by the Board of Trustees to execute purchases and sales of
securities. All purchases and sales are reported for the Board of Trustees'
review at the meeting subsequent to such transactions.
Under the terms of the Sub-Advisory Agreement, BSFM has agreed
to pay Symphony a monthly fee at the annual rate of .45 of 1% of the value of
the Portfolio's average daily net assets, which will be adjusted by a Monthly
Performance Adjustment. The Monthly Performance Adjustment applicable to
Symphony may increase or decrease the total advisory fee payable to Symphony by
up to .25% per year of the value of the Portfolio's average daily net assets.
For the period June 16, 1995 (commencement of operations) through March 31,
1996, no fees were paid by BSFM to Symphony pursuant to an undertaking by
Symphony.
Administration Agreement. BSFM provides certain administrative
services to the Fund pursuant to the Administration Agreement dated February 22,
1995, with the Fund. The Administration Agreement will continue until February
22, 1998 and thereafter will be subject to annual approval by (i) the Fund's
Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Portfolio, provided that in either event its
continuance also is approved by a majority of the Fund's Board members who are
not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by
vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement is terminable without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
Portfolio's shares or upon not less than 90 days' notice by BSFM. The
Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
As compensation for BSFM's administrative services, the Fund
has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the
Portfolio's average daily net assets. For the period from June 16, 1995
(commencement of operations) through March 31, 1996, the administration fee
accrued amounted to $21,806 and the amount paid was $18,824.
Administrative Services Agreement. PFPC provides
certain administrative services to the Fund pursuant to the Administrative
Services Agreement dated February 22, 1995, with the Fund. The Administrative
Services Agreement is terminable upon 60 days' notice by either the Fund or
PFPC. PFPC may assign its rights or delegate its duties under the Administrative
Services Agreement to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the
Fund 30 days' notice; (ii) the delegate (or assignee) agrees with PFPC and the
Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and
such delegate (or assignee) promptly provide information requested by the Fund
in connection with such delegation.
As compensation for PFPC's administrative services, the Fund
has agreed to pay PFPC a monthly fee at the rate set forth in the Portfolio's
Prospectus. For the period from June 16, 1995 (commencement of operations)
through March 31, 1996, the administrative fee payable by the Portfolio amounted
to $104,500. This amount was reduced to $44,282 as a result of a waiver of fees
by PFPC.
Distribution and Shareholder Servicing Plan. Rule
12b-1 (the "Rule") adopted by the Securities and Exchange Commission under the
1940 Act provides, among other things, that an investment company may bear
expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. The Fund's Trustees have adopted such a plan with
respect to Class A and Class C shares (the "Plan"). The Fund's Trustees believe
that there is a reasonable likelihood that the Plan will benefit the Portfolio
and the holders of its Class A and Class C shares.
A quarterly report of the amounts expended under the Plan, and
the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, the Plan provides that it may not be
amended to increase materially the costs which holders of a Class of shares may
bear pursuant to the Plan without approval of such shareholders and that other
material amendments of the Plan must be approved by the Board of Trustees, and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or in the related Plan agreements, by vote cast in person
at a meeting called for the purpose of considering such amendments. The Plan and
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan was so approved
on January 23, 1996. The Plan is terminable at any time by vote of a majority of
the Trustees who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Plan or in the Plan agreements or by
vote of holders of a majority of the Portfolio's relevant Class of shares. A
Plan agreement is terminable, as to the Portfolio, without penalty, at any time,
by such vote of the Trustees, upon not more than 60 days' written notice to the
parties to such agreement or by vote of the holders of a majority of the
Portfolio's Class A and Class C shares. A Plan agreement will terminate
automatically, as to the Portfolio, in the event of its assignment (as defined
in the 1940 Act).
For the period from June 16, 1995 (commencement of operations)
through March 31, 1996, the Portfolio paid Bear Stearns $38,956 with respect to
Class A shares and $61,049 with respect to Class C shares under the Plan. With
respect to Class A, of the $38,956 paid under the Plan, $38,621 was paid to
brokers or dealers and $335 was paid for advertising. With respect to Class C,
the entire amount paid under the Plan was paid to brokers or dealers.
Expenses. All expenses incurred in the operation of the Fund
are borne by the Fund, except to the extent specifically assumed by BSFM. The
expenses borne by the Fund 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, Symphony or their 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 expenses, costs of maintaining the Fund's existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a particular portfolio are charged against
the assets of that portfolio; other expenses of the 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.
Expense Limitation. BSFM agreed that if, in any fiscal year,
the aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest
on borrowings and (with the prior written consent of the necessary state
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSFM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the Portfolio's Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolio's
distributor on a best efforts basis pursuant to an agreement dated February 22,
1995 which is renewable annually. For the period from June 16, 1995
(commencement of operations) through March 31, 1996, Bear Stearns retained
$502,600 from the sales loads on Class A shares and $9,000 from contingent
deferred sales charges ("CDSC") on Class C shares. In some states, banks or
other institutions effecting transactions in Portfolio shares may be required to
register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order
may be delayed if PFPC, the Portfolio's transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the
method of computing the offering price of the Class A shares of the Portfolio.
The example assumes a purchase of Class A shares aggregating less than $50,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of the Class A shares on March 31, 1996.
Net Asset Value per Share $14.00
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.70
Per Share Offering Price to
the Public $14.70
Redemption Commitment. The Portfolio has committed itself to
pay in cash all redemption requests by any shareholder of record, limited in
amount during any 90-day period to the lesser of $250,000 or 1% of the value of
the Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (b) when trading in the markets the Portfolio ordinarily utilizes is
restricted, or when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of the Portfolio's investments or
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
to protect Portfolio shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "How to Buy
Shares."
Valuation of Portfolio Securities. Portfolio securities,
including covered call options written by the Portfolio, are valued at the
last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available.
Short-term investments are carried at amortized cost, which approximates value.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by the
Fund's Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each Class, the per share net
asset value of each Class will differ.
Restricted securities, as well as securities or other assets
for which market quotations are not readily available, or are not valued by
a pricing service approved by the Board of Trustees, are valued at fair value as
determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Trustees generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Trustees if the Trustees believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Trustees.
New York Stock Exchange Closings. The holidays (as observed)
on which the New York Stock Exchange is closed currently are: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
Management of the Fund believes that the Portfolio has
qualified for the fiscal year ended March 31, 1996 as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). The Portfolio intends to continue to so qualify if qualification is in
the best interests of its shareholders. Qualification as a regulated investment
company relieves the Portfolio from any liability for Federal income taxes on
net investment income and net realized securities gains to the extent that such
income and gains are distributed to shareholders in accordance with applicable
provisions of the Code. The term "regulated investment company" does not imply
the supervision of management or investment practices or policies by any
government agency.
Any dividend or distribution paid shortly after an investor's
purchase may have the effect of reducing the net asset value of the shares
below the cost of the investment. Such a dividend or distribution would be a
return of investment in an economic sense, although taxable as stated above. In
addition, the Code provides that if a shareholder holds shares of the regulated
investment company for six months or less and has received a capital gain
distribution with respect to such shares, any loss incurred on the sale of such
shares will be treated as long-term capital loss to the extent of the capital
gain distribution received.
Depending on the composition of a regulated investment
company's income, dividends paid by the regulated investment company from net
investment income may qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders ("dividends received deduction"). In
general, dividend income of the regulated investment company distributed to
qualifying corporate shareholders will be eligible for the dividends received
deduction only to the extent that (i) the regulated investment company's income
consists of dividends paid by U.S. corporations and (ii) the regulated
investment company would have been entitled to the dividends received deduction
with respect to such dividend income if the regulated investment company were
not a regulated investment company under the Code. The dividends received
deduction for qualifying corporate shareholders may be further reduced if the
shares of the regulated investment company held by such shareholders with
respect to which dividends are received are treated as debt-financed or deemed
to have been held for less than 46 days. In addition, the Code provides other
limitations with respect to the ability of a qualifying corporate shareholder to
claim the dividends received deduction in connection with holding shares of a
regulated investment company.
Ordinarily, gains and losses realized from portfolio
transactions will be treated as capital gain and loss. However, a portion of the
gain or loss from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial forward futures and option
contracts and certain preferred stock) may be treated as ordinary income or loss
under Section 988 of the Code. In addition, all or a portion of any gain
realized from the sale or other disposition of certain market discount bonds
will be treated as ordinary income under Section 1276. Finally, all or a portion
of the gain realized from engaging in "conversion transactions" may be treated
as ordinary income under Section 1258. "Conversion transactions" are defined to
include certain forward, futures, option and straddle transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by a
regulated investment company from certain futures and forward contracts and
options transactions will be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. Gain or loss will arise upon exercise or
lapse of such contracts and options as well as from closing transactions.
In addition, any such contracts or options remaining unexercised at the end of
a regulated investment company's taxable year will be treated as sold for their
then fair market value, resulting in additional gain or loss to such regulated
investment company characterized in the manner described above.
Offsetting positions held by a regulated investment company
involving certain contracts or options may constitute "straddles." "Straddles"
are defined to include "offsetting positions" in actively traded personal
property. The tax treatment of "straddles" is governed by Sections 1092 and 1258
of the Code, which, in certain circumstances, overrides or modifies the
provisions of Section 1256 and 988. If a regulated investment company were
treated as entering into "straddles" by reason of its engaging in certain
forward contracts or options transactions, such "straddles" would be
characterized as "mixed straddles" if the contracts or options transactions
comprising a part of such "straddles" were governed by Section 1256 of the Code.
A regulated investment company may make one or more elections with respect to
"mixed straddles." Depending on which election is made, if any, the results to a
regulated investment company may differ. If no election is made to the extent
the "straddle" and conversion transactions rules apply to positions established
by a regulated investment company, losses realized by the regulated investment
company will be deferred to the extent of unrealized gain in the offsetting
position. Moreover, as a result of the "straddle" rules, short-term capital loss
on "straddle" positions may be recharacterized as long-term capital loss, and
long-term capital gains may be treated as short-term capital gains or ordinary
income.
Investment by a regulated investment company in securities
issued or acquired at a discount, or providing for deferred interest or for
payment of interest in the form of additional obligations could under special
tax rules affect the amount, timing and character of distributions to
shareholders by causing a regulated investment company to recognize income prior
to the receipt of cash payments. For example, a regulated investment company
could be required to accrue a portion of the discount (or deemed discount) at
which the securities were issued and to distribute such income in order to
maintain its qualification as a regulated investment company. In such case, the
regulated investment company may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
PORTFOLIO TRANSACTIONS
Symphony assumes general supervision over placing orders on
behalf of the Portfolio for the purchase or sale of investment securities.
Allocation of brokerage transactions, including their frequency, is made in
Symphony's best judgment and in a manner deemed fair and reasonable to
shareholders. The primary consideration is prompt execution of orders at the
most favorable net price. Subject to this consideration, the brokers selected
will include those that supplement Symphony's research facilities with
statistical data, investment information, economic facts and opinions.
Information so received is in addition to and not in lieu of services required
to be performed by Symphony and Symphony's fees are not reduced as a consequence
of the receipt of such supplemental information.
Such information may be useful to Symphony in serving both the
Portfolio and the other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to Symphony in carrying out its obligations to the Portfolio. Sales of Portfolio
shares by a broker may be taken into consideration, and brokers also will be
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more funds advised or administered by Symphony being engaged simultaneously
in the purchase or sale of the same security. Certain of Symphony's transactions
in securities of foreign issuers may not benefit from the negotiated commission
rates available to the Portfolio for transactions in securities of domestic
issuers. When transactions are executed in the over-the-counter market, the
Portfolio will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as
within a year. The turnover rate for the Portfolio for the period June 16, 1995
(commencement of operations) through March 31, 1996 was 93%. In periods in which
extraordinary market conditions prevail, Symphony will not be deterred from
changing investment strategy as rapidly as needed, in which case higher turnover
rates can be anticipated which would result in greater brokerage expenses. The
overall reasonableness of brokerage commissions paid is evaluated by Symphony
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
To the extent consistent with applicable provisions of the
1940 Act and the rules and exemptions adopted by the Securities and Exchange
Commission thereunder, the Board of Trustees has determined that transactions
for the Portfolio may be executed through Bear Stearns if, in the judgment of
BSFM, the use of Bear Stearns is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for the
Portfolio on the floor of any national securities exchange, provided (i) on the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees of
the aggregate compensation it earned on such transactions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
For the period June 16, 1995 (commencement of operations)
through March 31, 1996, the Portfolio paid total brokerage commissions of
$38,019, of which $26,339 was paid to Bear Stearns. The Portfolio paid 69.28% of
its commissions to Bear Stearns, and, with respect to all the securities
transactions for the Portfolio, 39.40% of the transactions involved commissions
being paid to Bear Stearns.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return is calculated by determining the
ending redeemable value of an investment purchased at net asset value (maximum
offering price in the case of Class A) per share with a hypothetical $1,000
payment made at the beginning of the period (assuming the reinvestment of
dividends and distributions), dividing by the amount of the initial investment,
taking the "n"th root of the quotient (where "n" is the number of years in the
period) and subtracting 1 from the result. A Class' average annual total return
figures calculated in accordance with such formula assume that in the case of
Class A the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or in the case of Class C the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The total return for Class A for the period June 16, 1995
(commencement of investment operations) to March 31, 1996 was 11.20%. Based on
net asset value per share, the total return for Class A was 16.75% for this
period. The total return for Class C for the same period was 15.33%. Without
giving effect to the applicable CDSC, the total return for Class C was 16.33%
for this period. The total return for Class Y for the period June 20, 1995
(commencement of initial public offering) to March 31, 1996 was 15.98%.
Total return is calculated by subtracting the amount of the
Portfolio's net asset value (maximum offering price in the case of Class A) per
share at the beginning of a stated period from the net asset value per share at
the end of the period (after giving effect to the reinvestment of dividends and
distributions during the period and any applicable CDSC), and dividing the
result by the net asset value (maximum offering price in the case of Class A)
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class C shares, which, if reflected would reduce the
performance quoted.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid
for in accordance with the terms of the offering, is fully paid and
non-assessable. Portfolio shares have no preemptive, subscription or conversion
rights and are freely transferable.
The Fund will send annual and semi-annual financial statements
to all its shareholders.
As of May 31, 1996, the following shareholders owned, directly
or indirectly, 5% or more of the indicated class of the Portfolio's outstanding
shares.
Percent of Class Y
Name and Address Shares Outstanding
Master Works 401k Trustee 32.2%
FBO Barra 401k Plan
c/o Wells Fargo Bank
420 Montgomery St., 8th Flr
San Francisco, CA 94104
Bear Stearns Securities Corp. 5.6%
FBO 048-02528-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
A shareholder who beneficially owns, directly or indirectly,
more than 25% of a Portfolio's voting securities may be deemed a "control
person" (as defined in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center,
Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's
custodian. Under the custody agreement with the Portfolio, CTC holds the
Portfolio's securities and keeps all necessary accounts and records. For its
services, CTC receives an annual fee of the greater of .015% of the value of the
domestic assets held in custody or $5,000, such fee to be payable monthly based
upon the total market value of such assets, as determined on the last business
day of the month. In addition, CTC receives certain securities transactions
charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, is the Portfolio's transfer agent, dividend
disbursing agent and registrar. Neither CTC nor PFPC has any part in determining
the investment policies of the Portfolio or which securities are to be purchased
or sold by the Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New
York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of beneficial interest being sold pursuant to the Portfolio's Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New
York, New York 10281-1434, independent auditors, have been
selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolio's Annual Report to Shareholders for the fiscal
year ended March 31, 1996 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
into this Statement of Additional Information.
BSF-S-003-06
<PAGE>
THE BEAR STEARNS FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements for the Large Cap Value Portfolio, Small
Cap Value Portfolio, Total Return Bond Portfolio, S&P STARS
Portfolio, S&P STARS Master Series and The Insiders Select
Fund.
Contained in Part A of the Registration Statement is
Condensed Financial Information.
Contained in Part B through incorporation by reference to
the Annual Report filed with the Securities and Exchange
Commission on May 29, 1996 are the following:
(1) Portfolio of Investments as of March 31, 1996 (excluding S&P
STARS Portfolio).
(2) Statements of Assets and Liabilities as of March 31, 1996.
(3) Statements of Operations for the period ended March 31,
1996.
(4) Statements of Changes in Net Assets for the period ended
March 31, 1996.
(5) Financial Highlights for the period ended March 31, 1996.
(6) Report of Deloitte & Touche LLP, Independent Auditors, dated
May 9, 1996.
(b) Exhibits:
(1)(a) Agreement and Declaration of Trust is incorporated by
reference to Exhibit (1)(a) of Post-Effective Amendment No.
7 to the Registration Statement on Form N-1A, filed November
10, 1995.
(1)(b) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1)(b) of
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A, filed November 10, 1995.
(2) By-Laws are incorporated by reference to Exhibit (2) of
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A, filed November 10, 1995.
(5)(a) Investment Advisory Agreement between the Registrant and
Bear Stearns Funds Management Inc. ("BSFM") is incorporated
by reference to Exhibit (5)(a) of Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A, filed
November 10, 1995.
(5)(b) Administration Agreement between the Registrant and BSFM
is incorporated by reference to Exhibit (5)(b) of
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A, filed November 10, 1995.
(5)(c) Administrative Services Agreement, as amended, between the
Registrant and PFPC Inc. is incorporated by reference to
Exhibit (5)(c) of Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A, filed November 10,
1995.
(5)(d) Sub-Investment Advisory Agreement between BSFM and
Symphony Asset Management is incorporated by reference to
Exhibit (5)(d) of Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A, filed November 10,
1995.
(6)(a) Distribution Agreement between the Registrant and Bear,
Stearns & Co. Inc. is incorporated by reference to Exhibit
(6)(a) of Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A, filed November 10, 1995.
(6)(b) Form of Dealer Agreement.
(8) Custody Agreements between the Registrant and Custodial
Trust Company are incorporated by reference to Exhibit (8)
of Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A, filed November 10, 1995.
(10) Opinion (including consent) of Stroock & Stroock & Lavan is
incorporated by reference to Exhibit (10) of Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A,
filed November 10, 1995.
(11) Consent of Independent Auditors.
(15) Distribution and Shareholder Servicing Plan is incorporated
by reference to Exhibit (15) of Post- Effective Amendment
No. 7 to the Registration Statement on Form N-1A, filed
November 10, 1995.
(16) Schedules of Computation of Performance Data are
incorporated by reference to Exhibit (16) of Post- Effective
Amendment No. 5 to the Registration Statement on Form N-1A,
filed September 1, 1995 and to Exhibit (16) of
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A, filed on November 10, 1995.
(17) Financial Data Schedule.
(18) Rule 18f-3 Plan, as revised.
Other Exhibit: (a) Certificate of Corporate Secretary is
incorporated by reference to Other
Exhibit (a) of Post-Effective Amendment
No. 7 to the Registration Statement on
Form N-1A, filed November 10, 1995.
(b) Powers of attorney are incorporated by
reference to Other Exhibit (b) of Post-
Effective Amendment No. 8 to the
Registration on Form N-1A, filed April
12, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable
Item 26. NUMBER OF HOLDERS OF SECURITIES
(1) (2)
Number of Record
TITLE OF CLASS HOLDERS*
Shares of beneficial interest,
$.001 par value per share,
of the following portfolios:
S&P STARS Portfolio--Class A 3,330
S&P STARS Portfolio--Class C 1,963
S&P STARS Portfolio--Class Y 290
Large Cap Value Portfolio--Class A 148
Large Cap Value Portfolio--Class C 179
Large Cap Value Portfolio--Class Y 92
Small Cap Value Portfolio--Class A 549
Small Cap Value Portfolio--Class C 481
Small Cap Value Portfolio--Class Y 236
Total Return Bond Portfolio--Class A 124
Total Return Bond Portfolio--Class C 46
Total Return Bond Portfolio--Class Y 20
The Insiders Select Fund--Class A 1,192
The Insiders Select Fund--Class C 700
The Insiders Select Fund--Class Y 95
- --------------
* As of May 31, 1996.
Item 27. INDEMNIFICATION
Reference is made to Article VIII of the Registrant's
Declaration of Trust previously filed as Exhibit 1(a). The application of
these provisions is limited by Article 10 of the Registrant's ByLaws filed as
Exhibit 2 and by the following undertaking set forth in the rules promulgated
by the Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to trustees,
officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is,
therefore, unenforce- able. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by
a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
Reference also is made to the Distribution Agreement
previously filed as Exhibit 6(a).
ITEM 28(A). BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Registrant is fulfilling the requirement of this Item
28(a) to provide a list of the officers and directors of Bear Stearns Funds
Management Inc. ("BSFM"), the investment adviser of the Registrant, together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by BSFM or those of its officers and
directors during the past two years, by incorporating by reference the
information contained in the Form ADV filed with the SEC pursuant to the
Investment Advisers Act of 1940 by BSFM (SEC File No. 801-29862).
ITEM 28(B). BUSINESS AND OTHER CONNECTIONS OF SUB-INVESTMENT ADVISER
Registrant is fulfilling the requirement of this Item
28(b) to provide a list of the officers and directors of Symphony Asset
Management ("Symphony"), the sub-investment adviser of the Registrant's The
Insiders Select Fund, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by
Symphony or those of its officers and directors during the past two years, by
incorporating by reference the information contained in the Form ADV filed
with the SEC pursuant to the Investment Advisers Act of 1940 by Symphony (SEC
File No. 801-46388).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as
principal underwriter or depositor for the following investment
companies:
o Municipal Securities Trust, High Income Series 1 (and
Subsequent Series)
o Bear Stearns Investment Trust -- Emerging Markets Debt Fund
(b) Set forth below is a list of each executive officer
and director of Bear Stearns. The principal business address of each such
person is 245 Park Avenue, New York, New York 10167, except as set forth
below.
Positions and Positions and
Offices with Offices with
NAME BEAR STEARNS REGISTRANT
DIRECTORS
Alan C. Greenberg Chairman
James E. Cayne
John L. Knight
Mark E. Lehman
Michael L. Tarnopol
Alan D. Schwartz
John H. Slade Director Emeritus
Warren J. Spector
EXECUTIVE OFFICERS
Alan C. Greenberg Chairman of Board
James E. Cayne Chief Executive Officer/
President
William J. Montgoris Chief Operating Officer/
Chief Financial Officer/
Chief Operations
Officer (designation)
Michael L. Tarnopol Executive Vice President
Alan D. Schwartz Executive Vice President
Warren J. Spector Executive Vice President
Kenneth L. Edlow Secretary
Michael Minikes Treasurer
Michael J. Abatemarco(1) Controller/Assistant
Secretary
- --------
(1) Michael J. Abatemarco's principal business address is
1 MetroTech Center North, Brooklyn, New York 11201-3859.
Mark E. Lehman Executive Vice President-
General Counsel
Chief Legal Officer
(designation)
Samuel L. Molinaro, Jr. Senior Vice President -
Finance
Frederick B. Casey Assistant Treasurer
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
1. Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
2. The Bear Stearns Funds
245 Park Avenue
New York, New York 10167
3. Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
4. PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes
(1) to call a meeting of shareholders for the purpose of voting
upon the question of removal of a trustee or trustees when
requested in writing to do so by the holders of at least 10%
of the Registrant's outstanding shares of beneficial
interest and in connection with such meeting to comply with
the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications; and
(2) to furnish each person to whom a prospectus is delivered
with a copy of its most current annual report to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies that it meets
all of the requirements for effectiveness of the Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 18th day of June, 1996.
THE BEAR STEARNS FUNDS
(Registrant)
By: /S/ NEIL T. EIGEN*
-------------------------
Neil T. Eigen, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/S/ NEIL T. EIGEN* President (Principal June 18, 1996
- ------------------------- Executive Officer)
Neil T. Eigen
/S/ FRANK J. MARESCA Vice President and June 18, 1996
- ------------------------ Treasurer
Frank J. Maresca (Principal Financial
and Accounting Officer)
/S/ PETER M. BREN* Trustee June 18, 1996
- -------------------------
Peter M. Bren
/S/ ALAN J. DIXON* Trustee June 18, 1996
- -------------------------
Alan J. Dixon
/S/ JOHN R. MCKERNAN, JR.* Trustee June 18, 1996
- -------------------------
John R. McKernan, Jr.
/S/ M.B. OGLESBY, JR.* Trustee June 18, 1996
- -------------------------
M.B. Oglesby, Jr.
/S/ ROBERT S. REITZES* Trustee June 18, 1996
- -------------------------
Robert S. Reitzes
* By: /S/ FRANK J. MARESCA
---------------------
Frank J. Maresca,
Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed, in respect of Registrant's S&P STARS
Portfolio only, by the undersigned, thereunto duly authorized, in the City of
New York and State of New York on the 18th day of June, 1996.
S&P STARS FUND
By: /S/ BARRY NIX*
--------------------
Barry Nix, President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to Registration Statement has been signed below, in respect of
Registrant's S&P STARS Portfolio only, by the following persons in the
capacities and on the dates indicated.
/S/ BARRY NIX* President June 18, 1996
- ------------------------- (Principal Executive
Barry Nix Officer)
/S/ JAMES FERGUS MCKEON* Treasurer and June 18, 1996
- ------------------------- Secretary
James Fergus McKeon Principal Financial
and Accounting Officer)
/S/ ROBERT S. REITZES* Chairman of the June 18, 1996
- -------------------------- Board
Robert S. Reitzes
/S/ JOHN J. DANILOVICH* Trustee June 18, 1996
- -------------------------
John J. Danilovich
/S/ VINCENT ANTHONY WALSH* Trustee June 18, 1996
- -------------------------
Vincent Anthony Walsh
* By: /S/ FRANK J. MARESCA
---------------------
Frank J. Maresca,
Attorney-in-Fact
THE BEAR STEARNS FUNDS
Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A under
the Securities Act of 1933 and
the Investment Company Act of 1940
EXHIBITS
INDEX TO EXHIBITS
(6)(b) Form of Dealer Agreement
(11) Consent of Independent Auditors
(17) Financial Data Schedule
(18) Rule 18f-3 Plan, as revised
<PAGE>
Exhibit 6(b)
THE BEAR STEARNS FUNDS
Shares of Beneficial Interest
DEALER AGREEMENT
________________, 199_
Ladies and Gentlemen:
Bear, Stearns & Co. Inc. ("Bear Stearns") has entered into a distribution
agreement (the "Distribution Agreement"), dated February 22, 1995 with The Bear
Stearns Funds (the "Trust"), pursuant to which Bear Stearns has agreed to act as
distributor (the "Distributor") of shares of each Class of each Series of the
Trust set forth on Schedule 1 hereto, as such Schedule may be revised from time
to time (each, a "Series"). For purposes of this Agreement, the term "Shares"
shall mean the authorized shares of the relevant Series or Class of the Trust,
as the case may be.
This Dealer Agreement shall herein be referred to as the "Agreement." For
purposes of this Agreement, "Bear Stearns" shall mean Bear, Stearns & Co. Inc.
in our capacity as Distributor.
1. The Offering. The Shares will be offered initially during an
initial offering period (the "Initial Offering Period") for those Series set
forth as having an Initial Offering Period on Schedule 1. The Initial Offering
Period, for each Series subject to one, will end on the date specified in the
relevant Prospectus. After the Initial Offering Period terminates, the Trust
intends to commence the continuous offering period (the "Continuous Offering
Period") referred to in the Prospectus relating to such Shares. Shares of the
other Series will be sold on a continuous basis.
2. Role of Bear Stearns. Pursuant to the Distribution Agreement, we
have agreed to use our best efforts to make arrangements for securities dealers
which can make the representation set forth in Section 7(b) of this Agreement to
solicit from the public orders to purchase Shares. You are hereby invited to
become one of such securities dealers (each such securities dealer, an
"Authorized Dealer"). This will confirm our mutual agreement as to the terms and
conditions applicable to your participation as an Authorized Dealer, such
agreement to be effective on your confirmation hereof. You understand (a) that
we may, at any time at our option, act as an Authorized Dealer, (b) that we are
seeking to enter into this Agreement in counterparts with you and certain other
securities dealers, which also may act as Authorized Dealers, (c) that, except
as we may otherwise agree with you, we may enter into agreements (which may or
may not be the same as this Agreement) with Authorized Dealers, (d) that the
Trust and we may modify, suspend, terminate or withdraw entirely the offering of
Shares at any time without giving notice to you pursuant to Section 11 and
without incurring any liability or obligation to you, (e) that we may, upon
notice, change the public offering price, sales load, or dealer allowance or
modify, cancel or change the terms of this Agreement, and (f) we shall be under
no liability to you except for lack of good faith and for obligations expressly
assumed by us herein. All purchases of Shares from, and redemptions of Shares
by, the Trust shall be effected through us acting on behalf of the Trust. You
understand that we shall have no obligation to sell Shares to you at such times
as we are not acting as Distributor for the Shares.
3. Role of Authorized Dealers. (a) As an Authorized Dealer, you shall
have no obligation to purchase or sell or to solicit the purchase or sale of
Shares. As, when and if you determine to purchase Shares or you receive a
customer order for the purchase of Shares and you determine to accept such
order, you shall comply with the procedures for the purchase of Shares set forth
in the relevant Prospectus and Statement of Additional Information as most
currently amended or supplemented (the "SAI"). The procedure relating to the
handling of orders shall be subject to such further instructions as we shall
forward to you in writing from time to time.
(b) You agree to offer Shares to the public at the then applicable
public offering price and subject to the minimum investment amount set forth in
the relevant Prospectus and SAI, subject to any waivers or reductions of sales
load (the "Sales Load") or dealer allowances (the "Dealer Allowances") as
described in the Prospectus as amended from time to time. Any amendment to a
Prospectus which affects the Sales Load, Dealer Allowances, waivers or discounts
shall not affect Sales Load, Dealer Allowances, discounts or waivers with
respect to sales on which orders have been accepted by us prior to the date of
notice of such amendment. Your placement of an order for Shares after the date
of any notice of such amendment shall conclusively evidence your agreement to be
bound thereby. The Trust and Bear Stearns reserve the right to modify the
minimum investment requirement, the subsequent investment requirement, the
manner in which Shares are offered and the Sales Load rates applicable to future
purchases of Shares. You also acknowledge that the amounts charged to the public
for Shares may include such transaction fees ("Transaction Fees") as may be
described in the relevant Prospectus and SAI. Bear Stearns shall make a
reasonable effort to notify you of any redetermination or suspension of the
public offering price, but Bear Stearns shall be under no liability for failure
to do so. Reduced Sales Loads also may be available as a result of a cumulative
discount or pursuant to a right of accumulation as set forth in the relevant
Prospectus. You agree to advise us promptly as to the amounts of any sales made
by you to the public qualifying for reduced Sales Loads.
(c) You agree to purchase Shares from us only to cover purchase orders
already received from your customers, or for your own bona fide investment. Any
order of Shares from us as part of an initial distribution for those Series set
forth as having an Initial Offering Period on Schedule 1 must be received by
Bear Stearns on or before the close of business on the last day of the Initial
Offering Period (the "Closing Date"); after the Closing Date and prior to the
commencement of the Continuous Offering Period, orders for Shares may be made by
you only in respect of orders from your customers who have purchased Shares as a
part of the initial distribution. You will not withhold placing with us orders
received from your customers so as to profit yourself as a result of such
withholding.
All orders for Shares are subject to acceptance or rejection by Bear
Stearns or the Trust in the sole discretion of either.
(d) In purchasing Shares through us, you shall rely solely on the
representations contained in the relevant Prospectus, relevant SAI and the
registration statement, as most recently amended (the "Registration Statement"),
relating to the Shares. You will not furnish to any person any information
relating to the Shares, the Trust, any Series or us that is inconsistent with
information contained in the relevant Prospectus, relevant SAI, the Registration
Statement or any printed information issued by the Trust or us as information
supplemental to such Prospectus or cause any advertisement to be published or
posted in any public place without our consent and the consent of the Trust.
(e) In all sales of Shares to the public, you shall act as dealer for
your own account, whether as agent or principal. Nothing herein shall be deemed
to constitute you or any other Authorized Dealer as agent for the Trust, us, or
any other Authorized Dealer. You agree not to act as our agent and not to claim
to act as our agent or as agent of any of the foregoing. You shall be deemed an
independent contractor and you shall have no authority to act for or represent
the Trust. You will not act as an "underwriter" or "distributor" of Shares, as
those terms are used in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations thereunder.
You agree to buy Shares only through us and not from any other sources
and to sell Shares only to us, as the Trust's redemption agent, and not to any
other purchasers.
(f) You agree to accept orders for the redemption of Shares and to
transmit to the Trust such orders and all additional material, as may be
required to complete the redemption as described in the relevant Prospectus and
SAI.
(g) You agree that we shall have full authority to act upon your
express instructions to repurchase or exchange Shares through us on behalf of
your customers under the terms and conditions provided in the relevant
Prospectus and SAI. You agree to hold us harmless as a result of any action
taken with respect to authorized repurchases or exchanges upon your express
instructions.
4. Compensation. (a) You will be entitled to receive that portion of
the Sales Load allocated to Authorized Dealers as set forth in the relevant
Prospectus in connection with purchases of Shares effected to or through you.
You acknowledge that the Prospectuses will set forth a description of waivers or
reduction of the Sales Load in certain cases and you hereby waive such portion
of the Sales Load otherwise allocated to you. We will promptly remit or cause to
be remitted to you, by wire transfer of same day funds to an account you shall
designate, that portion of the Sales Load or Transaction Fees, if any, to which
you are entitled, after deduction of the portion allocated to us, which was
received by us and not yet paid to you.
(b) If payment in Federal Funds is not received by the fifth business
day after the Subscription Date or, in case of orders during the Continuous
Offering Period, within five business days after the execution of the order,
Bear Stearns reserves the right, without any notice, to cancel the sale and to
hold you responsible for any loss, including loss of profits, suffered by Bear
Stearns or by the Trust resulting from such failure.
5. Orders and Payment for Shares. Upon receipt from you of any order
to purchase Shares and, if a new account, an Account Information Form, we shall
confirm such order to you in writing or by wire to be followed by a confirmation
in writing. Additional instructions may be forwarded to you from time to time.
Payment for Shares ordered from us shall be made in Federal Funds and
must be received by the Trust's agent, PFPC Inc., within five business days of a
receipt and acceptance by us of an order.
6. Blue Sky and Other Qualifications. The Trust has registered an
indefinite number of Shares under the Securities Act. Upon application by you,
we shall inform you as to any advice received by us concerning the jurisdictions
in which the Shares have been qualified for offer or sale or are exempt under
the securities or blue sky laws of such jurisdictions, but we assume no
obligation or responsibility as to your right to offer or sell Shares in any
jurisdiction (other than under the federal laws of the United States). If you
propose to offer or sell Shares outside the United States, its territories or
its possessions, you will take, at your expense, such action, if any, as may be
necessary to comply with the laws of such foreign jurisdictions.
7. Representations, Warranties and Undertakings. You represent and
warrant to and undertake that:
(a) You are familiar with Rule 15c2-8 under the Securities Exchange
Act of 1934 (the "Exchange Act"), Section 4(3) of Securities Act and Section
24(d) of the Investment Company Act relating to the distribution and delivery of
preliminary and final prospectuses and agree that you will comply therewith. You
agree to deliver thereafter to any purchaser whose Shares you are holding as
record holder copies of the annual and interim reports and proxy solicitation
materials relating to the Shares. You further agree to make reasonable efforts
to endeavor to obtain proxies from such purchasers whose Shares you are holding
as record holder. Additional copies of the Trust's Prospectuses, SAI, annual or
interim reports, proxy solicitation materials and any other printed information
supplemental to such material will be supplied to you as you reasonably request.
(b) You are a member of good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or, if you are not such a member, you are
a foreign bank, dealer or institution not eligible for membership in the NASD
which agrees to make no sales within the United States, its territories or its
possessions or to persons who are citizens thereof or residents therein, and in
making other sales to comply, as though you were a member of NASD, with the
provisions of Sections 8, 24 and 36 of Article III of the Rules of Fair Practice
of the NASD and with Section 25 thereof as that Section applies to a non-NASD
member broker or dealer in a foreign country.
(c) You undertake to comply with respect to your offering of Shares to
the public pursuant to this Agreement with all applicable provisions of the
Securities Act, the Exchange Act and the Investment Company Act and the rules
and regulations thereunder and with the applicable rules of the NASD.
(d) You represent that any compensation payable to you hereunder (i)
will be disclosed to your customers; (ii) will be authorized by your customers;
and (iii) will not result in an excessive fee to you. In addition, if an issue
relating to a Class' 12b-1 Plan (as defined below) is submitted for shareholder
approval, you will vote any Shares held for your own account in the same
proportion as the vote of the Shares held by your customers on such issue. You
further represent that in effecting the purchase or redemption of Shares in
accordance with the terms of this Agreement, you represent as follows: (i) you
shall act solely as agent for the account of your customer; (ii) purchases or
redemptions of Shares shall be initiated solely upon the instruction and order
of your customer; (iii) the customer will have full beneficial ownership of any
Shares purchased upon its authorization and order; and (iv) all transactions
shall be for the account of the customer and under no circumstances for your
account, and shall be without recourse to you. Under no circumstances will you
make any oral or written representations to the contrary.
8. 12b-1 Plan. Those Series or Classes set forth as having a 12b-1
Plan on Schedule 1 have adopted a plan under Rule 12b-1 of the Investment
Company Act (a "12b-1 Plan") as described in the Prospectuses. To the extent you
provide services of the type contemplated by the 12b-1 Plan, you may be entitled
to receive compensation from us as set forth in the 12b-1 Plan. All
compensation, including fees under the 12b-1 Plan, shall be payable to you only
to the extent that funds are received and in the possession of the Distributor.
9. Indemnification. The parties to this Agreement hereby agree to
indemnify and hold harmless each other, their officers and directors, and any
person who is or may be deemed to be a controlling person of each other, from
and against any losses, claims, damages, liabilities or expenses (including
reasonable fees of counsel) to which any such person or entity may become
subject insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arise out of or are based upon (a) any untrue
statement or alleged untrue statement of material fact, or any omission or
alleged omission to state a material fact made or omitted by it herein, or (b)
any willful misfeasance or gross misconduct by it in the performance of its
duties and obligations hereunder.
10. NSCC Indemnity - Shareholder and House Accounts. In consideration
of the Distributor liquidating, exchanging and/or transferring unissued Shares
for your customers without the use of original or underlying documentation
supporting such instruction (e.g. a signed stock power or signature guarantees),
you hereby agree to indemnify the Distributor and the Trust against any losses,
including reasonable attorney's fees, that may arise from such liquidation,
exchange and/or transfer of unissued Shares upon your direction. This
indemnification shall apply only to the liquidation, exchange and/or transfer of
unissued Shares in shareholder and house accounts executed as wire orders
transmitted via NSCC's Fund/SERV system. You represent and warrant to the Trust
and the Distributor that all such transactions shall be authorized by your
customers.
This indemnification shall not apply to any losses (including
attorneys fees) caused by the Distributor or the Trust to comply with any of
your instructions governing any of the above transactions, or any negligent act
or omission of the Distributor or the Trust, or any of their directors,
officers, employees or agents. All transactions shall be settled upon your
confirmation through NSCC transmission to the Distributor.
The Distributor or the Trust may revoke the indemnity contained in
this Section 10 upon written notice to each of the other parties hereto, and in
the case of such revocation, this indemnity agreement shall remain effective as
to trades made prior to such revocation.
11. Termination. Either party to this Agreement may cancel this
Agreement, as to any Series or Class, as the case may be, by written notice to
the other party. Such cancellation shall be effective upon receipt of such
notice. Bear Stearns agrees to cancel this Agreement upon instruction by a
majority of the Trustees who are not "interested persons" of the Trust (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of this Agreement or by a vote of a majority
of the relevant Series' or Class' outstanding voting securities.
12. Representations to Survive. The agreements, representations,
warranties and other statements set forth in or made pursuant to this Agreement
will remain in full force and effect, to the extent permitted by applicable law,
regardless of any investigation made by or on behalf of us or any Authorized
Dealer. The provisions of Sections 7 and 9 of this Agreement shall survive the
offer and sale of the Shares, to the extent permitted by applicable law, and the
termination or cancellation of this Agreement.
13. No Association. Nothing herein contained constitutes an agreement
to become partners with you or with any other Authorized Dealer, but you shall
be liable for your proportionate share of any tax, liability or expense based on
any claim arising from the sale of Shares under this Agreement. We shall not be
under any liability to you, except for obligations expressly assumed by us in
this Agreement and liabilities under Section 11(f) of the Securities Act of
1933, as amended, and no obligations on our part shall be implied or inferred
herefrom. We and you hereby elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as
amended, and agree not to take any position inconsistent with that election.
14. Recordkeeping. You will maintain all records required by law to be
kept by you relating to transactions in the Shares and, upon request by the
Trust, promptly make such of these records available to the Trust as the Trust
may reasonably request in connection with its operations.
15. Notices. Notices hereunder shall be deemed to have been duly given
if delivered by hand or facsimile (a) if to you, at your address or facsimile
number set forth below and (b) if to us, to Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Frank J. Maresca or, in each case,
such other address as may be notified to the other party.
16. Amendments. We may modify this Agreement at any time by written
notice to you. The first order placed by you subsequent to the giving of such
notice shall be deemed acceptance by you of the modification described in such
notice.
17. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
18. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the Rules of the New York Stock Exchange, Inc. Such arbitration
shall be commenced within one year after the cause of action forming the basis
of the controversy or claim accrued. The arbitration shall be conducted in New
York, New York before three arbitrators, all of whom shall be from the
securities industry. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
Please confirm your agreement by signing and returning to us the two
enclosed duplicate copies of this Agreement. Upon our acceptance hereof, the
Agreement shall constitute a valid and binding contract between us. After our
acceptance, we will deliver to you one fully executed copy of this Agreement.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: ____________________________
Name:
Title:
Confirmed: ___________, 199
- --------------------------------
(Name of Authorized Dealer)
By: ____________________________
(Authorized Signature)
Name:
Title:
- --------------------------------
Street Address
- --------------------------------
City State Zip
- --------------------------------
Fax No.
- --------------------------------
Telephone No.
- --------------------------------
Telex No.
- --------------------------------
Firm Taxpayer Identification No.
<PAGE>
SCHEDULE 1
Name of Series Offering Type 12b-1 Plan
S&P STARS Portfolio
Class A Continuous Basis Yes
Class C Continuous Basis Yes
Class Y Continuous Basis No
Large Cap Value Portfolio
Class A Continuous Basis Yes
Class C Continuous Basis Yes
Class Y Continuous Basis No
Small Cap Value Portfolio
Class A Continuous Basis Yes
Class C Continuous Basis Yes
Class Y Continuous Basis No
Total Return Bond Portfolio
Class A Continuous Basis Yes
Class C Continuous Basis Yes
Class Y Continuous Basis No
The Insiders Select Fund
Class A Continuous Basis Yes
Class C Continuous Basis Yes
Class Y Continuous Basis No
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form
N-1A of our reports dated May 9, 1996 appearing in the Annual Report of Large
Cap Value Portfolio, Small Cap Value Portfolio, and Total Return Bond Portfolio
for the period ended March 31, 1996. We also consent to the reference to us
under the heading "Condensed Financial Information" appearing in the Prospectus,
which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 29, 1996
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form
N-1A of our report dated May 9, 1996 appearing in the Annual Report of S&P STARS
Portfolio for the period ended March 31, 1996. We also consent to the reference
to us under the heading "Condensed Financial Information" appearing in the
Prospectus, which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 29, 1996
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form
N-1A of our report dated May 9, 1996 appearing in the Annual Report of The
Insiders Select Fund for the period ended March 31, 1996. We also consent to the
reference to us under the heading "Condensed Financial Information" appearing in
the Prospectus, which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 29, 1996
<PAGE>
Exhibit (18)
THE BEAR STEARNS FUNDS
Rule 18f-3 Plan
Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"), requires that the Board of an investment company desiring to offer
multiple classes pursuant to said Rule adopt a plan setting forth the separate
arrangement and expense allocation of each class, and any related conversion
features or exchange privileges.
The Board, including a majority of the non-interested Board members,
of the above-referenced fund (the "Fund") which desires to offer multiple
classes for the series set forth on Schedule A (the "Series") has determined
that the following plan is in the best interests of each class individually and
the Fund as a whole:
1. Class Designation: Each Series' shares shall be
divided into Class A, Class C and Class Y.
2. Differences in Services: The services offered to shareholders of
each Class shall be substantially the same, except that Right of Accumulation
and Letter of Intent shall be available only to holders of Class A shares.
3. Differences in Distribution Arrangements: Class A shares shall be
offered with a front-end sales charge, as such term is defined in Article III,
Section 26(b), of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and a deferred sales charge (a "CDSC"), as such term
is defined in said Section 26(b), may be assessed on certain redemptions of
Class A shares purchased without an initial sales charge as part of an
investment of $1 million or more. The amount of the sales charge and the amount
of and provisions relating to the CDSC pertaining to the Class A shares are set
forth on Schedule B hereto.
Class C shares shall not be subject to a front-end sales charge, but
shall be subject to a CDSC. The amount of and provisions relating to the CDSC
pertaining to Class C shares are set forth on Schedule C hereto.
Class A and Class C shares shall be charged a fee pursuant to a
Distribution and Shareholder Servicing Plan adopted under Rule 12b-1 under the
1940 Act. The amount of the fees under the Distribution and Shareholder
Servicing Plan are set forth on Schedule D hereto.
Class Y shares shall be offered at net asset value with no front-end
sales charge, CDSC or distribution and shareholder servicing fees. Class Y
shares are available to investors whose minimum initial purchase is at least
$2.5 million, subject to such waivers or variations as from time to time may be
in effect.
4. Expense Allocation. The following expenses will be allocated, to
the extent practicable, on a Class-by-Class basis: (a) fees under the
Distribution and Shareholder Servicing Plan; (b) printing and postage expenses
related to preparing and distributing materials, such as shareholder reports,
prospectuses and proxies, to current shareholders of a specific Class; (c)
Securities and Exchange Commission and Blue Sky registration fees incurred by a
specific Class; (d) the expense of administrative personnel and services as
required to support the shareholders of a specific Class; (e) litigation or
other legal expenses relating solely to a specific Class; and (f) Board members'
fees incurred as a result of issues relating to a specific Class.
5. Conversion Features. On October 13, 1995, Class A Shares held by
investors who are eligible to purchase Class Y Shares shall be converted to
Class Y shares, based on the relative net value of such Classes as of the close
of business on such date, without the imposition of any sales charge, fee or
other charge. Thereafter, if a holder of Class A Shares notifies the Fund's
distributor that it desires to have its Class A Shares converted to Class Y
Shares because it then is eligible to purchase Class Y Shares, the shares which
are the subject of the notice shall be converted to Class Y shares, without the
imposition of any sales charge, fee or other charge, on the third business day
following confirmation of the investor's eligibility to own Class Y Shares, at
the relative net value of such Classes as of the close of business on such date.
6. Exchange Privileges. Shares of a Class are
exchangeable only for (a) shares of the same Class of another
Series or of other investment companies sponsored by the Fund's
distributor and (b) shares of the Money Market Portfolio of The
RBB Fund, Inc.
Dated: March 24, 1995, as revised May 4, 1995,
May 31, 1995, September 29, 1995 and April 12, 1996
<PAGE>
SCHEDULE A
S&P STARS Portfolio
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
The Insiders Select Fund
<PAGE>
SCHEDULE B
FRONT-END SALES CHARGE--CLASS A SHARES--The public offering price for Class A
shares shall be the net asset value per share of that Class plus a sales load as
shown below:
(A) FOR S&P STARS PORTFOLIO, LARGE CAP VALUE PORTFOLIO, SMALL
CAP VALUE PORTFOLIO AND THE INSIDERS SELECT FUND
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
Amount of Transaction share share
------------------------ -------------------------
<S> <C> <C>
Less than $50,000............................................... 4.75 4.99
$50,000 to less than $100,000................................... 4.25 4.44
$100,000 to less than $250,000.................................. 3.75 3.90
$250,000 to less than $500,000.................................. 3.25 3.36
$500,000 to less than $750,000.................................. 2.75 2.83
$750,000 to less than $1,000,000................................ 2.25 2.30
$1,000,000 and above............................................ 0.00 0.00
</TABLE>
(B) FOR TOTAL RETURN BOND PORTFOLIO
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
Amount of Transaction share share
------------------------ -------------------------
<S> <C> <C>
Less than $50,000............................................... 3.75 3.90
$50,000 to less than $100,000................................... 3.25 3.36
$100,000 to less than $250,000.................................. 2.75 2.83
$250,000 to less than $500,000.................................. 2.25 2.30
$500,000 to less than $750,000.................................. 2.00 2.04
$750,000 to less than $1,000,000................................ 1.50 1.52
$1,000,000 and above............................................ 0.00 0.00
</TABLE>
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES--A CDSC of 1.00% (.50% in the
case of the Total Return Bond Portfolio) shall be assessed at the time of
redemption of Class A shares purchased without an initial sales charge as part
of an investment of at least $1,000,000 and redeemed within one year after
purchase. A CDSC of .50% (1% for shares purchased from April 15, 1996 through
June 28, 1996 (or such other dates as the Board, from time to time, may
determine)) shall be assessed at the time of redemption of Class A shares
purchased without a sales charge with the proceeds from the redemption of shares
of an investment company sold with a sales charge or commission and not
distributed by the Fund's Distributor, if such shares are redeemed within one
year of their purchase. The terms contained in Schedule C pertaining to the CDSC
assessed on redemptions of Class C shares, including the provisions for waiving
the CDSC, shall be applicable to the Class A shares subject to a CDSC. Letter of
Intent and Right of Accumulation shall apply to such purchases of Class A
shares.
SCHEDULE C
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES--A CDSC of 1.00% payable to the
Fund's Distributor shall be imposed on any redemption of Class C shares made
within one year of the date of purchase. No CDSC shall 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 reinvestment of
dividends or capital gain distributions, plus (ii) increases in the net asset
value of the shareholder's Class C shares above the dollar amount of all
payments for the purchase of Class C shares of the Fund held by such shareholder
at the time of redemption.
If the aggregate value of the Class C shares redeemed has
declined below their original cost as a result of the Fund's performance, a 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 shall be made in a manner that results in the lowest possible
rate. Therefore, it shall be assumed that the redemption is made first of
amounts representing shares acquired 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 the cost of
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
redemption.
WAIVER OF CDSC--The CDSC shall 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 Eligible Benefit Plans, (c)
redemptions as a result of a combination of any investment company with the Fund
or Series 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. Any Fund shares subject to a CDSC which were
purchased prior to the termination of such waiver shall have the CDSC waived as
provided in the Fund's prospectus at the time of the purchase of such shares.
SCHEDULE D
AMOUNT OF DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--Each Series shall pay a
fee based on the value of the average daily net assets of the respective Class
as follows:
NAME OF SERIES CLASS A CLASS C
S&P Stars Portfolio .50% 1.00%
Large Cap Value Portfolio .50% 1.00%
Small Cap Value Portfolio .50% 1.00%
The Insiders Select Fund .50% 1.00%
Total Return Bond Portfolio .35% .75%
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<TABLE> <S> <C>
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NUMBER> 023
<NAME> SMALL CAP VALUE PORTFOLIO - CLASS Y
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NUMBER> 031
<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS A
<S> <C>
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<PERIOD-END> MAR-31-1996
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
<SERIES>
<NUMBER> 032
<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS C
<S> <C>
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<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
<SERIES>
<NUMBER> 033
<NAME> TOTAL RETURN BOND PORTFOLIO - CLASS Y
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> S&P STARS PORTFOLIO - CLASS A
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NUMBER> 052
<NAME> S&P STARS PORTFOLIO - CLASS C
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> S&P STARS PORTFOLIO - CLASS Y
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE INSIDERS SELECT PORTFOLIO - CLASS A
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<CIK> 0000931145
<NAME> THE BEAR STEARNS FUNDS
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<NAME> THE INSIDERS SELECT PORTFOLIO - CLASS C
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