As filed via EDGAR with the Securities and Exchange Commission on August 29,
1997
Registration Nos. 33-84842
ICA No. 811-8798
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ________ [ ]
Post-Effective Amendment No. 14 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 14 [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
copy to:
Ellen Arthur, Esq. Jay G. Baris, Esq.
Bear, Stearns & Co. Inc. Kramer, Levin, Naftalis & Frankel
245 Park Avenue 919 Third Avenue
New York, New York 10167 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
-----
on (date) pursuant to paragraph (b)
-----
X 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, 1997 was filed on May 27, 1997.
<PAGE>
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
THE INSIDERS SELECT FUND
S&P STARS PORTFOLIO
FOCUS LIST PORTFOLIO
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
- ------------- --------
Part A Prospectus Caption
- ------ ---------- -------
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3 . Condensed Financial Information Financial Highlights
Item 4. General Description of Description of the
Registrant Fund; General
Information; Appendix
Item 5. Management of the Fund Management of the
Fund
Item 5A. Management's Discussion of Performance
Fund's Performance Information
Item 6. Capital Stock and Other Not Applicable
Securities
Item 7. Purchase of Securities Being Alternative Purchase
Offered Methods; How to Buy
Shares
Item 8 . Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings Not Applicable
-ii-
<PAGE>
Statement of Additional
Part B Information Caption
-----------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Information About
the Fund
Item 13. Investment Objectives and Investment Objective
Policies and Management Policies;
Appendix
Item 14. Management of the Fund Management of the
Fund
Item 15. Control Persons and Principal Information About the
Fund
Holders of Securities
Item 16. Investment Advisory and Other Management Arrangements;
Services Custodian, Transfer and
Dividend Disbursing
Agent, Counsel and
Independent Auditors
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Not Applicable
Securities
Item 19. Purchase, Redemption and Pricing Management of the
of Securities Fund; Purchase and
Redemption of Shares;
Determination of Net
Asset Value
Item 20. Tax Status Dividends,
Distributions and Taxes
Item 21. Underwriters Cover Page
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
-iii-
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio o Small Cap Value Portfolio o Total Return Bond
Portfolio Class A, B and C Shares
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: Large Cap Value Portfolio and Small Cap Value
Portfolio (together, the "Equity Portfolios") and Total Return Bond Portfolio
(the "Bond Portfolio").
o Each Equity Portfolio's investment objective is capital appreciation.
o 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 three classes of shares. Class A
shares are subject to a sales charge imposed at the time of purchase . Class B
shares are subject to a contingent deferred sales charge of up to 5% imposed on
redemptions made within the first six years of purchase. 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 ____,
1997, 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; ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
____, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
Fee Table.............................................................
Financial Highlights..................................................
Alternative Purchase Methods..........................................
Description of the Fund...............................................
Risk Factors..........................................................
Management of the Fund................................................
How to Buy Shares.....................................................
Shareholder Services..................................................
How to Redeem Shares..................................................
Dividends, Distributions and Taxes....................................
Performance Information...............................................
General Information...................................................
Appendix..............................................................
- 2 -
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A CLASS A CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
<S> <C> <C> <C>
(as a percentage of offering price)............... 5.50% 5.50% 4.50%
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)
Advisory Fees (after fee waiver)**............... 0.00% 0.00% 0.00%
12b-1 Fees (after fee waivers)***................ 0.25% 0.25% 0.25%
Other Expenses (after expense
reimbursement)**................................. 1.25% 1.25% 0.55%
---- ---- ----
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........................................... $ 69 $ 69 $ 53
3 YEARS.......................................... $100 $100 $ 69
5 YEARS.......................................... $132 $132 $ 87
10 YEARS**....................................... $222 $222 $156
</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 of purchase. See "How to Buy
Shares-Class A Shares."
** With respect to 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. With respect to all
Portfolios, without such fee waiver and expense reimbursement, Advisory
Fees stated above would have been 0.75% and 0.45%, for each Equity
Portfolio and the Bond Portfolio, respectively. Other Expenses are
estimated to be 2.33%, 1.75%, and 2.08% for Large Cap Value Portfolio,
Small Cap Value Portfolio and the Bond Portfolio, respectively, and Total
Portfolio Operating Expenses are estimated to be 3.08%, 2.50% and 2.53% for
Large Cap Value Portfolio, Small Cap Value Portfolio and the Bond
Portfolio, respectively. Such amounts are based on operating results for
the fiscal year ended March 31, 1997, restated for the reduction in 12b-1
fees.
*** With respect to Class A shares, 12b-1 fees include a shareholder servicing
fee of 0.25%. The remaining 0.25% with respect to each Equity Portfolio and
0.10% with respect to the Bond Portfolio, attributable to distribution
related expenses, is currently being waived. Without the fee waiver, 12b-1
fees would have been 0.50% for each Equity Portfolio and 0.35% for the Bond
Portfolio.
- 3 -
<PAGE>
FEE TABLE (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS B CLASS B CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
<S> <C> <C> <C>
(as a percentage of offering price)............... ___ ___ ___
Maximum Deferred Sales Charge Imposed
on Redemptions (as a percentage of the
amount subject to charge)........................ 5.00% 5.00% 5.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)*................ 0.00% 0.00% 0.00%
12b-1 Fees....................................... 0.75% 0.75% 0.75%
Other Expenses (after expense
reimbursement)*.................................. 1.25% 1.25% 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........................................... $ 71 $ 71 $ 63
3 YEARS.......................................... $106 $106 $ 82
5 YEARS.......................................... $131 $131 $ 90
10 YEARS.......................................... $220 $220 $134
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**........................................ $220 $220 $134
- --------------
* Other expenses includeS a shareholder servicing fee of 0.25%. With respect
to Class B 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 2.00% and 1.20% for each Equity
Portfolio and the Bond Portfolio, respectively. With respect to all
Portfolios, without such fee waiver and expense reimbursement, Advisory
Fees stated above would have been 0.75% and 0.45%, for each Equity
Portfolio and the Bond Portfolio, respectively. Other Expenses are
estimated to be 2.11%, 1.49%, and 1.74% for Large Cap Value Portfolio,
Small Cap Value Portfolio and the Bond Portfolio, respectively, and Total
Portfolio Operating Expenses are estimated at 3.61%, 2.99% and 2.94% for
Large Cap Value Portfolio, Small Cap Value Portfolio and the Bond
Portfolio, respectively.
** Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight.
- 4 -
<PAGE>
FEE TABLE (continued)
- ------------------------------------------------------------------------------------------------------------------------------
LARGE CAP SMALL 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)
Advisory 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
</TABLE>
- --------------
* With respect to Class C 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 2.00% and 1.20% for each
Equity Portfolio and the Bond Portfolio, respectively. With respect to all
Portfolios, without such fee waiver and expense reimbursement, Advisory
Fees stated above would have been 0.75% and 0.45%, for each Equity
Portfolio and the Bond Portfolio, respectively. Other Expenses would have
been 2.11%, 1.49% and 1.74% for Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio, respectively, and Total Portfolio Operating
Expenses would have been 3.61%, 2.99% and 2.94% for Large Cap Value
Portfolio, Small Cap Value Portfolio and the Bond Portfolio, respectively.
** With respect to the Equity Portfolios, 12b-1 fees include a shareholder
servicing fee of 0.25%.
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 fee waiver arrangements in effect, see "Management of the Fund."
- 5 -
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the table below covering each Portfolio's investment results
for the periods 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, 1997 which is incorporated by reference into the
Portfolios' Statement of Additional Information which is available upon request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A and
C shares of each Portfolio for the periods indicated. This information has been
derived from information provided in each Portfolio's financial statements.
LARGE CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period............... $ 15.13 $ 15.08 $ 12.00 $12.00
------- ------- -------
Net investment income/(loss) (1)................... 0.04 (0.02) 0.06 (0.01)
Net realized and unrealized gain on
investments (2).................................. 2.28 2.25 3.10 3.10
-------- ------- ------ -------
Net increase in net assets resulting from
operations....................................... 2.32 2.23 3.16 3.09
-------- ------- ------ -------
Dividends and distributions to shareholders from
Net investment income............................. (0.10) (0.02) (0.02) ----
Net realized capital gains......................... (0.18) (0.18) (0.01) (0.01)
-------- -------- ------- -------
(0.28) (0.20) (0.03) (0.01)
-------- -------- ------- -------
Net asset value, end of period..................... $ 17.17 $ 17.11 $ 15.13 $15.08
======= ======= ======= ======
Total investment return (3)....................... 15.44% 14.87% 26.35% 25.71%
======= ======= ======== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).......... $ 4,987 $ 2,986 $ 3,616 $3,520
Ratio of expenses to average net assets (1)....... 1.50% 2.00% 1.50%(4) 2.00%(4)
Ratio of net investment income/(loss) to average
net assets (1).................................. 0 .43% (0.08)% 0.46%(4) (0.06)%(4)
Decrease reflected in above expense ratios and
net investment income/(loss) due to waivers and
reimbursements................................... 1.58% 1.61% 4.34%(4) 4.39%(4)
Portfolio turnover rate........................... 136.67% 136.67% 45.28%(5) 42.28%(5)
Average commission rate per share (6)............. $0.0593 $0.0593 $0.0596 $0.0596
</TABLE>
- ----------
* Commencement of operations. Commenced investment operations on
April 4, 1995.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset values
during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
- 6 -
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
SMALL CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period............... $ 15.87 $ 15.79 $ 12.00 $12.00
------- ------- ------- ------
Net investment loss (1)............................ (0.10) (0.18) (0.07) (0.10)
Net realized and unrealized gain on
investments (2).................................. 1.95 1.93 4.17 4.11
-------- ------- ------ -------
Net increase in net assets resulting from
operations....................................... 1.85 1.75 4.10 4.01
-------- ------- ------ -------
Distributions to shareholders from
Net realized capital gains......................... (0.24) (0.16) (0.23) (0.22)
-------- -------- ------- -------
Net asset value, end of period..................... $ 17.48 $ 17.38 $ 15.87 $15.79
======= ======= ======= ======
Total investment return (3)....................... 11.71% 11.12% 34.36% 33.59%
======== ======== ======= ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).......... $13,143 $11,071 $ 6,474 $ 6,753
Ratio of expenses to average net assets (1)....... 1.50% 2.00% 1.50%(4) 2.00%(4)
Ratio of net investment loss to average
net assets (1).................................. (0.81)% (1.31)% (0.66)%(4) (1.09)%(4)
Decrease reflected in above expense ratios and
net investment loss due to waivers and
reimbursements................................... 1.00% 0.99% 2.32%(4) 2.39%(4)
Portfolio turnover rate........................... 56.88% 56.88% 40.79%(5) 40.79%(5)
Average commission rate per share (6)............. $0.0550 $0.0550 $0.0572 $0.0572
</TABLE>
- -------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset values
during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
- 7 -
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
TOTAL RETURN BOND PORTFOLIO
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period............... $ 12.26 $ 12.26 $ 12.00 $12.00
------- ------- ------- ------
Net investment income (1)........................ 0.73 0.68 0.71 0.67
Net realized and unrealized gain/(loss) on
investments (2).................................. (0.20) (0.20) 0.30 0.30
-------- ------- ------ -------
Net increase in net assets resulting from
operations....................................... 0.53 0.48 1.01 0.97
-------- ------- ------ -------
Dividends and distributions to shareholders from
Net investment income.............................. (0.73) (0.68) (0.71) (0.67)
-------- -------- ------- -------
Net realized capital gains (0.03) (0.03) (0.04) (0.04)
-------- -------- ------- -------
(0.76) (0.71) (0.75) (0.71)
-------- -------- ------- -------
Net asset value, end of period..................... $ 12.03 $ 12.03 $ 12.26 $ 12.26
======= ======= ======= =======
Total investment return (3)....................... 4.40% 3.99% 8.54% 8.13%
======== ======== ========= ========
RATIOS/SUPPLEMENTAL DATA (6)
Net assets, end of period (000's omitted).......... $ 3,367 $ 1,018 $ 4,467 $ 1,775
Ratio of expenses to average net assets (1)....... 0.80% 1.20% 0.85%(4) 1.25%(4)
Ratio of net investment income to average
net assets (1).................................. 5.99% 5.57% 5.76%(4) 5.38%(4)
Decrease reflected in above expense ratios and
net investment income due to waivers and
reimbursements................................... 1.73% 1.74% 2.87%(4) 2.95%(4)
Portfolio turnover rate........................... 262.95% 262.95% 107.35%(5) 107.35%(5)
</TABLE>
- -------
* Commencement of operations. Commenced investment operations on
April 5, 1995.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset values
during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Average commission rate per share disclosure is required for fiscal years
beginning on or after September 1, 1995. The Portfolio incurred no such
charges.
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."
- 8 -
<PAGE>
ALTERNATIVE PURCHASE METHODS
By this Prospectus, each Portfolio offers investors three 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 each Portfolio's investment
portfolio.
CLASS A SHARES
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 5.50% and 4.50%,
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 0.50 of 1% and 0.35 of 1%, respectively, of the value of the
average daily net assets of Class A. With respect to each Portfolio, 0.25% of
this fee, attributable to distribution related expenses, is currently being
waived."See Management of the Fund-Distribution and Shareholder Servicing Plan."
CLASS B SHARES
Class B shares of each Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares-Class B Shares." The Class B shares of each Portfolio also are subject to
an annual distribution fee at the rate of 0.75 of 1% and an annual shareholder
servicing fee at the rate of 0.25 of 1% of the value of the average daily net
assets of Class B. See "Management of the Fund-Distribution and Shareholder
Servicing Plan". Class B shares will convert to Class A shares, based on their
relative net asset values, eight years after the initial purchase. The
distribution and shareholder servicing fee paid by Class B will cause such class
to have a higher expense ratio and to pay lower dividends than Class A.
CLASS C SHARES
Class C shares of each Portfolio are subject to a 1% CDSC which is assessed only
if Class C shares are redeemed within one year of purchase. See "How to Redeem
Shares-Class C Shares." Class C shares of each Equity Portfolio and the Bond
Portfolio are subject to an annual distribution and shareholder servicing fee at
the rate of 1.00% and 0.75%, respectively, of the average daily net assets of
Class C. With respect to Class C shares of the Bond Portfolio, the Fund has
entered into a Shareholder Servicing Agreement under which the Fund pays 0.25%
of the average daily net assets of Class C shares for fees incurred in
connection with the personal service and maintenance of accounts holding
Portfolio shares. 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 B or 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 investment
return of Class A. See "How to Buy Shares-Choosing a Class of Shares".
DESCRIPTION OF THE FUND
INVESTMENT OBJECTIVE
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
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investment objective cannot be changed 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. There can be no assurance
that a Portfolio's investment objective will be achieved.
MANAGEMENT POLICIES
EQUITY PORTFOLIOS
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.
SMALL CAP VALUE PORTFOLIO invests, under normal market conditions, substantially
all of its assets in equity securities of issuers with market capitalizations
between $500 million and $1 billion 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 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 statistical 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 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
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31, 1996, the weighted average maturity of securities comprising the Salomon
Brothers BIG Bond Index was approximately nine years and their average 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
or 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.
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, 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 TECHNIQUES
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
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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
liquid securities, at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral always equals the current
value of the security sold short; or (b) otherwise cover its short position in
accordance with positions taken by the staff of the 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
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
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<PAGE>
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
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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
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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 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
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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 June 30, 1997 of over $3.3 billion.
BSFM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSFM and the Portfolios, subject
to the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law. Large Cap Value Portfolio's principal portfolio managers are
Robert S. Reitzes, Mark A. Kurland and James G. McCluskey. Mark A. Kurland,
Chairman and Chief Executive Officer of BSFM and Bear Stearns Asset Management
("BSAM"), serves as Co-Manager of the Portfolio. Mr. Kurland also serves as
Senior Managing Director of Bear, Stearns & Co. Inc. He was previously Director
of Global Research from 1991 to 1995 at Bear, Stearns & Co. Inc., where he also
served as a member of the Investment Policy Committee, President's Advisory
Counsel, Equities Subcommittee and the Funds Committee. He was previously
Co-Head of Institutional Equities and Director of Research at Mabon, Nugent &
Co. Mr. McCluskey serves as Senior Portfolio Manager of the Portfolio. He is
also a Senior Managing Director of Bear Stearns. Prior to joining Bear Stearns
in 1997, Mr. McCluskey was a Principal and Senior Portfolio Manager at Spare,
Kaplan, Bischel & Associates, Inc. from 1990 to 1997. Mr. Reitzes is also the
principal portfolio manager for Small Cap Value Portfolio. Small Cap Value
Portfolio is managed by Robert S. Reitzes, Harris Cohen and Gail Sprute. Mr.
Reitzes is the Director of Mutual Funds of BSAM and Senior Managing Director of
Bear Stearns since March 1994. From January 1991 to March 1994, he was
Co-Director of Research and Senior Chemical Analyst of C.J. Lawrence/Deutsche
Bank Securities Corp. Ms. Sprute joined BSAM in 1994 as an equity portfolio
manager/equity analyst. From 1991 to 1994, she was employed by Deutsche Morgan
Grenfell/C.J. Lawrence as an associate analyst in the equity research division.
Mr. Cohen joined BSAM in 1996 as an equity portfolio manager/analyst. Prior to
this, he was a Senior Analyst at Furman Selz LLC. Mr. Cohen graduated in 1993
with a M.B.A. from the Stern School of Business at New York University. 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 BSAM, 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.
Under the terms of the Investment Advisory Agreement, each Equity Portfolio has
agreed to pay BSFM a monthly fee at the annual rate of 0.75 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 0.45 of 1% of the Bond Portfolio's
average daily net assets. For the fiscal year ended March 31, 1997, no fees were
paid by Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio
pursuant to a voluntary undertaking by BSFM.
Each Portfolio's administrator is BSFM. 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 0.15 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, PFPC Inc. is entitled to receive from each Portfolio a monthly fee
equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $132,000 for each Portfolio.
For the fiscal year ended March 31, 1997, Large Cap Value Portfolio, Small Cap
Value Portfolio and Bond Portfolio each paid PFPC Inc. a monthly fee at the
effective annual rate of 0.49 of 1%, 0.31 of 1% and 0.45 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.
- 16 -
<PAGE>
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 - CLASS A AND CLASS C SHARES
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 ......................... 0.50% 1.00%
Bond Portfolio ............................ 0 .35 0.75%
With respect to Class A shares, 0.25% of this fee, attributable to
distribution related expenses, is currently being waived. 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. Of these amounts, up to 0.25% of the average
daily net assets of each class will compensate institutions for personal service
and maintenance of accounts holding Portfolio shares. 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.
DISTRIBUTION PLAN - CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the Fund will
pay the Distributor an annual fee of 0.75% per year of the average daily net
assets of Class B shares. Amounts paid under the Distribution Plan compensates
Bear Stearns for distributing Portfolio shares. Bear Stearns may pay a portion
of this amount to other institutions that sell Portfolio shares.
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<PAGE>
SHAREHOLDER SERVICING PLAN - CLASS B SHARES
The Fund has adopted a Shareholder Servicing Plan for Class B shares. In
accordance with the Shareholder Servicing Plan, the Fund may enter into
Shareholder Service Agreements under which the Fund pays fees of up to 0.25% of
the average daily net assets of Class B shares for fees incurred in connection
with the personal service and maintenance of accounts holding Portfolio shares.
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 B, 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, 2.00% of the average daily net assets of each Equity
Portfolio--Class B, 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.
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<PAGE>
HOW TO BUY SHARES
GENERAL
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.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each Class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment. If your goals change over time, you
should review your investment to determine whether a particular class of shares
best suits your needs.
The factors discussed below assume the expenses that apply to each Class of
shares as described in this prospectus. In addition, they assume an annual rate
of return of 10%. The actual amount of the return may be higher or lower,
depending on actual investment returns over time. This discussion is not
intended to be investment advice or recommendations, because each investor's
goals, needs and circumstances are unique.
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of $500,000 in the aggregate on purchases
of Class B shares and a maximum purchase limitation of $1,000,000 in the
aggregate on purchases of Class C shares. Investors who purchase $1 million or
more with a time horizon of more than one year may only purchase Class A shares.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not feature an initial sales charge.
- 19 -
<PAGE>
If you plan to invest up to $100,000 for a short period of time, Class C shares
might be more appropriate even though the class expenses are higher, because
there is no initial sales charge and no CDSC if held for over one year. In other
cases, investors with a medium-term investment horizon may find Class A shares
more suitable, because of the higher class expenses and CDSC of Class B shares.
If you invest more than $100,000 and increase your investment horizon toward six
years, then Class A shares may be more appropriate, because the effect of the
higher class expenses of Class C shares might be greater than the effect of the
initial sales charge of the Class A shares.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate the Distributor and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
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. Direct overnight
deliveries to PFPC, Inc., 400 Bellevue Parkway, Suite 108, Wilmington, Delaware
19809. 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. Shareholders may not purchase shares of the Portfolio with a check
issued by a third party and endorsed over to the Portfolio. 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.
- 20 -
<PAGE>
NET ASSET VALUE
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 backup withholding and a $50 penalty imposed
by the Internal Revenue 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
OFFERING NET ASSET CONCESSIONS
PRICE PER VALUE PER AS A % OF
AMOUNT OF TRANSACTION SHARE SHARE OFFERING PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................................... 5.50% 5.82% 5.25%
$50,000 to less than $100,000....................... 4.75 4.99 4.25
$100,000 to less than $250,000..................... 3.75 3.90 3.25
$250,000 to less than $500,000...................... 2.75 2.83 2.50
$500,000 to less than $1,000,000................... 2.00 2.04 1.75
$1,000,000 and above................................ 0.00* 0.00 1.25
</TABLE>
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<PAGE>
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER
OFFERING NET ASSET CONCESSIONS
PRICE PER VALUE PER AS A % OF
AMOUNT OF TRANSACTION SHARE SHARE OFFERING PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................................... 4.50% 4.71% 4.25%
$50,000 to less than $100,000....................... 4.25 4.44 4.00
$100,000 to less than $250,000...................... 3.25 3.36 3.00
$250,000 to less than $500,000...................... 2.50 2.56 2.25
$500,000 to less than $1,000,000................... 2.00 2.04 1.75
$1,000,000 and above 0.00 0.00 1.25
</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.
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 of its employees in Class A shares of each Portfolio. 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.
- 22 -
<PAGE>
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 B SHARES
The public offering price for Class B 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 B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolios will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
CDSC as a Percentage of
Year Since Dollar Amount
Purchase Subject to CDSC
- -------- ---------------
First 5%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
- -----------------
* As discussed below, Class B Shares automatically convert to Class A Shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares of
the same Portfolio at the end of the calendar quarter that is eight years after
the initial purchase of the Class B shares. Class B shares acquired by exchange
from Class B shares of another portfolio will convert into Class A shares of
such Portfolio based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A shares
based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolios believe
is unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
- 23 -
<PAGE>
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
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 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 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
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
- 24 -
<PAGE>
Transfer Agent at 1-800-447-1139 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 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 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
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 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 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.
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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 B or C shares at the time of an exchange. The CDSC
applicable on redemption of Class B or C shares will be calculated from the date
of the initial purchase of the Class B or 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 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 recognize a taxable
gain or loss.
REDIRECTED DISTRIBUTION OPTION
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 current net asset value. If an investor is investing in
a Class that charges a CDSC, the shares purchased will be subject upon
redemption to the CDSC, if 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.
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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 or of any other Bear Stearns
Fund within 60 days of the redemption. Shareholders should obtain and read the
applicable prospectuses of such other funds and consider their objectives,
policies and applicable fees before investing in any of such funds. 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 B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B 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 B shares above the
total amount of payments for the purchase of Class B 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 $256) would be charged at a rate of 5%
for a total CDSC of $12.00.
WAIVER OF CDSC
The CDSC applicable to Class B 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, (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, (e) to the
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extent that shares redeemed have been withdrawn from the Automatic Withdrawal
Plan, up to a maximum amount of 12% per year from a shareholder account based on
the value of the account at the time the automatic withdrawal is established,
and (f) redemption proceeds which are to be reinvested in accounts or
non-registered products over which BSFM or its advisory affiliates have
investment discretion. 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 that 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.
CONTINGENT DEFERRED SALES CHARGE - CLASS C SHARES
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.
WAIVER OF CDSC
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, (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, (e) to the extent that shares redeemed
have been withdrawn from the Automatic Withdrawal Plan, up to a maximum amount
of 12% per year from a shareholder account based on the value of the account at
the time the automatic withdrawal is established, and (f) redemption proceeds
which are to be reinvested in accounts or non-registered products over which
BSFM or its advisory affiliates have investment discretion. 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.
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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
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.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program by the securities transfer association. The
three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are
not a part of these programs will not be accepted. Please note that a notary
public stamp or seal is not acceptable. The Fund reserves the right to amend or
discontinue its signature guarantee policy at any time and, with regard to a
particular redemption transaction, to require a signature guarantee at its
discretion. Any questions with respect to signature-guarantees should be
directed to the Transfer Agent by calling 1-800-447-1139.
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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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
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 B and C
shares will receive lower per share dividends than Class A shares because of the
higher expenses borne by Class B and C shares. 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
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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.
Generally, the Fund must 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 share holder fails to certify
that the TIN furnished in connection with opening an account is correct and 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 direct
the Fund to institute backup withholding if the IRS determines that 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.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state and 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, 1997 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. A Portfolio may be 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 applicable to an investment in a Portfolio.
PERFORMANCE INFORMATION
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 B and
Class C should be expected to be lower than that of Class A. Performance for
each class will be calculated separately.
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<PAGE>
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 B 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 B or 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 a business trust under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994, and commenced operations on or about April
3, 1995. The 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 four classes-Class A, B, C and Y. Each share has one vote and
shareholders will vote in the aggregate and not by class, except as otherwise
required by law.
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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 seven 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, Rule 18f-2 exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of Rule 18f-2.
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 Bear Stearns Funds, P.O. Box 8960, Wilmington, Delaware
19899-8960, by calling 1-800-447-1139 or by calling Bear Stearns at
1-800-766-4111.
- 33 -
<PAGE>
THE BEAR STEARNS FUNDS
<TABLE>
<S> <C>
Account Information Form
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-766-4111. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
1 Account Type (Please print; indicate only one registration type)
[ ] Individual [ ] Joint Tenant
------------------------------------------------------------------------------------------------------------------
NAME
------------------------------------------------------------------------------------------------------------------
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
___ ___ ___ - ___ ___ - ___ ___ ___ ___ ___ - ___ ___ ___ ___ ___ ___ ___
SOCIAL SECURITY NUMBER OF PRIMARY OWNER TAXPAYER IDENTIFICATION NUMBER
(1) Use only the Social Security number or Taxpayer Identification Number
of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants
with right of survivorship and not tenants in common unless tenants in
common or community property registrations are requested.
------------------------------------------------------------------------------------------------------------------
[ ] Uniform Gift to Minors, or [ ] Uniform Transfer to Minors (where allowed by law)
------------------------------------------------------------------------------------------------------------------
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
------------------------------------------------------------------------------------------------------------------
NAME OF MINOR (ONLY ONE PERMITTED)
Under the Uniform Gift/Transfers to Minors Act.
------------------------------------------------------------------
STATE RESIDENCE OF MINOR
___ ___ / ___ ___ / ___ ___ ___ ___ ___ - ___ ___ - ___ ___ ___ ___
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER (REQUIRED TO OPEN ACCOUNT)
------------------------------------------------------------------------------------------------------------------
[ ] Corporation [ ] Partnership [ ] Trust* [ ] Other
------------------------------------------------------------------------------------------------------------------
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
------------------------------------------------------------------------------------------------------------------
NAME(S) OF TRUSTEE(S) DATE OF THE TRUST AGREEMENT
___ ___ ___ - ___ ___ - ___ ___ ___ ___ ___ - ___ ___ ___ ___ ___ ___ ___
SOCIAL SECURITY NUMBER (REQUIRED TO OPEN ACCOUNT) TAXPAYER IDENTIFICATION NUMBER (REQUIRED TO OPEN ACCOUNT)
* If a Trust, include date of trust instrument and list of trustees if they are to be named in the registration.
2 Mailing Address
------------------------------------------------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP CODE
( ) ( )
------------------------------------------------------------------------------------------------------------------
DAY TELEPHONE EVENING TELEPHONE
3 Investment Information
Method of Investment
[ ] I have enclosed a check for a minimum initial investment of $1,000 per Fund.
[ ] I have enclosed a check for a minimum subsequent investment of $250 per Fund or completed the Systematic
Investment Plan information in Section 13.
[ ] I purchased _____________________ shares of _______________________________________________ through my
broker on ____/____/____. Confirm # _______________.
Please make my investment in the Funds designated below:
------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT
------------------------------------------------------------------------------------------------------------------
______ ______ S&P STARS Portfolio $______________________
______ ______ Large Cap Value Portfolio $______________________
______ ______ Small Cap Value Portfolio $______________________
______ ______ Total Return Bond Portfolio $______________________
______ ______ The Insiders Select Fund $______________________
______ ______ Emerging Markets Debt Portfolio $______________________
______ ______ Money Market Portfolio $______________________
Focus List Portfolio $______________________
----------------------- $______________________
-----------------------
TOTAL INVESTMENT AMOUNT $======================
Note: All shares purchased will be held in a shareholder account for the investor at the Transfer Agent. Checks drawn on
foreign banks and checks made payable to persons or entities other than the Fund will not be accepted.
NOT PART OF THE PROSPECTUS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Checks should be made payable to the Fund which you are investing in. If no class is designated, your investment will
be made in Class A shares.
<S> <C>
4 Reduced Sales Charge (Available for Class A Shares Only)
Method of Investment
Are you a shareholder in another Bear Stearns Fund? [ ] Yes [ ] No
[ ] I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
------------------------------------------------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
------------------------------------------------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
------------------------------------------------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
Letter of Intent
[ ] I am already investing under an existing Letter of Intent.
[ ] I agree to the Letter of Intent provisions in the Fund's current prospectus. During a 13-month period, I plan to invest a
dollar amount of at least: [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Net Asset Value Purchase
[ ] I qualify for an exemption from the sales charge by meeting the conditions set forth in the prospectus. (Please attach
certification to this form.)
[ ] I qualify to purchase shares at net asset value, with proceeds received from a mutual fund or closed-end fund not
distributed by Bear Stearns. (Please attach proof of fund share redemption.)
5 Distribution Options
Dividends and capital gains may be reinvested or paid by check. If no options are selected below, both dividends and capital
gains will be reinvested in additional Fund shares.
Dividends [ ] Pay by check. [ ] Reinvest.
Capital Gains [ ] Pay by check. [ ] Reinvest.
The Redirected Distribution Option allows an investor to have dividends and any other distributions from a Fund automatically
used to purchase shares of the same class of any other Fund. The receiving account must be in the same name as your existing
account.
[ ] Please reinvest dividends and capital gains from the ____________________________ to the __________________________ .
(NAME OF FUND) (NAME OF FUND)
If you elect to have distributions paid by check, distributions will be sent to the address of record. Distributions may also
be sent to another payee:
------------------------------------------------------------------------------------------------------------------
NAME
------------------------------------------------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP CODE
------------------------------------------------------------------------------------------------------------------
Optional Features
6 Automatic Withdrawal Plan
[ ] Fund Name [ ] Amount
-------------------------------------------------------- --------------------------
[ ] Startup month __________________________
Frequency option: [ ] Monthly [ ] Every other month [ ] Quarterly [ ] Semiannually [ ] Annually
. A minimum account value of $5,000 in a single account is required to establish an automatic withdrawal plan.
. Payments will be made on or near the 25th of the month.
. Shareholders holding share certificates are not eligible for the Automatic Withdrawal Plan.
[ ] Please mail checks to Address of Record (Named in Section 2)
[ ] Please electronically credit my Bank of Record (Named in Section 9)
[ ] Special payee as specified below:
------------------------------------------------------------------------------------------------------------------
NAME
------------------------------------------------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP CODE
7 Telephone Exchange Privilege
Unless indicated below, I authorize the Transfer Agent to accept instructions from any persons to exchange shares in my
account(s) by telephone, in accordance with the procedures and conditions set forth in the Fund's current prospectus.
[ ] I DO NOT want the Telephone Exchange Privilege.
NOT PART OF THE PROSPECTUS
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<PAGE>
<TABLE>
<S> <C>
8 Telephone Redemption Privilege
[ ] I authorize the Transfer Agent to accept instructions from any person to
redeem shares in my account(s) by telephone, in accordance with the procedures
and conditions set forth in the Fund's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to
the address of record, unless the information in Section 9 is completed for
redemption by wire of $500 or more.
9 Bank of Record (for Telephone Redemptions and/or Systematic Investment Plans)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
------------------------------------------------------------------------------------------------------------------
BANK NAME
------------------------------------------------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP CODE
------------------------------------------------------------------------------------------------------------------
BANK ABA NUMBER BANK ACCOUNT NUMBER
------------------------------------------------------------------------------------------------------------------
ACCOUNT NAME
10 Signature and Taxpayer Certification
The undersigned warrants that I(we) have full authority and, if a natural person, I(we) am(are) of legal age to purchase shares
pursuant to this Account Information Form, and have received a current prospectus for the Bear Stearns Fund(s) in which I(we)
am(are) investing. The undersigned acknowledges that the Telephone Exchange Privilege is automatic and that I(we) may bear the
risk of loss in event of fraudulent use of the Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we) have so
indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from backup withholding or (b) I have not been notified
by the IRS that I am subject to 31% backup withholding as a result of a failure to report all interest or dividends or (c)
the IRS has notified me that I am no longer subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have been notified by the IRS that you are currently
subject to backup withholding because of underreporting of interest or dividends on your tax return. Mutual fund shares are not
deposits of, or guaranteed by, any depository institution, nor are they insured by the FDIC. Investment in the funds involves
investment risks, including possible loss of principal.
[ ] Exempt from backup withholding [ ] Nonresident alien (Form W-8 attached)
-----------------------------
COUNTRY OF CITIZENSHIP
------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURE TITLE DATE
------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURE TITLE DATE
11 For Authorized Dealer Use Only (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection with the transactions authorized by the Account
Information Form and agree to notify the Transfer Agent of any purchases made under a Letter of Intent or Right of
Accumulation. If this Account Information Form includes a Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we guarantee the signature(s) above.
------------------------------------------------------------------------------------------------------------------
DEALER'S NAME DEALER NUMBER
------------------------------------------------------------------------------------------------------------------
MAIN OFFICE ADDRESS BRANCH NUMBER
------------------------------------------------------------------------------------------------------------------
REPRESENTATIVE'S NAME REP. NUMBER
( )
------------------------------------------------------------------------ ---------------------------------------
BRANCH ADDRESS TELEPHONE NUMBER
------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURE OF DEALER TITLE DATE
12 Additional Account Statements (Please Print)
In addition to myself and my representative, please send copies of my account statements to:
----------------------------------------------------------- -----------------------------------------------------------
NAME NAME
----------------------------------------------------------- -----------------------------------------------------------
ADDRESS ADDRESS
----------------------------------------------------------- -----------------------------------------------------------
CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE
NOT PART OF THE PROSPECTUS
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<PAGE>
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<S> <C>
13 Systematic Investment Plan
The Systematic Investment Plan, which is available to shareholders of the Bear Stearns Funds, makes possible regularly
scheduled purchases of Fund shares to allow dollar-cost averaging. The Funds' Transfer Agent can arrange for an amount of money
selected by you ($100 minimum) to be deducted from your checking account and used to purchase shares of a specified Bear
Stearns Fund. A $250 minimum initial investment is required. This may not be used in conjunction with the Automatic Withdrawal
Plan.
Please debit $_______________ from my checking account (named in Section 9) on or about the 20th of the month. Depending on the
Application receipt date, the Plan may take 10 to 20 days to be in effect.
[ ] Monthly [ ] Every alternate month
[ ] Quarterly [ ] Other _________________________________
$ ______________ into the ______________________________________________Fund __________________________ Start Month.
$100 MINIMUM
$ ______________ into the ______________________________________________Fund __________________________ Start Month.
$100 MINIMUM
$ ______________ into the ______________________________________________Fund __________________________ Start Month.
$100 MINIMUM
If you are applying for the Telephone Redemption Privilege or Systematic Investment Plan, please tape your voided check on top
of our sample below.
John Smith 000
123 First Avenue
Anytown, USA 12345
------------------------------------------------------------------------------------------------------------
VOID
------------------------------------------------------------------------------------------------------------
-------------------------------------------------- --------------------------------------------
Service Assistance
Our knowledgeable Client Services Representatives are
available to assist you between 8:00 a.m. and 6:00 p.m.
Eastern Time at:
1-800-447-1139
Mailing or Fax Instructions
Mail your completed Account Information Form and
check to:
The Bear Stearns Funds
c/o PFPC Inc.
P.O. Box 8960
Wilmington, DE 19899-8960
Fax: 302-791-1777
If applications will be faxed, please call and notify Client Services at 1-800-
447-1139 before placing an order.
Bear, Stearns & Co, Inc.
6.97
NOT PART OF THE PROSPECTUS
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<PAGE>
APPENDIX
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, each Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options and futures transactions involve "derivative 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 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
A-1
<PAGE>
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 liquid securities 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.
FORWARD COMMITMENTS--(BOND PORTFOLIO)
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 basis prior to
its stated delivery date.
Securities purchased on a when-issued or forward commitment basis and certain
other securities held by the Bond Portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a
when-issued or forward commitment basis may expose the Bond Portfolio to risk
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.
A-2
<PAGE>
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)
From time to time, each Portfolio may lend securities from its portfolio of
investments 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)
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'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,
A-3
<PAGE>
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
greater than anticipated prepayments of principal, the Bond Portfolio may fail
to fully recoup its initial investment in these securities even if the
securities are rated in the highest rating category by a nationally 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 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)
Convertible securities are fixed income securities that may be converted at
either a stated price or stated rate 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
A-4
<PAGE>
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)
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 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 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
A-5
<PAGE>
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 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.
A-6
<PAGE>
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, 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 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 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
A-7
<PAGE>
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.
A-8
<PAGE>
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 and Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
CustodianCustodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIO'S PROSPECTUS AND IN
THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
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 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.
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 8 0 0 7 6 6 4 1 1 1
PROSPECTUS
THE BEAR STEARNS FUNDS
The Insiders Select Fund
Class A, B and C Shares
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.
By this Prospectus, the Portfolio is offering three classes of shares. Class A
shares are subject to a sales charge imposed at the time of purchase . Class B
shares are subject to a contingent deferred sales charge of up to 5% imposed on
redemptions made within the first six years of purchase. 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 , 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
is also referred to herein as the "Adviser."
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 ________,
1997, 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; ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
_________, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
Fee Table......................................................... 3
Financial Highlights.............................................. 4
Alternative Purchase Methods...................................... 5
Description of the Fund........................................... 5
Risk Factors...................................................... 9
Management of the Fund............................................ 10
How to Buy Shares................................................. 12
Shareholder Services.............................................. 16
How to Redeem Shares.............................................. 17
Dividends, Distributions and Taxes................................ 20
Performance Information........................................... 21
General Information............................................... 22
Appendix.......................................................... A-1
- 2 -
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............................ 5.50% -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount subject to
charge) ............................................................ * 5.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)** ............................ 0.00%*** 0.00*** 0.00%***
12b-1 Fees (after fee waiver)**** ............................. 0.25% 0.75% 1.00%
Other Expenses (after expense
reimbursement)** .............................................. 1.40% 1.40% 1.15%
---- ---- ----
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)** ............................ 1.65% 2.15% 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 .................................................... $ 71 $ 73 $ 32
3 YEARS ................................................... $ 104 $110 $ 67
5 YEARS ................................................... $ 140 $138 $115
10 YEARS .................................................. $ 240 $235 $248
EXAMPLE:
You would pay the following expenses on the same investment, assuming no
redemption:
1 YEAR .................................................... $ -- $ 22 $ 22
3 YEARS ................................................... $ -- $ 67 $ 67
5 YEARS ................................................... $ -- $115 $115
10 YEARS *****............................................. $ -- $235 $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."
** With respect to Class A and B shares, Other Expenses includes a
shareholder servicing fee of 0.25%. With respect to all classes, 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, 2.15% for Class B and 2.15% for Class C. Without
such waiver and expense reimbursement, Advisory Fees stated above would
have been 1.00% for each class, Other Expenses would have been 2.47% for
Class A and 2.21% for Class C, and Total Portfolio Operating Expenses
would have been 3.47% for Class A and 3.96% for Class C. With respect to
Class B shares, Other Expenses are estimated to be 2.21, and Total
Portfolio Operating Expenses are estimated to be 3.96%.
*** The Advisory 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."
**** With respect to Class A and Class C shares, 12b-1 fees include a
shareholder servicing fee of 0.25%. With respect to Class A shares, the
remaining 0.25%, attributable to distribution related expenses, is
currently being waived. Without the fee waiver, 12b-1 fees with respect to
Class A shares would have been 0.50%.
***** Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after
year eight with respect to Class B shares.
- 3 -
<PAGE>
The amounts listed in the example should not be considered as representative of
past or future expenses. 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 reimbursements
or fee waiver arrangements in effect, see "Management of the Fund."
- 4 -
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the table below covering the Portfolio's investment results
for the periods 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, 1997 which is incorporated by reference into the
Portfolio's Statement of Additional Information which is available upon request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A and
C shares of the Portfolio for the periods indicated. This information has been
derived from information provided in the Portfolio's financial statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FISCAL JUNE 16, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE**
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 14.00 $ 13.96 $ 12.00 $12.00
Net investment income/(loss) (1).................. 0.02 (0.06) 0.03 (0.01)
Net realized and unrealized gain on
investments and securities sold short (2)........ 2.48 2.47 1.98 1.97
-------- ------- ----- -------
Net increase in net assets resulting from
operations....................................... 2.50 2.41 2.01 1.96
-------- ------- ------ -------
Dividends and distributions to shareholders from
Net investment income............................. (0.01) -- (0.01) --
Net realized capital gains........................ (1.91) (1.89) -- --
-------- --------
(1.92) (1.89) (0.01) --
-------- -------- ------- ------
Net asset value, end of period.................... $ 14.58 $ 14.48 $ 14.00 $13.96
======= ======= ======= ======
Total investment return (3)....................... 18.31% 17.69% 16.75% 16.33%
====== ======= ======== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)......... $13,860 $9,519 $12,132 $9,928
Ratio of expenses to average net assets (1)....... 1.65% 2.15% 1.65%(4) 2.15%(4)
Ratio of net investment income/(loss) to average
net assets...................................... 0.11% (0.38)% 0.38%(4) (0.12)%(4)
Decrease reflected in above expense ratios and
net investment income/(loss) due to waivers and
reimbursements................................... 1.82% 1.81% 1.87%(4) 1.92%(4)
Portfolio turnover rate........................... 128.42% 128.42% 93.45%(5) 93.45%(5)
Average commission rate per share (6)............. $0.0264 $0.0264 $0.0294 $0.0294
</TABLE>
- -----------------------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset values
during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
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."
- 5 -
<PAGE>
ALTERNATIVE PURCHASE METHODS
By this Prospectus, the Portfolio offers investors three 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
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 5.50% 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." Class A shares of the
Portfolio are subject to an annual distribution and shareholder servicing fee at
the rate of 0.50 of 1% of the value of the average daily net assets of Class A.
Currently, 0.25% of this fee, attributable to distribution related expenses, is
being waived. See "Management of the Fund-Distribution and Shareholder Servicing
Plan."
CLASS B SHARES
Class B shares of the Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares-Class B shares." The Class B shares of the Portfolio also are subject to
an annual distribution fee at the rate of 0.75 of 1% and an annual shareholder
servicing fee at the rate of 0.25 of 1% of the value of the average daily net
assets of Class B. See "Management of the Fund-Distribution and Shareholder
Servicing Plan." Class B shares will convert to Class A shares, based on their
relative net asset values, eight years after initial purchase. The distribution
and shareholder servicing fee paid by Class B will cause such class to have a
higher expense ratio and to pay lower dividends than Class A.
CLASS C SHARES
Class C shares of the Portfolio are subject to a 1% 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 Portfolio also are subject to an
annual distribution and shareholder servicing fee at the rate of 1% of the
average daily net assets of Class C, of which 0.75% compensates Bear Stearns for
distribution services and 0.25% is deemed to be for shareholder servicing. 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 Portfolio, the accumulated distribution and
shareholder servicing fee and CDSC, if any, on Class B or 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 investment
return of Class A . See "How to Buy Shares - Choosing a Class of Shares."
DESCRIPTION OF THE PORTFOLIO
INVESTMENT OBJECTIVE
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 Investment Company Act of 1940, as amended, (the
- 6 -
<PAGE>
"1940 Act") of the Portfolio's outstanding voting shares. There can be no
assurance that the Portfolio's investment objective will be achieved.
INVESTMENT STRATEGY
The Adviser selects portfolio securities by 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 the Adviser to be in the best position to
understand the near-term prospects of their companies. The Adviser 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.
The Adviser believes that collecting, classifying and analyzing these
transactions 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. The
Adviser monitors changes in analysts' predicted earnings and ratings. The
Adviser 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 company may decide that its stock is
undervalued. Many companies see undervaluation as an opportunity to purchase the
company's stock in the open market. The Adviser believes that by monitoring
changes in shares outstanding (in the hands of the public), a useful signal can
be extracted relating to the companies 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 by the Adviser to produce valuable information
about the prospects for individual companies. The Adviser 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 unless a positive or
negative signal, as the case may be, is received from insider behavior. In its
analysis, the Adviser uses only data that is available to the public. The
Adviser obtains the data on insider trading activity from CDA/Investnet, which
compiles this information from publicly available Securities and Exchange
Commission filings.
- 7 -
<PAGE>
MANAGEMENT POLICIES
Under normal market conditions, the Adviser invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. The Adviser 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 the Adviser anticipates that the issuers
principally will be mid- to large capitalization companies; that is, those with
market capitalizations exceeding $1 billion.
The Adviser selects 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, 1997, approximately 48% 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 purchasing other equity securities in a
manner intended to approximate or exceed the performance of the S&P 500
Index-the Adviser 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 agreements, 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 the
Adviser determines that adverse market conditions exist, the Portfolio may adopt
a temporary defensive posture and invest all of its assets in money market
instruments.
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 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 TECHNIQUES
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
- --------
* "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.
- 8 -
<PAGE>
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."
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
liquid securities, at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral always equals the current
value of the security sold short; or (b) otherwise cover its short position in
accordance with positions taken by the staff of the 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.
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<PAGE>
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 the Adviser'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 liquid
securities 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
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.
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<PAGE>
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The 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. 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. 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
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<PAGE>
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 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 Adviser. 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 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, 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, 1997 of over $2.9 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. BSFM uses a team approach to money management consisting of
portfolio managers, assistant portfolio managers and analysts performing as a
dynamic unit to manage the assets of the Portfolio. The team consists of Mark
Kurland, Senior Portfolio Manager; Robert Reitzes, Senior Portfolio Manager; Jim
McCluskey, Senior Portfolio Manager; Gail Sprute, Portfolio Manager/Analyst and
Harris Cohen, Portfolio Manager/Analyst. Jim McCluskey leads the portfolio
manager team for the Portfolio. Mr. McCluskey, a Chartered Financial Analyst,
joined BSFM in May 1997 as a Senior Managing Director and Senior Portfolio
Manager. From 1989 through 1997, he was a Senior Portfolio Manager at Spare,
Kaplan, Bischel & Associates, an institutional asset management firm where he
co-managed over $2 billion in assets.
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 0.50% per year of the
value of the Portfolio's average daily net assets.
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<PAGE>
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% 0.50% 1.50%
+2.75 percentage points or more but less than +3.00
percentage points.................................. 1% 0.40% 1.40%
+2.50 percentage points or more but less than +2.75
percentage points.................................. 1% 0.30% 1.30%
+2.25 percentage points or more but less than +2.50
percentage points.................................. 1% 0.20% 1.20%
+2.00 percentage points or more but less than +2.25
percentage points.................................. 1% 0.10% 1.10%
Less than +2.00 percentage points but more than
- -2.00 percentage points............................ 1% 0.00% 1.00%
- -2.00 percentage points or less but more than -2.25
percentage points.................................. 1% -0.10% 0.90%
- -2.25 percentage points or less but more than -2.50
percentage points.................................. 1% -0.20% 0.80%
- -2.50 percentage points or less but more than -2.75
percentage points.................................. 1% -0.30% 0.70%
- -2.75 percentage points or less but more than -3.00
percentage points.................................. 1% -0.40% 0.60%
- -3.00 percentage points or less.................... 1% -0.50% 0.50%
</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. For the fiscal year ended March 31, 1997, no fees were paid by
the Portfolio pursuant to a voluntary undertaking by BSFM.
The Portfolio's administrator is BSFM. 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 0.15 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 follows: 0.10 of 1% per
annum of the first $200 million of the Portfolio's average daily net assets,
0.075 of 1% per annum of the next $200 million up to $400 million of the
Portfolio's average daily net assets, 0.05 of 1% of the next $200 million up to
$600 million of the Portfolio's average daily net assets, 0.03 of 1% per annum
of
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<PAGE>
average daily net assets in excess of $600 million. These advisory fees are
subject to a monthly minimum fee of $11,000.
For the fiscal year ended March 31, 1997, the Portfolio paid PFPC Inc. a monthly
fee at the effective annual rate of 0.45 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.
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 - CLASS A SHARES AND CLASS C SHARES
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
0.50% and 1.00% of the average daily net assets of Class A and Class C,
respectively. With respect to Class A shares, 0.25% of this fee, attributable to
distribution related expenses, is currently being waived. 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. Of these amounts, up to 0.25% of the average
daily net assets of each class will compensate institutions for personal service
and maintenance of accounts holding Portfolio shares. 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.
- 14 -
<PAGE>
DISTRIBUTION PLAN - CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the Fund will
pay Bear Stearns an annual fee of 0.75% per year of the average daily net assets
of Class B shares. Amounts paid under the Distribution Plan compensates Bear
Stearns for distributing Portfolio shares. Bear Stearns may pay a portion of
this amount to other institutions that sell Portfolio shares.
SHAREHOLDER SERVICING PLAN - CLASS B SHARES
The Fund has adopted a Shareholder Servicing Plan for Class B shares. In
accordance with the Shareholder Servicing Plan, the Fund may enter into
Shareholder Service Agreements under which the Fund pays fees of up to 0.25% of
the average daily net assets of Class B shares for fees incurred in connection
with the personal service and maintenance of accounts holding Portfolio shares.
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 1.50% of Class A's
average daily net assets 2% of Class B'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
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.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your
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<PAGE>
investment. If your goals change over time, you should review your investment to
determine whether a particular class of shares best suits your needs.
The factors discussed below assume the expenses that apply to each class of
shares as described in this prospectus. In addition, they assume an annual rate
of return of 10%. The actual amount of the return may be higher or lower,
depending on actual investment returns over time. This discussion is not
intended to be investment advice or recommendations, because each investor's
goals, needs and circumstances are unique.
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of $500,000 in the aggregate on purchases
of Class B shares and a maximum purchase limitation of $1,000,000 in the
aggregate on purchases of Class C shares. Investors who purchase $1 million or
more may only purchase Class A shares. If you purchase over $1 million, and do
not maintain your investment for at least one year from the date of purchase,
you will be charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not feature an initial sales charge.
If you plan to invest up to $100,000 for a short period of time, Class C shares
might be more appropriate even though the class expenses are higher, because
there is no initial sales charge and no CDSC if held for over one year. In other
cases, investors with a medium-term investment horizon may find Class A shares
more suitable, because of the higher class expenses and CDSC of Class B shares.
If you invest more than $100,000 and increase your investment horizon toward
eight years, then Class A shares may be more appropriate, because the effect of
the higher class expenses of Class C shares might be greater than the effect of
the initial sales charge of the Class A shares.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate Bear Stearns and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
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. Direct overnight
deliveries to PFPC Inc., 400 Bellevue Parkway, Suite 108, Wilmington, Delaware
19809. Payment by check or Federal Reserve draft must be received within three
business days of receipt
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<PAGE>
of the purchase order by Bear Stearns or an Authorized Dealer. Shareholders may
not purchase shares of the Portfolio with a check issued by a third party and
endorsed over to the Portfolio. 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, a copy of which is attached to this
Prospectus, indicating which class of shares is being purchased 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 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
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 backup withholding and a $50 penalty imposed
by the Internal Revenue 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:
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<PAGE>
TOTAL SALES LOAD
<TABLE>
<CAPTION>
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.......................... 5.50% 5.82% 5.25%
$50,000 to less than $100,000........... 4.75 4.99 4.25
$100,000 to less than $250,000.......... 3.75 3.90 3.25
$250,000 to less than $500,000.......... 2.75 2.83 2.50
$500,000 to less than $1,000,000.. ..... 2.00 2.04 1.75
$1,000,000 and above..................... 0.00* 0.00 1.25
</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.
Class A shares may be sold at net asset value to (a) the Adviser, its affiliates
or its officers, directors or employees (including retired employees), any
partnership of which the 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 the 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 the
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 of its
employees in Class A shares of the Portfolio. 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.
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<PAGE>
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 B SHARES
The public offering price for Class B 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 B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolio will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
CDSC as a Percentage of
Year Since Dollar Amount
Purchase Subject to CDSC
- -------- ---------------
First 5%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
- -----------------
* As discussed below, Class B Shares automatically convert to Class A Shares
after the eighth year following purchase.
Class B shares of the Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the
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<PAGE>
date of the initial purchase. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of the initial
purchase of the shares on which the distribution was paid. The conversion of
Class B shares to Class A shares will not occur at any time the Portfolio is
advised that such conversions may constitute taxable events for federal tax
purposes, which the Portfolio believes is unlikely. If conversions do not occur
as a result of possible taxability, Class B shares would continue to be subject
to higher expenses than Class A shares for an indeterminate period.
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.
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<PAGE>
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 or about 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 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 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 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 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).
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<PAGE>
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. No
CDSC will be imposed on Class B or C shares at the time of an exchange. The CDSC
applicable on a redemption of Class B or C shares will be calculated from the
date of the initial purchase of the Class B or 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 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 recognize a taxable
gain or loss.
REDIRECTED DISTRIBUTION OPTION
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 current net asset value. If an investor is investing in
a class that charges a CDSC, the shares purchased will be subject upon
redemption to the CDSC, if 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
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<PAGE>
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 or of any other Bear Stearns
Fund within 60 days of the redemption. Shareholders should obtain and read the
applicable prospectuses of such other funds and consider their objectives,
policies and applicable fees before investing in any of such funds. 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 B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B 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 B shares
above the total amount of payments for the purchase of Class B 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 $256) would be charged at a rate of 5% for a
total CDSC of $12.00.
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<PAGE>
WAIVER OF CDSC
The CDSC applicable to Class B 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, (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, and
(e) to the extent that shares redeemed have been withdrawn from the Automatic
Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder
account based on the value of the account at the time the automatic withdrawal
is established. 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 that 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
CONTINGENT DEFERRED SALES CHARGE - CLASS C SHARES
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.
WAIVER OF CDSC
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 a Portfolio by merger, acquisition of
assets or otherwise, (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, and
(e) to the extent that shares redeemed have been withdrawn from the
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<PAGE>
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the automatic
withdrawal is established. 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
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.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association who are participants in a
medallion program recognized by the securities transfer
- 25 -
<PAGE>
association. The three recognized medallion programs are Securities Transfer
Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and
New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature
Guarantees which are not a part of these programs will not be accepted. Please
note that a notary public stamp or seal is not acceptable. The Fund reserves the
right to amend or discontinue its signature guarantee policy at any time and,
with regard to a particular redemption transaction, to require a signature
guarantee at its discretion. Any questions with respect to signature-guarantees
should be directed to the Transfer Agent by calling 1-800-447-1139.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPATED]
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 B and C shares will receive lower per share dividends than Class A
shares because of the higher expenses borne by Class B and C shares. 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.
- 26 -
<PAGE>
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
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.
Generally, the Fund must 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 that
the TIN furnished in connection with opening an account is correct and 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 direct
the Fund to institute backup withholding if the IRS determines that 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.
While the Portfolio is not expected to have any federal tax liability, 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, 1997 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. The Portfolio may be
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 applicable to an investment in the Portfolio.
PERFORMANCE INFORMATION
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 during the
measuring period were
- 27 -
<PAGE>
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 B and Class C shares should be expected to
be lower than that of Class A shares. 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 B 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 B or 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 a business trust under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994. 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 four classes-Class A, B, C and 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
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<PAGE>
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 seven 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, Rule 18f-2 exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of Rule 18f-2.
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 or by calling Bear Stearns at
1-800-766-4111.
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<PAGE>
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The Bear Stearns Funds
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Account Information Form
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-766-4111. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
(1) Account Type (Please print indicate only one registration type)
[_] Individual [_] Joint Tenant
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NAME
---------------------------------------------------------------------------
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
- - -
------ --- ------ ----- ----------------
SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER
OF PRIMARY OWNER
(1) Use only the Social Security number or Taxpayer Identification Number
of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants
with right of survivorship and not tenants in common unless tenants in
common or community property registrations are requested.
---------------------------------------------------------------------------
[_] Uniform Gift to Minors, or [_] Uniform Transfer to Minors (where
allowed by law)
---------------------------------------------------------------------------
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
---------------------------------------------------------------------------
NAME OF MINOR (ONLY ONE PERMITTED)
Under the _______________________ Uniform Gift/Transfers to Minors Act.
STATE RESIDENCE OF MINOR
/ / - -
------ ----- ------ ------ --- ------
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER
(REQUIRED TO OPEN AN ACCOUNT)
--------------------------------------------------------------------------
[_] Corporation [_] Partnership [_] Trust* [_] Other
--------------------------------------------------------------------------
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
<PAGE>
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NAME(S) OF TRUSTEE(S) DATE OF THE TRUST AGREEMENT
- - -
------ ----- ------ ----- ----------------
SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER
(REQUIRED TO OPEN ACCOUNT) (REQUIRED TO OPEN ACCOUNT)
* If a Trust, include date of trust instrument and list of trustees if they
are to be named in the registration.
(2) Mailing Address
---------------------------------------------------------------------------
STREET OF P.O. BOX APARTMENT NUMBER
---------------------------------------------------------------------------
CITY STATE ZIP CODE
( ) ( )
---------------------------------- -----------------------------------
DAY TELEPHONE EVENING TELEPHONE
(3) Investment Information
Method of Investment
[_] I have enclosed a check for a minimum investment of $1,000 per Fund.
[_] I have enclosed a check for a minimum subsequent investment of $250 per
Fund or completed the Systematic Investment Plan information in Section
13.
[_] I purchased ____________ shares of __________________ through my broker
on____/____/_____. Confirm #__________________.
Please make my investment in the Funds designated below:
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CLASS A CLASS B CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT
---------------------------------------------------------------------------
S&P STARS Portfolio $
------ ------- --------------
Large Cap Value Portfolio $
------ ------- --------------
Small Cap Value Portfolio $
------ ------- --------------
Total Return Bond Portfolio $
------ ------- --------------
The Insiders Select Fund $
------ ------- --------------
Emerging Markets Debt Portfolio $
------ ------- --------------
<PAGE>
Money Market Portfolio $
------ ------- --------------
N/A Focus List Portfolio $
------ ------- --------------
TOTAL INVESTMENT AMOUNT $
==============
Note: All shares purchased will be held in a shareholder account for the
investor at the Transfer Agent. Checks drawn on foreign banks and checks
made payable to persons or entities other than the Fund will not be
accepted. Checks should be made payable to the Fund which you are investing
in. If no class is designated, your investment will be made in Class A
shares.
NOT PART OF THE PROSPECTUS
<PAGE>
(4) Reduced Sales Charge (Available for Class A Shares)
Method of Investment
Are you a shareholder in another Bear Stearns Fund? Yes [_] No
[_] I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
---------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
---------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
---------------------------------------------------------------------------
FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
Letter of Intent
[_] I am already investing under an existing Letter of Intent.
[_] I agree to the Letter of Intent provisions in the Fund's current
prospectus. During a 13-month period, I plan to invest a dollar amount
of at least [_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000
Net Asset Value Purchase
[_] I qualify for an exemption from the sales charge by meeting the
conditions set forth in the prospectus. (Please attach certification to
this form.)
[_] I qualify to purchase shares at net asset value, with proceeds received
from a mutual fund or closed-end fund not distributed by Bear Stearns.
(Please attach proof of fund share redemption.)
(5) Distribution Options
Dividends and capital gains may be reinvested or paid by check. If no
options are selected below, both dividends and capital gains will be
reinvested in additional Fund shares.
Dividends [_] Pay by check. [_] Reinvest.
Capital Gains [_] Pay by check. [_] Reinvest.
The Redirected Distribution Option allows an investor to have dividends and
any other distributions from a Fund automatically used to purchase shares
of the same class of any other Fund. The receiving account must be in the
same name as your existing account.
[_] Please reinvest dividends and capital gains from the __________________
(NAME OF FUND)
to the _________________.
<PAGE>
(NAME OF FUND)
If you elect to have distributions paid by check, distributions will be
sent to the address of record. Distributions may also be sent to another
payee:
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NAME
---------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
---------------------------------------------------------------------------
CITY STATE ZIP CODE
---------------------------------------------------------------------------
Optional Features
(6) Automatic Withdrawal Plan
[_] Fund Name [_] Amount
--------------------------------- ------------
[_] Startup Month
-----------------------
Frequency option: [_] Monthly [_] Every other month [_] Quarterly
[_] Semiannually [_] Annually
* A minimum account value of $5,000 in a single account is required to
establish an automatic withdrawal plan.
* Payments will be made on or near the 25th of the month
* Shareholders holding share certificates are not eligible for the
Automatic Withdrawal Plan.
[_] Please mail checks to Address of Record (Named in Section 2)
[_] Please electronically credit my Bank of Record (Named in Section 9)
[_] Special payee as specified below:
---------------------------------------------------------------------------
NAME
---------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
---------------------------------------------------------------------------
CITY STATE ZIP CODE
(7) Telephone Exchange Privilege
Unless indicated below, I authorize the Transfer Agent to accept
instructions from any persons to exchange shares in my account(s) by
telephone, in accordance with the procedures and conditions set forth in
<PAGE>
the Fund's current prospectus.
[_] I DO NOT want the Telephone Exchange Privilege.
NOT PART OF THE PROSPECTUS
<PAGE>
(8) Telephone Redemption Privilege
[_] I authorize the Transfer Agent to accept instructions from any person
to redeem shares in my account(s) by telephone, in accordance with the
procedures and conditions set forth in the Fund's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to
the address of record, unless the information in Section 9 is completed for
redemption by wire of $500 or more.
(9) Bank of Record (for Telephone Redemptions and/or Systematic Investment
Plans)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
---------------------------------------------------------------------------
BANK NAME
---------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
---------------------------------------------------------------------------
CITY STATE ZIP CODE
---------------------------------------------------------------------------
BANK ASA NUMBER BANK ACCOUNT NUMBER
---------------------------------------------------------------------------
ACCOUNT NAME
(10) Signature and Taxpayer Certification
The undersigned warrants that I (we) have full authority and, if a natural
person, I (we) am (are) of legal age to purchase shares pursuant to this
Account Information Form, and have received a current prospectus for the
Bear Stearns Fund(s) in which I (we) am (are) investing. The undersigned
acknowledges that the Telephone Exchange Privilege is automatic and that I
(we) may bear the risk of loss in event of fraudulent use of the Privilege.
If I (we) do not want the Telephone Exchange Privilege, I (we) have so
indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is
required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding or (b) I have not been notified by the Internal Revenue
Service that I am subject to 31% backup withholding as a result of a
failure to report all interest or dividends or (c) the IRS has notified me
that I am no longer subject to backup withholding.
<PAGE>
Certification Instructions -- You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting of interest or dividends on your tax
return. Mutual fund shares are not deposits of, or guaranteed by, any
depository institution, nor are they insured by the FDIC. Investment in the
funds involves investment risks, including possible loss of principal.
[_] Exempt from backup withholding
[_] Nonresident alien (Form W-8 attached)
---------------------------------
COUNTRY OF CITIZENSHIP
---------------------------------------------------------------------------
AUTHORIZED SIGNATURE TITLE DATE
---------------------------------------------------------------------------
AUTHORIZED SIGNATURE TITLE DATE
(11) For Authorized Dealer Use Only (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection
with the transactions authorized by the Account Information Form and agree
to notify the Transfer Agent of any purchases made under a Letter of Intent
or Right of Accumulation. If this Account Information Form includes a
Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
---------------------------------------------------------------------------
DEALER'S NAME DEALER NUMBER
---------------------------------------------------------------------------
MAIN OFFICE ADDRESS BRANCH NUMBER
---------------------------------------------------------------------------
REPRESENTATIVE'S NAME REP. NUMBER
( )
----------------------------------------------------- --------------------
BRANCH ADDRESS TELEPHONE NUMBER
---------------------------------------------------------------------------
AUTHORIZED SIGNATURE OF DEALER TITLE DATE
(12) Additional Account Statements (Please Print)
In addition to myself and my representative, please send copies of my
account statements to:
------------------------------------- ------------------------------------
NAME NAME
------------------------------------- ------------------------------------
ADDRESS ADDRESS
<PAGE>
------------------------------------- ------------------------------------
CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE
NOT PART OF THE PROSPECTUS
<PAGE>
(13) Systematic Investment Plan
The Systematic Investment Plan, which is available to shareholders of The
Bear Stearns Funds, makes possible regularly scheduled purchases of Fund
shares to allow dollar-cost averaging. The Funds' Transfer Agent can
arrange for an amount of money selected by you ($100) minimum to be
deducted from your checking account and used to purchase shares of a
specified Bear Stearns Fund. A $250 minimum initial investment is required.
This may not be used in conjunction with the Automatic Withdrawal Plan.
Please debit $ ____________ from my checking account (named in Section 9)
on or about the 20th of the month. Depending on the Application receipt
date, the Plan may take 10 to 20 days to be in effect.
[_] Monthly [_] Every alternate month
[_] Quarterly [_] Other _______________
$_____________ into the __________________ Fund _____________ Start Month.
$100 MINIMUM
$_____________ into the __________________ Fund _____________ Start Month.
$100 MINIMUM
$_____________ into the __________________ Fund _____________ Start Month.
$100 MINIMUM
If you are applying for the Telephone Redemption Privilege or Systematic
Investment Plan, please tape your voided check on top of our sample below.
---------------------------------------------------------------------------
John Smith 000
123 First Avenue
Anytown, USA 12345
$[-----]
------------------------------------------------------------
--------------------------------------------------------------------
V O I D
-------------------------- --------------------------------------
---------------------------------------------------------------------------
Service Assistance
Our knowledgeable Client Services Representatives are available to assist you
between 8:00 a.m. and 6:00 p.m. Eastern Time at:
1-800-447-1139
Mailing or Fax Instructions
<PAGE>
Mail your completed Account Information Form and check to:
The Bear Stearns Funds
c/o PFPC Inc.
P.O. Box 8960
Wilmington, DE 19899-8960
Fax: 302-791-1777
If applications will be faxed, please call and notify Client Services at
1-800-447-1139 before placing an order.
Bear Stearns & Co. Inc.
7.97
NOT PART OF THE PROSPECTUS
<PAGE>
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 is permitted to invest up to 5% of its total 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 the Adviser's
ability to predict correctly movements in the direction of individual stocks,
the stock market generally, foreign currencies or interest rates. To the extent
the Adviser's predictions are incorrect, the Portfolio may incur losses which
could adversely affect the value of a shareholder's investment.
LENDING PORTFOLIO SECURITIES
From time to time, the Portfolio may lend securities from its portfolio of
investments 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
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
A-27
<PAGE>
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
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into a specified number of shares of common
stock of the same or a different issuer. 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
appreciation 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 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
A-28
<PAGE>
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 Inc.
("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 Adviser 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.
A-29
<PAGE>
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 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 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.
A-30
<PAGE>
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 AND ADMINISTRATOR
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
CUSTODIAN
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
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIO'S PROSPECTUS AND IN
THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
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 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.
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 8 0 0 7 6 6 o 4 1 1 1
PROSPECTUS
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
Class A, B and C Shares
S&P STARS Portfolio (the "STARS Portfolio" or the "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.
By this Prospectus, the STARS Portfolio is offering three classes of shares.
Class A shares are subject to a sales charge imposed at the time of purchase .
Class B shares are subject to a contingent deferred sales charge of up to 5%
imposed on redemptions made within the first six years of purchase. 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, 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 Portfolio's investment adviser.
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 _________,
1997, 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; ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
_________, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
Fee Table............................................................... 3
Financial Highlights.................................................... 4
Alternative Purchase Methods............................................ 5
Description of the STARS Portfolio...................................... 6
Risk Factors............................................................ 8
Management of the STARS Portfolio....................................... 10
How to Buy Shares....................................................... 12
Shareholder Services.................................................... 15
How to Redeem Shares.................................................... 17
Dividends, Distributions and Taxes...................................... 19
Performance Information................................................. 20
General Information..................................................... 21
Appendix................................................................ A-1
- 2 -
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 5.50% -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)*..................................... * 5.00% 1.00%
ANNUAL STARS PORTFOLIO OPERATING EXPENSES**
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)........................ 0.05% 0.05% 0.05%
12b-1 Fees****.......................................... 0.25% 0.75% 1.00%
Other Expenses (after expense reimbursement)***......... 1.20% 1.20% 0.95%
Total Portfolio Operating Expenses (after fee waiver and
expense reimbursement)***............................... 1.50% 2.00% 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.................................................. $ 69 $ 71 $ 30
3 YEARS................................................. $100 $106 $ 63
5 YEARS................................................. $132 $131 $108
10 YEARS*****........................................... $228 $220 $233
You would pay the following expenses on the same investment,
assuming no redemption:
1 YEAR.................................................. -- $ 20 $ 20
3 YEARS................................................. -- $ 63 $ 63
5 YEARS................................................. -- $ 108 $108
10 YEARs*****........................................... -- $ 220 $233
</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 of Class A shares within the first year after purchase. See
"How to Buy Shares-Class A Shares."
** Prior to June 25, 1997, the Portfolio invested all of its assets in the
S&P STARS Master Series (the "Master Series"), a series of S&P STARS Fund.
The Master Series had substantially the same investment objective,
policies and restrictions as the Portfolio.
*** With respect to Class B shares, Other Expenses include a shareholder
servicing fee of 0.25%. With respect to all classes, BSFM has undertaken
to waive its advisory fee and assume certain expenses of 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, 2.00% for Class B and 2.00% for Class C. Without such
waiver, Advisory Fees stated above would have been 0.75% for each class.
Other Expenses would have been 2.15% for Class A and 1.90% for Class C and
Total STARS Portfolio Operating Expenses would be 2.20% for Class A and
2.70% for Class C. With respect to Class B shares, Other Expenses are
estimated to be 1.90, and Total Portfolio Operating Expenses are estimated
at 2.70.
**** With respect to Class A and Class C shares, 12b-1 fees include a
shareholder servicing fee of 0.25%. With respect to Class A shares, the
remaining 0.25%, attributable to distribution related expenses, is
currently being waived. Without the fee waiver, 12b-1 fees with respect to
Class A shares would have been 0.50%.
- 3 -
<PAGE>
***** Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after
year eight with respect to Class B shares.
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."
- 4 -
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the table below covering the STARS Portfolio's investment
results for the periods 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, 1997 which is incorporated by reference into
the Portfolio's Statement of Additional Information which is available upon
request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A and
Class C shares of the Portfolio for the periods indicated. Prior to June 25,
1997, the Portfolio invested all of its assets in the S&P STARS Master Series
(the "Master Series"), a series of S&P STARS Fund. The Master Series had
substantially the same investment objective, policies and restrictions as the
Portfolio. This information has been derived from information provided in the
Portfolio's financial statements.
<TABLE>
<CAPTION>
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FOR THE PERIOD
FOR THE FISCAL YEAR APRIL 5, 1995*
ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance**
Net asset value, beginning of period ........... $14.92 $14.86 $12.00 $12.00
Net investment loss (1) ........................ (0.09) (0.17) -- (0.06)
Net realized and unrealized gain from Master
Series (2) ..................................... 2.63 2.62 3.31 3.28
---------- ---------- ---------- ----------
Net increase in net assets resulting from 2.54 2.45 3.31 3.22
operations ..................................... ---------- ---------- ---------- ----------
Dividends and distributions to shareholders from (1.33) (1.25) (0.39) (0.36)
Net realized capital gains ..................... ---------- ---------- ---------- ----------
(1.33) (1.25) (0.39) (0.36)
---------- ---------- ---------- ----------
Net asset value, end of period ................. $16.13 $16.06 $14.92 $14.86
====== ====== ====== ======
Total investment return for the period (3) ..... 16.87% 16.33% 27.68% 26.91%
====== ====== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000's omitted) ...... $67,491 $37,622 $45,049 $28,081
Ratio of expenses to average net assets (1) .... 1.50% 2.00% 1.50%(4) 2.00%(4)
Ratio of net investment loss to average
net assets (1) ................................. (0.59)% (1.09)% (0.01)%(4) (0.45)%(4)
Decrease reflected in above expense ratios and
net investment loss due to waivers and
reimbursements (5) ............................. 0.70% 0.70% 0.89%(4) 0.92%(4)
</TABLE>
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* Commencement of investment operations.
** Calculated based upon shares outstanding on the first and last day of the
respective period, except for dividends and distributions, if any, which are
based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and/or reimbursements.
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<PAGE>
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset value
during the respective period. (3) Total investment return does not consider the
effects of sales charges or contingent deferred sales charges. Total investment
return is calculated assuming a purchase of shares on the first day and a sale
of shares on the last day of each period reported and includes reinvestment of
dividends and distributions, if any. Total investment return is not annualized.
(4) Annualized. (5) Includes 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 periods indicated. This information has been derived
from information provided in the Master Series' financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL APRIL 5, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Ratios/Supplemental Data
Net assets, end of period (000's omitted)..................... $120,140 $82,028
Ratio of expenses to average net assets(1).................... 0.32% 0.19%(2)
Ratio of net investment income to average net assets(1)....... 0.59% 1 .36%(2)
Decrease reflected in above expense ratios
due to waivers and/or reimbursements........................ 0.70% 0.91%(2)
Portfolio turnover rate....................................... 220.00% 295.97%(3)
Average commission rate per share(4).......................... $0.0595 $0.0603
</TABLE>
* Commencement of investment operations.
(1) Reflects waivers and/or reimbursements.
(2) Annualized.
(3) Not annualized.
(4) Represents average commission rate per share charged to the Master Series
on purchases and sales of investments subject to such commissions during
each period.
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."
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<PAGE>
ALTERNATIVE PURCHASE METHODS
By this Prospectus, the Portfolio offers investors three 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
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 5.50% 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 0.50 of 1% of the value of the average daily net assets of
Class A. Currently, 0.25% of this fee, attributable to distribution related
expenses, is being waived. See "Management of the Fund-Distribution and
Shareholder Servicing Plan."
CLASS B SHARES
Class B shares of the Portfolio are sold without an initial sales charge but are
subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the Class
B shares are redeemed within six years of purchase. See "How to Redeem
Shares-Class B Shares." The Class B shares of the Portfolio also are subject to
an annual distribution fee at the rate of 0.75 of 1%, and an annual shareholder
servicing fee at the rate of 0.25 of 1% of the value of the average daily net
assets of Class B. See "Management of the Fund-Distribution and Shareholder
Servicing Plan." Class B shares will convert to Class A shares, based on their
relative net asset values, eight years after the initial purchase. The
distribution and shareholder servicing fees paid by Class B will cause such
class to have a higher expense ratio and to pay lower dividends than Class A.
CLASS C SHARES
Class C shares of the Portfolio are subject to a 1% 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 Portfolio also are subject to an
annual distribution and shareholder servicing fee at the rate of 1% of the
average daily net assets of Class C, of which 0.75% compensates Bear Stearns for
distribution services and 0.25% is deemed to be for shareholder servicing. 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 B or 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 investment
return of Class A. See "How to Buy Shares - Choosing a Class of Shares."
- 7 -
<PAGE>
DESCRIPTION OF THE STARS PORTFOLIO
GENERAL
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."
INVESTMENT OBJECTIVE
The 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 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. There can be no assurance that the
investment objective of the Portfolio 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 gives equal weight by dollar amount to 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.
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<PAGE>
FROM JANUARY 1, 1987 THROUGH MARCH 31, 1997
a The S&P 500 (measured on a total return basis, without dividend
reinvestment)* increased by 212.64%.
a The ranked stocks, measured as described above, changed in value
as follows*:
a Five stars - +443.52%
a Four stars - +264.03%
a Three stars - +161.04%
a Two stars - +140.11%
a One star - -47.81%
- -------------
* During this period, the average dividend yields on securities included
in the S&P 500 and the securities ranked five stars were approximately
2.9% and 1.9%, respectively.
The 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. In 1996, five star stocks
outperformed both the one star stocks and the S&P 500. Investors also should
consider that the Portfolio 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 74,000 subscriber
terminals.
MANAGEMENT POLICIES
The STARS Portfolio 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 Portfolio's 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 Portfolio 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 Portfolio. Subsequent
market appreciation of a security or changes in total assets due to
subscriptions and redemptions or
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<PAGE>
dividends or distributions to shareholders will not by themselves cause a
violation of this investment policy. In addition, a subsequent downgrade of a
five star ranked security (or a subsequent upgrade of a one-star security that
has been sold short) will cause the security to be included in the 15%
calculation, but will not by itself cause the Portfolio to violate this
limitation. If at any time, however, the Portfolio exceeds the 15% limitation,
the Portfolio will not purchase additional non-five star ranked securities or
sell short additional non-one star ranked securities. The Portfolio 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. The
Portfolio will not count money market instruments for purposes of determining
compliance with the 15% limitation.
INVESTMENT TECHNIQUES
The Portfolio 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 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
liquid securities at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral always equals the current
value of the security sold short; or (b) otherwise cover its short position in
accordance with positions taken by the staff of the 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
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<PAGE>
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
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 outstanding voting securities of
the Portfolio. 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 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.
NET ASSET VALUE FLUCTUATIONS
The Portfolio's 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 held
by the 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 Portfolio, 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.
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<PAGE>
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 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, 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 turnover rate of
the Portfolio generally will not exceed 150%. However, the portfolio turnover
rate may exceed this rate, when 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 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 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 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 STARS 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 STARS PORTFOLIO
BOARD OF TRUSTEES
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.
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<PAGE>
INVESTMENT ADVISER
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, 1997 of over $2.8 billion.
BSFM serves as investment adviser of the Portfolio under an Investment Advisory
Agreement between BSFM and the Portfolio, subject to the overall authority of
the Fund's Board of Trustees in accordance with Massachusetts law. The
Portfolio's 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.
Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Portfolio's
average daily net assets. Prior to June 25, 1997, the Portfolio did not retain
an investment adviser. Rather, the Portfolio invested all of its assets in the
S&P STARS Master Series, a series of S&P STARS Fund, which was advised by BSFM.
Accordingly, information contained in this Prospectus and Statement of
Additional Information, to the extent it describes historical information
regarding fees, expenses and other portfolio information, reflects such results
incurred by the Master Series. For the period April 3, 1995 (commencement of
operations) through March 31, 1996, investment advisory fees payable amounted to
$384,778 all of which was waived. In addition, BSFM reimbursed $4,424 and
$79,750 of the Portfolio's and the Master Series' expenses, respectively,
pursuant to a voluntary undertaking by BSFM. For the fiscal year ended March 31,
1997, the investment advisory fees payable amounted to $747,970. BSFM waived
$699,997 of its advisory fee pursuant to a voluntary undertaking by BSFM
resulting in net advisory fees of $47,973 paid by the Master Series.
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 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, PFPC Inc. is
entitled to receive a monthly fee equal to an annual rate of .10 of 1% of the
Portfolio's average daily net assets up to $200 million, .075 of 1% of the next
$200 million, .05 of 1% of the next $200 million and .03 of 1% of net assets
above $600 million, subject to a minimum annual fee of approximately $100,000
for the Portfolio. Prior to June 25, 1997, PFPC Inc. provided certain
administrative services to the STARS Portfolio. For providing these services,
the Fund agreed to pay PFPC Inc.
$5,500 per month.
Prior to June 25, 1997, the Master Series paid PFPC International Ltd. an annual
fee, as set forth below:
- --------------------------------------------------------------------------------
MASTERS 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 was subject to a monthly minimum fee of $8,500.
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<PAGE>
For the period April 3, 1995 (commencement of operations) through March 31,
1996, and the fiscal year ended March 31, 1997, the Master Series 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 Portfolio expenses, which would have the effect of lowering the 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. The
Portfolio will not pay BSFM at a later time for any amounts it may waive, nor
will it 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
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
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 -- CLASS A AND CLASS C SHARES
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
0.50% and 1.00% of the average daily net assets of Class A and Class C,
respectively. With respect to Class A shares, 0.25% of this fee, attributable to
distribution related expenses, is currently being waived. 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. Of these amounts, up to 0.25% of the average
daily net assets of each class will compensate institutions for personal service
and maintenance of accounts holding portfolio shares. The Portfolio 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.
DISTRIBUTION PLAN - CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the Fund will
pay the Distributor an annual fee of 0.75% per year of the average daily net
assets of Class B shares. Amounts paid under the Distribution Plan compensates
Bear Stearns for distributing Portfolio shares. Bear Stearns may pay a portion
of this amount to other institutions that sell Portfolio shares.
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<PAGE>
SHAREHOLDER SERVICING PLAN - CLASS B SHARES
The Fund has adopted a Shareholder Servicing Plan for Class B shares. In
accordance with the Shareholder Servicing Plan, the Fund may enter into
Shareholder Service Agreements under which the Fund pays fees of up to 0.25% of
the average daily net assets of Class B shares for fees incurred in connection
with the personal service and maintenance of accounts holding Portfolio shares.
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 1.50% of Class A's
average daily net assets, 2% of Class B'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
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 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 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'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 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.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment. If your goals change over time, you
should review your investment to determine whether a particular class of shares
best suits your needs.
The factors discussed below assume the expenses that apply to each class of
shares as described in this prospectus. In addition, they assume an annual rate
of return of 10%. The actual amount of the return may be higher or lower,
depending on actual investment returns over time. This discussion is not
intended to be investment advice or recommendations, because each investor's
goals, needs and circumstances are unique.
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<PAGE>
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of $500,000 in the aggregate on purchases
of Class B shares and a maximum purchase limitation of $1,000,000 in the
aggregate on purchases of Class C shares. Investors who purchase $1 million or
more may only purchase Class A shares. If you purchase over $1 million, and do
not maintain your investment for at least one year from the date of purchase,
you will be charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not feature an initial sales charge.
If you plan to invest up to $100,000 for a short period of time, Class C shares
might be more appropriate even though the class expenses are higher, because
there is no initial sales charge and no CDSC if held for over one year. In other
cases, investors with a medium-term investment horizon may find Class A shares
more suitable, because of the higher class expenses and CDSC of Class B shares.
If you invest more than $100,000 and increase your investment horizon toward
eight years, then Class A shares may be more appropriate, because the effect of
the higher class expenses of Class C shares might be greater than the effect of
the initial sales charge of the Class A shares.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate Bear Stearns and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
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 Portfolio, and should be directed to the Transfer Agent: PFPC Inc.,
Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Direct overnight deliveries to PFPC, Inc., 400 Bellevue Parkway, Suite 108,
Wilmington, Delaware 19809. 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. Shareholders may not purchase shares of the
Portfolio with a check issued by a third party and endorsed over to the
Portfolio. 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 Portfolio. 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 Portfolio. 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
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<PAGE>
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
Portfolio and directed to the address set forth in the preceding paragraph.
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
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 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 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 backup withholding and a $50 penalty imposed
by the Internal Revenue Service (the "IRS").
CLASS A SHARES
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 %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000........................... 5.50% 5.82% 5.25%
$50,000 to less than $100,000............... 4.75 4.99 4.25
$100,000 to less than $250,000.............. 3.75 3.90 3.25
$250,000 to less than $500,000.............. 2.75 2.83 2.50
$500,000 to less than $1,000,000............ 2.00 2.04 1.75
$1,000,000 and above........................ 0.00* 0.00 1.25
</TABLE>
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<PAGE>
- -------------
* There is no initial sales charge on purchases of $1,000,000 or more of
Class A shares. However, if an investor purchases Class A shares without an
initial sales charge as part of an investment of at least $1,000,000 and
redeems those shares within one year after purchase, a CDSC of 1.00% will
be imposed at the time of redemption.
The terms contained in the section of the Portfolio'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.
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
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
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
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<PAGE>
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 B SHARES
The public offering price for Class B 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 B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolios will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
CDSC as a Percentage of
Year Since Dollar Amount
Purchase Subject to CDSC
-------- ---------------
First 5%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
- -----------------
* As discussed below, Class B Shares automatically convert to Class A Shares
after the eighth year following purchase.
Class B shares of the Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class A
shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolio is advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolio believes
is unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
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
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<PAGE>
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. 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 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 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 STARS Portfolio shares will be
purchased once a month, on or about 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 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.
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<PAGE>
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
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 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 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. No
CDSC will be imposed on Class B or C shares at the time of an exchange. The CDSC
applicable on redemption of Class B or C shares will be calculated from the date
of the initial purchase of the Class B or C shares exchanged. If an investor is
exchanging Class A into a portfolio or fund that charges a sales load, the
investor
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<PAGE>
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 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 current net asset value. If an investor is investing in
a class that charges a CDSC, the shares purchased will be subject upon
redemption to the CDSC, if 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
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 Portfolio or of any other Bear Stearns
- 22 -
<PAGE>
Fund within 60 days of the redemption. Shareholders should obtain and read the
applicable prospectuses of such other funds and consider their objectives,
policies and applicable fees before investing in any of such funds. 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 B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B 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 B shares above the
total amount of payments for the purchase of Class B 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 $256) would be charged at a rate of 5% for a
total CDSC of $12.00.
WAIVER OF CDSC
The CDSC applicable to Class B 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 share holder, (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, (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, and
(e) to the extent that shares redeemed have been withdrawn from the Automatic
Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder
account based on the value of the account at the time the automatic withdrawal
is established. 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
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<PAGE>
CONTINGENT DEFERRED SALES CHARGE - CLASS C SHARES
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 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.
WAIVER OF CDSC
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, (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, and
(e) to the extent that shares redeemed have been withdrawn from the Automatic
Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder
account based on the value of the account at the time the automatic withdrawal
is established. 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
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
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<PAGE>
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.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program recognized by the securities transfer
association. The three recognized medallion programs are Securities Transfer
Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and
New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature
Guarantees which are not a part of these programs will not be accepted. Please
note that a notary public stamp or seal is not acceptable. The Fund reserves the
right to amend or discontinue its signature guarantee policy at any time and,
with regard to a particular redemption transaction, to require a signature
guarantee at its discretion. Any questions with respect to signature-guarantees
should be directed to the Transfer Agent by calling 1-800-447-1139.
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
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<PAGE>
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
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 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 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 the
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 B and C shares will receive
lower per share dividends than Class A shares because of the higher expenses
borne by Class B and C shares. 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'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 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 charge on the exchange, is not
included in the basis of such shares
- 26 -
<PAGE>
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.
Generally the Fund must 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
and 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.
While the STARS Portfolio is not expected to have any federal tax liability,
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 Portfolio has qualified for the fiscal
year ended March 31, 1997 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. The Portfolio may be
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 applicable to an investment in the STARS
Portfolio.
PERFORMANCE INFORMATION
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 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 B and 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 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 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 B 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
- 27 -
<PAGE>
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
B or 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. 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 a business trust under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994, and commenced operations on or about April
3, 1995. The 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 four classes-Class A, B, C and 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 Portfolio 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 Portfolio"
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 seven 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
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<PAGE>
matter are identical or that the matter does not affect any interest of such
portfolio. However, Rule 18f-2 exempts the selection of independent accountants
and the election of Trustees from the separate voting requirements of Rule
18f-2.
The 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 Portfolio
or any member of the public regarding the advisability of investing in the
Portfolio. S&P's only ongoing relationship with Bear Stearns and its affiliates
in connection with the 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 Portfolio's Statement
of Additional Information under "Information About the 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 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, and 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 or by calling Bear Stearns at 1-800-766-4111.
- 29 -
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION FORM
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-766-4111. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
(1) ACCOUNT TYPE (Please print; indicate only one registration type)
[_] INDIVIDUAL [_] JOINT TENANT
---------------------------------------------------------------------------
NAME
---------------------------------------------------------------------------
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
- - -
--- --- --- --- --- --- --- --- ---- --- ----- --- --- --- --- --- ---
SOCIAL SECURITY NUMBER of Primary Owner Taxpayer Identification number
(1) Use only the Social Security number or Taxpayer Identification
Number of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants
with right of survivorship and not tenants in common unless tenants in
common or community property registrations are requested
====================================================
=======================
[_] UNIFORM GIFT TO MINORS, OR [_] UNIFORM TRANSFER TO MINORS (WHERE
ALLOWED BY LAW)
---------------------------------------------------------------------------
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
---------------------------------------------------------------------------
NAME OF MINOR (ONLY ONE PERMITTED)
Under the Uniform Gift/Transfers to
------------------------------------
STATE RESIDENCE OF MINOR
Minors Act.
--- --- / --- --- / --- --- --- --- --- - --- --- - --- --- --- ---
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER (REQUIRED
TO OPEN ACCOUNT)
[_] Corporation [_] Partnership [_] Trust* [_] Other
---------------------------------------------------------------------------
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
---------------------------------------------------------------------------
<PAGE>
NAME(S) OF TRUSTEE(S) DATE OF THE TRUST AGREEMENT
--- --- --- - --- --- - --- --- --- ---
SOCIAL SECURITY NUMBER (REQUIRED TO OPEN ACCOUNT)
-
--- --- --- --- --- --- ---
Taxpayer Identification number (required to open account)
* If a Trust, include date of trust instrument and list of trustees if they
are to be named in the registration.
(2) MAILING ADDRESS
---------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
---------------------------------------------------------------------------
CITY STATE ZIP CODE
( ) ( )
------------------------------- -------------------------------------------
DAY TELEPHONE EVENING TELEPHONE
(3) INVESTMENT INFORMATION
METHOD OF INVESTMENT
[_] I have enclosed a check for a minimum initial investment of $1,000 per
Fund.
[_] I have enclosed a check for a minimum subsequent investment of $250 per
Fund or completed the Systematic Investment Plan information in Section
13.
[_] I purchased _____________________ shares of ___________________________
through my broker on ____/____/____. Confirm # _______________.
---------------------------------------------------------------------------
Please make my investment in the Funds designated below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class A Class B Class C Bear Stearns Funds Investment Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C>
_______ _______ S&P STARS PORTFOLIO $________________
_______ _______ Large Cap Value Portfolio $________________
_______ _______ Small Cap Value Portfolio $________________
_______ _______ Total Return Bond Portfolio $________________
_______ _______ The Insiders Select Fund $________________
_______ _______ Emerging Markets Debt Portfolio $________________
<PAGE>
_______ _______ Money Market Portfolio $________________
_______ _______ Focus List Portfolio $________________
- -----------------------------------------------------------------------------------------
Total Investment Amount $
================
</TABLE>
Note: All shares purchased will be held in a shareholder account for the
investor at the Transfer Agent. Checks drawn on foreign banks and checks
made payable to persons or entities other than the Fund will not be
accepted. Checks should be made payable to the Fund which you are investing
in. If no class is designated, your investment will be made in Class A
shares.
N O T P A R T O F T H E P R O S P E C T U S
<PAGE>
4 REDUCED SALES CHARGE (AVAILABLE FOR CLASS A SHARES ONLY)
METHOD OF INVESTMENT
Are you a shareholder in another Bear Stearns Fund? [_] Yes [_] No
[_] I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
--------------------------------------------------------------------------
Fund Account number or social security number
--------------------------------------------------------------------------
Fund Account number or social security number
--------------------------------------------------------------------------
Fund Account number or social security number
Letter of Intent
[_] I am already investing under an existing Letter of Intent.
[_] I agree to the Letter of Intent provisions in the Fund's current
prospectus. During a 13-month period, I plan to invest a dollar amount
of at least: [_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000
Net Asset Value Purchase
[_] I qualify for an exemption from the sales charge by meeting the
conditions set forth in the prospectus. (Please attach certification to
this form.)
[_] I qualify to purchase shares at net asset value, with proceeds received
from a mutual fund or closed-end fund not distributed by Bear Stearns.
(Please attach proof of fund share redemption.)
5 DISTRIBUTION OPTIONS
Dividends and capital gains may be reinvested or paid by check. If no
options are selected below, both dividends and capital gains will be
reinvested in additional Fund shares.
Dividends [_] Pay by check. [_] Reinvest.
Capital Gains [_] Pay by check. [_] Reinvest.
The Redirected Distribution Option allows an investor to have dividends and
any other distributions from a Fund automatically used to purchase shares
of the same class of any other Fund. The receiving account must be in the
same name as your existing account.
[_] Please reinvest dividends and capital gains from the _________________
(name of fund)
<PAGE>
to the __________________________ .
(name of fund)
If you elect to have distributions paid by check, distributions will be
sent to the address of record. Distributions may also be sent to another
payee:
--------------------------------------------------------------------------
Name
--------------------------------------------------------------------------
Street or P.O. Box Apartment Number
--------------------------------------------------------------------------
City State Zip code
--------------------------------------------------------------------------
OPTIONAL FEATURES
6 AUTOMATIC WITHDRAWAL PLAN
[_] Fund Name _____________________________ [_] Amount _________________
[_] Startup month __________________________
Frequency option: [_] Monthly [_] Every other month [_] Quarterly
[_] Semiannually [_] Annually
. A minimum account value of $5,000 in a single account is required to
establish an automatic withdrawal plan.
. Payments will be made on or near the 25th of the month.
. Shareholders holding share certificates are not eligible for the
Automatic Withdrawal Plan.
[_] Please mail checks to Address of Record (Named in Section 2)
[_] Please electronically credit my Bank of Record (Named in Section 9)
[_] Special payee as specified below:
--------------------------------------------------------------------------
Name
--------------------------------------------------------------------------
Street or P.O. Box Apartment Number
--------------------------------------------------------------------------
City State Zip code
7 TELEPHONE EXCHANGE PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept
instructions from any persons to exchange shares in my account(s) by
telephone, in accordance with the procedures and conditions set forth in
the Fund's current prospectus.
<PAGE>
[_] I DO NOT want the Telephone Exchange Privilege.
N O T P A R T O F T H E P R O S P E C T U S
<PAGE>
8 TELEPHONE REDEMPTION PRIVILEGE
[_] I authorize the Transfer Agent to accept instructions from any person
to redeem shares in my account(s) by telephone, in accordance with the
procedures and conditions set forth in the Fund's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail
to the address of record, unless the information in Section 9 is
completed for redemption by wire of $500 or more.
9 BANK OF RECORD (FOR TELEPHONE REDEMPTIONS AND/OR SYSTEMATIC INVESTMENT
PLANS)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
----------------------------------------------------------------------
Bank Name
----------------------------------------------------------------------
Street or P.O. Box Apartment Number
----------------------------------------------------------------------
City State Zip code
----------------------------------------------------------------------
Bank ABA Number Bank Account Number
----------------------------------------------------------------------
Account Name
10 SIGNATURE AND TAXPAYER CERTIFICATION
The undersigned warrants that I(we) have full authority and, if a natural
person, I(we) am(are) of legal age to purchase shares pursuant to this
Account Information Form, and have received a current prospectus for the
Bear Stearns Fund(s) in which I(we) am(are) investing. The undersigned
acknowledges that the Telephone Exchange Privilege is automatic and that
I(we) may bear the risk of loss in event of fraudulent use of the
Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we)
have so indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is
required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding or (b) I have not been notified by the IRS that I am
subject to 31% backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer
<PAGE>
subject to backup withholding.
Certification Instructions--You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting of interest or dividends on your tax
return. Mutual fund shares are not deposits of, or guaranteed by, any
depository institution, nor are they insured by the FDIC. Investment in the
funds involves investment risks, including possible loss of principal.
[_] Exempt from backup [_] Nonresident alien
withholding (Form W-8 attached) ______________________
Country of Citizenship
-------------------------------------------------------------------------
Authorized Signature Title Date
-------------------------------------------------------------------------
Authorized Signature Title Date
11 FOR AUTHORIZED DEALER USE ONLY (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection
with the transactions authorized by the Account Information Form and agree
to notify the Transfer Agent of any purchases made under a Letter of Intent
or Right of Accumulation. If this Account Information Form includes a
Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
-----------------------------------------------------------------------
Dealer's Name Dealer Number
-----------------------------------------------------------------------
Main office Address Branch number
-----------------------------------------------------------------------
Representative's Name Rep. Number
( )
-----------------------------------------------------------------------
Branch Address Telephone Number
-----------------------------------------------------------------------
Authorized Signature of Dealer Title Date
12 ADDITIONAL ACCOUNT STATEMENTS (Please Print)
In addition to myself and my representative, please send copies of my
account statements to:
-------------------------------- -------------------------------
Name Name
-------------------------------- -------------------------------
<PAGE>
Address Address
-------------------------------- -------------------------------
City, State, Zip Code City, State, Zip Code
N O T P A R T O F T H E P R O S P E C T U S
<PAGE>
13 SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan, which is available to shareholders of the
Bear Stearns Funds, makes possible regularly scheduled purchases of Fund
shares to allow dollar-cost averaging. The FundsO Transfer Agent can
arrange for an amount of money selected by you ($100 minimum) to be
deducted from your checking account and used to purchase shares of a
specified Bear Stearns Fund. A $250 minimum initial investment is required.
This may not be used in conjunction with the Automatic Withdrawal Plan.
Please debit $_______________ from my checking account (named in Section 9)
on or about the 20th of the month. Depending on the Application receipt
date, the Plan may take 10 to 20 days to be in effect.
[_] Monthly [_] Every alternate month
[_] Quarterly [_] Other _________________________________
$ ______________ into the ______________Fund _______________Start Month.
$100 Minimum
$ ______________ into the ______________Fund _______________Start Month.
$100 Minimum
$ ______________ into the ______________Fund _______________Start Month.
$100 Minimum
If you are applying for the Telephone Redemption Privilege or Systematic
Investment Plan, please tape your voided check on top of our sample below.
John Smith 000
123 First Avenue
Anytown, USA 12345
-------------------------------------------------- $[ ]
----------------------------------------------------------------
------------------------------ -------------------------------
VOID
SERVICE ASSISTANCE
Our knowledgeable Client Services Representatives are available to assist
you between 8:00 a.m. and 6:00 p.m. Eastern Time at:
1-800 -447-1139
MAILING OR FAX INSTRUCTIONS
Mail your completed Account Information Form and check to:
The Bear Stearns Funds
<PAGE>
c/o PFPC Inc.
P.O. Box 8960
Wilmington, DE 19899-8960
Fax (No.) 302-791-1777
If applications will be faxed please call and notify client services at
1-800-447-1139 before any orders are taken.
NOT PART OF THE PROSPECTUS
<PAGE>
Appendix A
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 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 Portfolio 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 Portfolio 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 Portfolio is permitted to invest in put options in respect of specific
securities (or groups or "baskets" of specific securities) in which it 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 Portfolio 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 Portfolio 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 Portfolio
may incur losses which could adversely affect the value of a shareholder's
investment.
LENDING 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 its 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
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 its total assets, the Portfolio
will not make any additional investments.
A-1
<PAGE>
CERTAIN PORTFOLIO SECURITIES
AMERICAN DEPOSITARY RECEIPTS
The Portfolio may invest 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 Portfolio 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 Portfolio 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 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,
because it is not so obligated by law.
BANK OBLIGATIONS
The Portfolio 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 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.
A-2
<PAGE>
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 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 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.
INVESTMENT COMPANY SECURITIES
The Portfolio may invest in securities issued by other investment companies
which are ranked by STARS. 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 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 Portfolio 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.
A-3
<PAGE>
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 and Administrator:
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:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Independent Auditors:
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
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.
<PAGE>
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7
1 o 8 0 0 o 7 6 6 o 4 1 1 1
PROSPECTUS
Focus List Portfolio
CLASS A, B AND C SHARES
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 A, B and C shares of the Focus List
Portfolio, a non-diversified portfolio (the "Portfolio"), are offered. The
Portfolio's investment objective is capital appreciation. The Portfolio seeks to
achieve this objective by investing at least 65% of its total assets in equity
securities of U.S. issuers that, at the time of purchase, are included on the
Bear Stearns Research Focus List (the "Focus List") developed by Bear Stearns'
Equity Research Department.
The Focus List typically consists of twenty stocks chosen from those stocks
currently rated as Buy or Attractive by a Bear Stearns research analyst. The
stocks are selected for inclusion on the Focus List by the Focus List Committee
(See p._ for a description of the Focus List Committee) based upon the
expectation that the selected stocks will outperform the total return realized
on the Standard & Poor's Index of 500 Common Stocks (the "S&P 500 Index") over
the next three to six months. There can be no assurance that the Portfolio will
achieve its investment objective.
By this Prospectus, the Portfolio is offering Class A, B and C shares. Class A
shares are subject to a sales charge imposed at the time of purchase. Class B
shares are subject to a contingent deferred sales charge of up to 5% imposed on
redemptions made within the first six years of purchase. Class C shares are
subject to a 1% contingent deferred sales charge imposed on redemptions made
within the first year of purchase. The Portfolio issues another class of shares
which has different expenses which would affect performance. Investors desiring
to obtain information about this other 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
is also referred to herein as the "Adviser."
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
_________, 1997, 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; ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
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.
__________, 1997
<PAGE>
Table of Contents
PAGE
Background and Expense Information .......................................
Description of the Portfolio..............................................
Risk Factors..............................................................
Management of the Fund ...................................................
How to Buy Shares ........................................................
Shareholder Services ....................................................
How to Redeem Shares .....................................................
Dividends, Distributions and Taxes .......................................
Performance Information ..................................................
General Information ......................................................
Appendix ................................................................. A-1
2
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...................... 5.50% -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge) * 5.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)**....................... 0.00% 0.00% 0.00%
12b-1 Fees***............................................ 0.25% 0.75% 1.00%
Other Expenses (after expense
reimbursement)**......................................... 1.15% 1.15% 0.90%
---- ---- ---
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)**...................... 1.40% 1.90% 1.90%
==== ==== ====
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.............................................. $ 68 $ 70 $ 29
3 YEARS............................................. $ 97 $103 $ 60
5 YEARS............................................. $127 $126 $103
10 YEARS****......................................... $214 $209 $209
EXAMPLE:
You would pay the following expenses on the same
investment, assuming no redemption:
1 YEAR.............................................. -- $ 19 $ 19
3 YEARS............................................. -- $ 60 $ 60
5 YEARS............................................. -- $103 $103
10 YEARS****......................................... -- $209 $209
</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 of purchase. See "How to Buy
Shares-Class A Shares."
** With respect to Class B shares, Other Expenses includes a shareholder
servicing fee of 0.25%. Without such fee waiver and expense reimbursement,
Advisory Fees stated above would have been 0.65% for each class. Other
Expenses are estimated to be 1.54% for Class A shares, 1.54% for Class B
shares and 1.54% for Class C shares and Total Portfolio Operating Expenses
are estimated at 2.34% for Class A shares, 2.84% for Class B shares and
2.84% for Class C shares.
*** With respect to Class A and C shares, 12b-1 fees include a share
holder servicing fee of 0.25%. With respect to Class A shares, the
remaining 0.25%, attributable to distribution related expenses, is
currently being waived. Without the fee waiver, 12b-1 fees with respect to
Class A shares would have been 0.50%.
**** Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after
year eight with respect to Class B share.
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."
3
<PAGE>
ALTERNATIVE PURCHASE METHODS
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
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 5.50% 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 0.50 of 1% of the value of the average daily net assets of
Class A. Currently, 0.25% of this fee, attributable to distribution related
expenses, is being waived. See "Management of the Fund-Distribution and
Shareholder Servicing Plan."
CLASS B SHARES
Class B shares of the Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares-Class B Shares." The Class B shares of the Portfolio also are subject to
an annual distribution fee at the rate of 0.75 of 1% and an annual shareholder
servicing fee at the rate of 0.25 of 1% of the value of the average daily net
assets of Class B. See "Management of the Fund-Distribution and Shareholder
Servicing Plan". Class B shares will convert to Class A shares, based on their
relative net asset values, eight years after the initial purchase. The
distribution and shareholder servicing fee paid by Class B 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 B 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 investment return
of Class A. See "How to Buy Shares -- Choosing a Class of Shares."
CLASS C SHARES
Class C shares of the Portfolio are subject to a 1% 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 Portfolio also are subject to an
annual distribution and shareholder servicing fee at the rate of 1% 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 Portfolio, the accumulated distribution and
shareholder servicing fee and CDSC, if any, on Class B or 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 investment
return of Class A. See "How to Buy Shares - Choosing a Class of Shares."
Description of the Portfolio
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
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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.
MANAGEMENT POLICIES
FOCUS LIST PORTFOLIO
The Portfolio will invest at least 65% of its total assets in the common stocks
of the U.S. and also foreign issuers that, at the time of purchase, are on the
Bear Stearns Equity Research Focus List (the "Focus List"). The Portfolio is
designed for investors seeking to maximize returns on a fully invested,
all-equity portfolio. The Portfolio is not a market-timing vehicle. Except for
short-term liquidity purposes, cash reserves are not expected to exceed 10% of
Portfolio assets.
THE BEAR STEARNS RESEARCH FOCUS LIST
The Bear Stearns Equity Research Department has over 70 equity analysts who
cover more than 900 common stocks of U.S. and foreign companies. Using a rating
system of "1" through "5", analysts assign stocks the following ratings: 1
("Buy", the highest rating), 2 ("Attractive"), 3 ("Neutral"), 4 ("Avoid"), 5
("Sell"). Approximately 300 stocks are rated as Buy or Attractive by a Bear
Stearns Research analyst.
A Buy rating is assigned to stocks that the Bear Stearns Research analyst and
the Research Stock Selection Committee (comprised of senior Research personnel)
feel will significantly outperform the market over the next three to six months
because of a catalyst or near-term event that will trigger upward movement in
the stock's price. These catalysts can include a change in management, the
introduction of a new product or a change in the industry outlook. (See p. 23
for information about historical performance of the Focus List.) An Attractive
rating means that an analyst has determined that the stock has solid long-term
growth prospects either because of, or in comparison to, its industry and that
it is undervalued in comparison to its industry.
Domestic and international stocks and American Depositary Receipts (ADRs) rated
Buy (1) or Attractive (2) are eligible for inclusion on the Focus List. Stocks
are picked by the Focus List Committee, whose current members are Kathryn Booth,
Director of Global Research for Bear Stearns, and Elizabeth Mackay, Chief
Investment Strategist of Bear Stearns. The Committee generally maintains twenty
stocks on the list and any new additions are usually accompanied by a comparable
number of deletions. The Committee monitors the List daily, and candidates are
considered based on any one or more of the following criteria: market outlook,
perception of the stock's sector, and an analyst's view of the stock's current
valuation relative to the market and its industry.
Stocks that are downgraded below Attractive by an analyst are automatically
deleted from the Focus List. However, the Focus List Committee may delete stocks
for other reasons including, but not limited to, achievement of its target price
range, the failure of a catalyst to materialize or have its expected effect,
and/or the appearance of new, more attractive opportunities.
TYPES OF INVESTMENTS
EQUITIES
Domestic and foreign common stocks, and American Depositary Receipts (ADRs) are
eligible for inclusion on the Focus List.
MONEY MARKET INSTRUMENTS
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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
commercial obligations and other short-term debt instruments, and repurchase
agreements, as set forth in the Appendix. Under normal market conditions, the
Portfolio expects to have less than 10% of its total assets invested in money
market instruments.
OPTIONS ON SECURITIES AND INDICES
In certain circumstances, the Portfolio may engage in options transactions, such
as purchasing put or call options or writing covered call options. The Portfolio
may purchase call options to gain market exposure in a particular sector while
limiting downside risk. The Portfolio may purchase put options in order to hedge
against an anticipated loss in value of Portfolio securities. 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. (See
"Risk Factors" on page 7 and the Statement of Additional Information for
additional risk factors).
FUTURES AND OPTIONS ON FUTURES
The Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance its
income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments in
futures and options on futures involve certain risks. (See "Risk Factors" on
page 7 and the Statement of Additional Information).
INVESTMENT STRATEGY
Generally, as soon as practicable after public announcement, the Adviser will
purchase a security that has been added to the Focus List, and will sell a
security when the security has been removed from the Focus List. The Adviser
determines what percentage of the Portfolio's total assets are to be allocated
into each Focus List stock and makes changes in allocation percentages as
investment and economic conditions change. The Adviser intends to allocate
portfolio transactions so that the Portfolio qualifies as a "regulated
investment company" under federal tax law, although there can be no assurance
that this goal will be achieved (see "Dividends, Distributions and Taxes").
Depending upon market conditions and to the extent the Portfolio needs to hold
cash balances to satisfy shareholder redemption requests, the Adviser may not
immediately purchase a new Focus List stock and/or may continue to hold one or
more Focus List stocks that have been deleted from the Focus List. The Adviser
will not have access to the Focus List prior to its becoming publicly
disseminated.
The Portfolio may invest up to 35% of its total assets in Portfolio stocks that
are not on the Focus List, although it currently intends to limit its investment
in non-Focus List securities to 20% of the Portfolio's total assets under normal
market conditions. The Portfolio will purchase stocks that are not on the Focus
List when the Adviser determines that any stocks on the Focus List are
inappropriate for the Portfolio because they are illiquid, would cause the
Portfolio to be overweighted in a particular sector or overly concentrated in a
particular industry, or for any other reason.
The Investment Strategy described above will be implemented to the extent it is
consistent with maintaining the Portfolio's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Dividends, Distributions and Taxes." The Portfolio's strategy may
be limited, in particular,
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by the requirements for such qualification that less than 30% of the Portfolio's
annual gross income be derived from the sale or other disposition of stocks held
for less than three months.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
total assets in cash and cash equivalents, including high quality short-term
money market investments.
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 securities of
issuers in a single industry , provided that there is no such limitation in
investments in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. This paragraph describes two of the Portfolio's
fundamental policies , which 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) 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. 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. The
Portfolio intends to remain almost fully invested in equity securities, even
during times of significant market decline, when other funds might take a more
defensive position by investing a greater amount of their assets in money market
instruments or cash that are less likely to decline when market conditions are
adverse for equities.
FOREIGN EQUITIES
The Portfolio may invest in equity securities that are issued by foreign issuers
and are traded in the United States. All such securities will be issued by
foreign companies that comply with U.S. accounting standards. The Portfolio
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<PAGE>
may also invest in sponsored ADRs which are receipts typically issued by a U.S.
bank or trust company which evidence ownership of underlying securities of
foreign corporations.
Investors should recognize that investments in foreign companies involves
certain considerations that are not typically associated with investing in
domestic companies. For instance, with respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on dividend payments, political or social instability of
diplomatic developments that could affect investments in those countries.
Individual economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Foreign securities denominated in foreign currencies may be subject to
the additional risk of fluctuations in the value of the currency as compared to
the U.S. dollar. Foreign securities markets may be subject to greater volatility
and may be less liquid than domestic markets. Transaction costs involving
foreign securities tend to be higher than similar costs applicable to
transactions in U.S. securities.
FUTURES AND OPTIONS
The Portfolio may trade futures contracts, options and options on futures
contracts. Investors should be aware that the use of derivative instruments such
as futures and options requires special skills and knowledge and investment
techniques that are different from what is required in other Portfolio
investments. If the Adviser trades a futures or options contract at the wrong
time or judges market conditions incorrectly, the strategies may result in a
significant loss to the Portfolio and reduce the Portfolio's return. The
Portfolio could also experience losses if the prices of its futures and options
positions were not properly correlated with its other investments or if it could
not close out a position because of an illiquid market for the future or option.
These risks and the strategies the Portfolio may use are described in greater
detail in the 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 Code, which
generally 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.
PORTFOLIO TURNOVER
The Adviser expects that the turnover in the securities held in the Portfolio
(that is, the frequency that the Portfolio will buy and sell securities) will
generally be 250% or greater. This portfolio turnover rate is significantly
higher than the portfolio turnover rates of other mutual funds that invest in
equity securities. A higher portfolio turnover rate means that the Portfolio
will incur substantially higher brokerage costs and may realize a greater amount
of short-term capital gains or losses. A high portfolio turnover rate may cause
the Portfolio to lose its status as a "regulated investment company" (see
"Dividends, Distributions and Taxes)."
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POTENTIAL INVESTMENT RESTRICTIONS
It is possible that the Focus List will include stocks of issuers for which Bear
Stearns or one of its affiliates performs banking services for which it receives
fees, as well as stocks of issuers in which Bear Stearns or one of its
affiliates makes a market and may have a long or short position in the stock.
When Bear Stearns or one of its affiliates is engaged in an underwriting or
other distribution of stock of an issuer, the Adviser may be prohibited from
purchasing the stock of the issuer for the Portfolio. The activities of Bear
Stearns or one of its affiliates may, from time to time, limit the Focus List
Committee's ability to include stocks on the Focus List or the Portfolio's
flexibility in purchasing and selling such stocks. In addition, the Focus List
is available to other clients of Bear Stearns and its affiliates, including the
Adviser, as well as the Portfolio.
SIMULTANEOUS INVESTMENTS
Investment decisions for the Portfolio are made independently from those of
other investment companies or accounts advised by the Adviser. 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.
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 December 31, 1996 of over $2.9 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.
Mark A. Kurland, Chairman and Chief Executive Officer of Bear Stearns Asset
Management, serves as Portfolio Manager of the Portfolio. Mr. Kurland also
serves as Senior Managing Director of Bear, Stearns & Co. Inc.. He was
previously Director of Global Research from 1991 to 1995 at Bear , Stearns &
Co., Inc., where he also served as a member of the Investment Policy Committee,
President's Advisory Counsel, Equities Subcommittee and the Funds Committee. He
was previously Co-Head of Institutional Equities and Director of Research at
Mabon, Nugent & Co.
THE PORTFOLIO PAYS BSFM AN ADVISORY FEE AT AN ANNUAL RATE EQUAL TO 0.65% OF
AVERAGE DAILY NET ASSETS.
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Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSFM a monthly fee at the annual rate of 0.65% of the Portfolio's average
daily net assets.
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., the Portfolio's transfer agent, 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
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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 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
voluntarily waive a portion of its fee.
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.
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.
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DISTRIBUTION AND SHAREHOLDER SERVICING PLAN - CLASS A AND C SHARES
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 of 0.50% and 1.00% of the
average daily net assets of Class A and Class C, respectively. With respect to
Class A shares, 0.25% of this fee, attributable to distribution related
expenses, is currently being waived.
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. Of these amounts, up to
0.25% of the average daily net assets of each class will compensate institutions
for personal service and maintenance of accounts holding Portfolio shares. 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.
DISTRIBUTION PLAN - CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the Fund will
pay the Distributor an annual fee of 0.75% of the average daily net assets of
Class B shares. Amounts paid under the Distribution Plan compensates Bear
Stearns for distributing Portfolio shares. Bear Stearns may pay a portion of
this amount to other institutions that sell Portfolio shares.
SHAREHOLDER SERVICING PLAN - CLASS B SHARES
The Fund has adopted a Shareholder Servicing Plan for Class B shares. In
accordance with the Shareholder Servicing Plan, the Fund may enter into
Shareholder Service Agreements under which the Fund pays fees of up to 0.25% of
the average daily net assets of Class B shares for fees incurred in connection
with the personal service and maintenance of accounts holding Portfolio shares.
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 1.40% of Class A's average daily net assets,
1.90% of Class B's average daily net assets and 1.90% 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 Portfolio reserves the right to reject any purchase
order. The 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.
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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 the 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 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 payments 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.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment. If your goals change over time, you
should review your investment to determine whether a particular class of shares
best suits your needs.
The factors discussed below assume the expenses that apply to each class of
shares as described in this prospectus. In addition, they assume an annual rate
of return of 10%. The actual amount of the return may be higher or lower,
depending on actual investment returns over time. This discussion is not
intended to be investment advice or recommendations, because each investor's
goals, needs and circumstances are unique.
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of $500,000 in the aggregate on purchases
of Class B shares and a maximum purchase limitation of $1,000,000 in the
aggregate on purchases of Class C shares. Investors who purchase $1 million or
more may only purchase Class A shares. If you purchase over $1 million, and do
not maintain your investment for at least one year from the date of purchase,
you will be charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B or Class C shares, which do not
feature an initial sales charge.
If you plan to invest up to $100,000 for a short period of time, Class C shares
might be more appropriate even though the class expenses are higher, because
there is no initial sales charge and no CDSC if held for over one year. In other
cases, investors with a medium-term investment horizon may find Class A shares
more suitable, because of the higher class expenses and CDSC of Class B shares.
If you invest more than $100,000 and increase your investment horizon toward
eight years, then Class A shares may be more appropriate, because the effect of
the higher class expenses of Class C shares might be greater than the effect of
the initial sales charge of Class A shares.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate Bear Stearns and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
12
<PAGE>
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
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--Focus List
Portfolio--Class A" if purchased directly from the Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns
Funds--Focus List Portfolio--Class A, 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--Focus List Portfolio--Class A, 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.
Shareholders may not purchase shares of the Fund with a check issued by a third
party and endorsed over to the Fund.
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.
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").
CLASS A SHARES
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<PAGE>
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 NET DEALER CONCESSIONS
OFFERING PRICE ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ........................ 5.50% 5.82% 5.25%
$50,000 to less than $100,000 ............ 4.75 4.99 4.25
$100,000 to less than $250,000 .......... 3.75 3.90 3.25
$250,000 to less than $500,000 ........... 2.75 2.83 2.50
$500,000 to less than $1,000,000 ........ 2.00 2.04 1.75
$1,000,000 and above ..................... 0.00* 0.00 1.25
</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" 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.
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,
country 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; (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
- --------
* Until further notice to the contrary, the full amount of the sales load
will be reallowed as a dealer concession.
14
<PAGE>
in order to verify that such purchase is eligible for an exemption. Bear Stearns
reserves the right to limit the participation of its employees in Class A shares
of the Portfolio. 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 include 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 transaction in Portfolio shares.
CLASS B SHARES
The public offering price for Class B 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 B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolio will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
CDSC as a Percentage of
Year Since Dollar Amount
Purchase Subject to CDSC
- -------- ---------------
First 5%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh 0%
Eighth* 0%
- -----------------
* As discussed below, Class B Shares automatically convert to Class A Shares
after the eighth year following purchase.
15
<PAGE>
Class B shares of the Portfolio will automatically convert into Class A shares
at the end of the calendar quarter that is eight years after the initial
purchase of the Class B shares. Class B shares acquired by exchange from Class B
shares of another portfolio will convert into Class A shares of such Portfolio
based on the date of the initial purchase. Class B shares acquired through
reinvestment of distributions will convert into Class A shares based on the date
of the initial purchase of the shares on which the distribution was paid. The
conversion of Class B shares to Class A shares will not occur at any time the
Portfolio is advised that such conversions may constitute taxable events for
federal tax purposes, which the Portfolio believes is unlikely. If conversions
do not occur as a result of possible taxability, Class B shares would continue
to be subject to higher expenses than Class A shares for an indeterminate
period.
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 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. 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.
16
<PAGE>
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 or about 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 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 Class A
Shares of the Portfolio, Class A 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.
17
<PAGE>
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 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 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 A 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. No
CDSC will be imposed on Class B shares at the time of an exchange. The CDSC
applicable on redemption of Class B shares will be calculated from the date of
the initial purchase of the Class B 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.
18
<PAGE>
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
Class A 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 current net asset value. If an investor is investing in a class
that charges a CDSC, the shares purchased will be subject upon redemption to the
CDSC, if 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.
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 or of any other Bear Stearns
Fund within 60 days of the redemption. Shareholders should obtain and read the
applicable prospectuses of such other funds and consider their objectives,
policies and applicable fees before investing in any of such funds. 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.
19
<PAGE>
CONTINGENT DEFERRED SALES CHARGE - CLASS A SHARES
CLASS A SHARES OF THE PORTFOLIO MAY BE 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 A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1% is
also imposed on any redemption of Class A shares within one year of the date of
purchase by any investor that purchased the shares 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. No CDSC will be imposed to the
extent that the net asset value of the Class A shares redeemed does not exceed
(i) the current net asset value of Class A shares acquired through reinvestment
of dividends or capital gain distributions, plus (ii) increase in the net asset
value of an investor's Class A shares above the dollar amount of all such
investor's payments for the purchase of Class A shares held by the investor at
the time of redemption. See the Statement of Additional Information for more
information.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B 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 B shares above the
total amount of payments for the purchase of Class B 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 $256) would be charged at a rate of 5% for a
total CDSC of $12.00.
WAIVER OF CDSC
The CDSC applicable to Class B 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, (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, and (e) to the extent that shares
redeemed have been withdrawn from the Automatic Withdrawal Plan, up to a maximum
amount
20
<PAGE>
of 12% per year from a shareholder account based on the value of the account at
the time the automatic withdrawal is established. 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 that 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
CONTINGENT DEFERRED SALES CHARGE - CLASS C SHARES
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.
WAIVER OF CDSC
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 a Portfolio by merger, acquisition of
assets or otherwise, (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, and
(e) to the extent that shares redeemed have been withdrawn from the Automatic
Withdrawal Plan, up to a maximum amount of 12% per year from a shareholder
account based on the value of the account at the time the automatic withdrawal
is established. 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
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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--Focus List Portfolio--Class A, 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.
If the proceeds of the redemption would exceed $25,000, or if the proceeds are
not to be paid to the record owner at the record address, or if the shareholder
is a corporation, partnership, trust or fiduciary, signature(s) must be
guaranteed by any eligible guarantor institution. A signature guarantee is
designed to protect the shareholders and the Portfolio against fraudulent
transactions by unauthorized persons. In certain instances, such as transfer of
ownership or when the registered shareholder(s) requests that redemption
proceeds be sent to a different name of address than the registered name and
address of record on the shareholder account, the Fund will require that the
shareholder's signature be guaranteed. When a signature guarantee is required,
each signature must be guaranteed. A signature guarantee may be obtained from a
domestic bank or trust company, broker, dealer, clearing agency or savings
association who are participants in a medallion program recognized by the
securities transfer association.
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The three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are
not a part of these programs will not be accepted. The institution providing the
guarantee must see a signature ink stamp or medallion which states "Signature(s)
Guaranteed" and be signed in the name of the guarantor by an authorized person
with that person's title and the date. The Fund may reject a signature guarantee
if the guarantor is not a member of or participant in a signature guarantee
program. Please note that a notary public stamp or seal is not acceptable. The
Fund reserves the right to amend or discontinue its signature guarantee policy
at any time and, with regard to a particular redemption transaction, to require
a signature guarantee at its discretion. 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.
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. Class A shares withdrawn pursuant to the Automatic Withdrawal will
be subject to any applicable CDSC. Purchases of additional shares concurrent
with withdrawals generally are undesirable.
Dividends, Distributions and Taxes
[TO BE UPDATED]
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 the
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 B and C shares will receive
lower per share dividends than Class A shares because of the higher expenses
borne by Class B and C shares. 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
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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 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 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 intends to have the Portfolio qualify as a "regulated
investment company" under the Code and, thereafter, 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.
The Portfolio anticipates that there will be high portfolio turnover rate, which
may result in the Portfolio losing its qualification as a regulated investment
company. In this event, the Portfolio would be subject to federal income tax on
its net income at regular corporate rates (without a deduction for distributions
to shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extend of the Portfolio's
24
<PAGE>
earnings and profits. Although Management intends to have the Portfolio qualify
as a regulated investment company, there can be no assurance that it will
achieve this goal.
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 A, B and C shares 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 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 B and 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, if any, 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, if any. 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 B 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 B or C. 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, the Bear
Stearns Research Focus List and other industry publications.
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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, B and 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 seven 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: Focus List Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960,
by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
26
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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.
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
FOREIGN SECURITIES
THE PORTFOLIO MAY PURCHASE FOREIGN SECURITIES.
The Portfolio may purchase securities of foreign issuers, which may involve more
risks than investment in securities issued by domestic companies. Securities of
foreign issuers may be traded in the United States in the form of American
Depository Receipts (ADRs) and other similar instruments, but most are traded
primarily in foreign markets. The risks of investing in foreign securities
include, among other things:
o Political and economic risk. Foreign investments are subject to increased
political and economic risks, especially in developing countries. In some
countries, there is the risk that assets may confiscated or taxed by foreign
governments.
o Regulatory risk. Foreign securities markets may be subject to less government
regulation and foreign issuers may not be subject to uniform accounting,
auditing and financial reporting standards.
o Currency risk. Foreign securities denominated in foreign currencies may be
subject to the additional risk of fluctuations in the value of the currency as
compared to the U.S. dollar.
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o Market risk. Foreign securities markets may be subject to greater volatility
and may be less liquid than domestic markets.
o Transaction costs. Transaction costs involving foreign securities tend to be
higher than similar costs applicable to transactions in U.S. securities.
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. Under normal circumstances, the Portfolio does not expect
to invest more than 5% of its total assets in money market instruments or cash.
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
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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 Inc.
("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.
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.
A-3
<PAGE>
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 and Administrator
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
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
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 FOCUS LIST PORTFOLIO'S
PROSPECTUS AND IN THE FOCUS LIST PORTFOLIO'S SALES LITERATURE IN CONNECTION WITH
THE OFFER OF THE FOCUS LIST 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 FOCUS LIST 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.
A-4
<PAGE>
- -------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
CLASS A, CLASS B, CLASS
C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
____, 1997
- -------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
prospectus (the "Prospectus") dated ____, 1997 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"): Large Cap Value Portfolio and
Small Cap Value Portfolio (together, the "Equity Portfolios") and 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 or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111.
Bear Stearns Funds Management Inc. ("BSFM" or the "Adviser"), 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-10
Management Arrangements ........................................... B-13
Purchase and Redemption of Shares ................................. B-16
Determination of Net Asset Value .................................. B- 19
Dividends, Distributions and Taxes ................................ B- 20
Portfolio Transactions ............................................ B- 27
Performance Information ........................................... B- 29
Code of Ethics .................................................... B- 30
Information About the Fund ........................................ B- 31
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors ................................ B- 34
Financial Statements .............................................. B- 34
Appendix .......................................................... B- 35
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Description of the
Fund."
Portfolio Securities
Bank Obligations. (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by each Portfolio are insured by the FDIC (although such
insurance may not be of material benefit to a Portfolio, depending on the
principal amount of the CDs of each bank held by such Portfolio) and are subject
to Federal examination and to a substantial body of Federal law and regulation.
As a result of Federal or state laws and regulations, domestic branches of
domestic banks whose CDs may be purchased by each Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as 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
B-2
<PAGE>
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
U.S. 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.
U.S. 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
B-3
<PAGE>
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 the borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with floating
and variable rate demand obligations, 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
B-4
<PAGE>
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 may engage 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 by the Portfolios 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,
B-5
<PAGE>
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
B-6
<PAGE>
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 each 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 on a futures contract, 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.
B-7
<PAGE>
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.
B-8
<PAGE>
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.
B-9
<PAGE>
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
fundamental policies, 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.
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.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- -------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co., since
126 East 56th Street 1969; President of Koll,
New York, NY 10021 Bren Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from 1981
to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
P.O. Box 15213 Officer of McKernan Enterprises
Portland, ME 02110 since January 1995; Governor of
Maine prior thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief Executive
700 13th Street, N.W. Officer, Association of American
Suite 400 Railroads since June 23, 1997; Vice
Washington, D.C. 20005 Chairman of Cassidy & Associates
since February 1996; Senior Vice
President of RJR Nabisco, Inc.
B-10
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- -------- ----------------------
from April 1989 to February 1996;
Former Deputy Chief of Staff-White
House from 1988 to January 1989.
Robert S. Reitzes* (53) Chairman of the Director of Mutual Funds-Bear
245 Park Avenue Board Stearns Asset Management and
New York, NY 10167 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.
Peter B. Fox (45)
Three First National Plaza Executive Vice Managing Director-Emeritus,
Chicago, IL 60602 President Bear Stearns, since February 1997;
Bear Stearns, Senior Managing
Director, Public Finance, since
September 1987.
William J. Montgoris (50) Executive Vice Chief Operating Officer, Bear
245 Park Avenue President Stearns.
New York, NY 10167
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue New York, Department; General Counsel,
NY 10167 Bear Stearns Asset Management,
a division of Bear Stearns.
Frank J. Maresca (38) 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.
Donalda L. Fordyce (38) Vice President Senior Managing Director,
245 Park Avenue Bear Stearns Asset
New York, NY 10167 Management since March,
1996; previously Vice
President, Asset
Management Group,
Goldman, Sachs from 1986
to 1996.
Ellen T. Arthur (44) Secretary Associate Director of
245 Park Avenue Bear Stearns since
New York, NY 10167 January 1996; Senior
Counsel and Corporate
Vice President of
PaineWebber Incorporated
from April 1989 to
September 1995.
Vincent L. Pereira (32) Assistant Associate Director of
245 Park Avenue Treasurer Bear Stearns since
New York, NY 10167 September 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
Asset Management Inc.
from October 1992 to May
1993.
Eileen M. Coyle (31) Assistant Vice President of Bear
245 Park Avenue Secretary Stearns since September
New York, NY 10167 1995; Manager of BSFM
since 1995; Senior
Administrator and
Supervisor for BSFM from
January 1994 to 1995;
Accounting Supervisor and
Senior Accountant for
Bear Stearns since 1990.
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, 1997 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> <C>
Peter M. Bren $7,000 None None $11,500 (2)
Alan J. Dixon $7,000 None None $ 6,500 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None (2)
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to approximately $7,000 Board members of the
Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1%
of each Portfolio's shares outstanding on May 31, 1997.
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
B-12
<PAGE>
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, as revised May 4, 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 January 28, 1997. 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; Frank J. Maresca,
Executive Vice President; Donalda L. Fordyce, Executive Vice President; Vincent
L. Pereira, Vice President and Treasurer; Ellen T. Arthur, Secretary; and James
G. McCluskey, 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 Robert S.
Reitzes, Mark A. Kurland, James G. McCluskey, Gail Sprute and Harris Cohen. The
portfolio manager of the Bond Portfolio is Peter E. Mahoney. All purchases and
sales are reported for the Board of Trustees' 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. For the
fiscal year ended March 31, 1997, the investment advisory fees payable by the
Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted
to $151,578, $285,539 and $98,957, respectively. These amounts were waived
pursuant to an undertaking by BSFM, resulting in no fees being paid by the Large
Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio. In addition,
BSFM reimbursed $224,658, $191,607 and $282,573 for Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio, respectively, in order to maintain
the voluntary expense limitation for the period April 3, 1995 (commencement of
operations) through
B-13
<PAGE>
March 31, 1996. BSFM reimbursed $161,196, $86,666 and $280,261 for Large Cap
Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively, in
order to maintain the voluntary expense limitation, for the fiscal year ended
March 31, 1997.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995, as
revised April 11, 1995 and June 2, 1997, 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 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
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 amounted to $9,106,
$17,782 and $17,290, respectively, for the Large Cap Value Portfolio, Small Cap
Value Portfolio and Bond Portfolio. For the fiscal year ended March 31, 1997,
the administration fees accrued, amounted to $30,232, $57,108 and $32,986,
respectively, for the Large Cap Value Portfolio, Small Cap Value Portfolio and
Bond Portfolio.
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 services fees payable by the Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio amounted to $62,405, $62,532 and
$63,913, respectively, as a result of a waiver of fees by PFPC. For the fiscal
year ended March 31, 1997, the administrative services fees for the Large Cap
Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to
$99,570, $119,822 and $99,469, 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 Board of Trustees have adopted a distribution and shareholder servicing
plan with respect to Class A and Class C shares (the "Plan"). The Fund's Board
of Trustees have also adopted a distribution plan (the "Distribution Plan") and
a shareholder servicing plan (the "Shareholder Servicing Plan", and together
with the Plan and/or the Distribution Plan, the
B-14
<PAGE>
"Plans") with respect to the Class B shares. The Fund's Board of Trustees
believe that there is a reasonable likelihood that the Plans will benefit each
Portfolio and the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under each Plan, and the
purposes for which such expenditures were incurred, must be made to the Trustees
for their review. In addition, each Plan provides that it may not be amended to
increase materially the costs which holders of a class of shares may bear
pursuant to such Plan without approval of such effected 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. In addition,
because Class B shares automatically convert into Class A shares after eight
years, the Fund is required by a Securities and Exchange Commission rule to
obtain the approval of Class B as well as Class A shareholders for a proposed
amendment to each Plan that would materially increase the amount to be paid by
Class A shareholders under such Plans. Such approval must be by a "majority" of
the Class A and Class B shares (as defined in the 1940 Act), voting separately
by class. Each Plan and related agreements is subject to annual approval by such
vote cast in person at a meeting called for the purpose of voting on such Plan.
The Plan with respect to Class A and Class C shares was so approved on January
28, 1997. The Distribution Plan and the Shareholder Servicing Plan with respect
to the Class B shares was approved on September 8, 1997. Each 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 $56,263 $60,759 $79,858 $99,631 $122,351 $52,251
Advertising
</TABLE>
For the fiscal year ended March 31, 1997, the Large Cap Value
Portfolio, Small Cap Value Portfolio and Bond Portfolio paid Bear Stearns
$27,440, $57,907 and $15,344, respectively, with respect to Class A shares and
$37,332, $111,111 and $12,483, 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:
B-15
<PAGE>
<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 $29,650 $15,245 $69,195 $78,264 $14,296 $5,077
Payments for
Advertising $7,439 $4,959 $24,900 $26,299 $9,496 $3,764
</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 of Trustees, 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 commissions,
interest on borrowings and (with 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. No such expense
limitations currently apply to any Portfolio.
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. For
the fiscal year ended March 31, 1997, Bear Stearns retained $41,212, $133,963
and $17,096 from the sales loads on Class A shares of the Large Cap Value
Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively, and
$3,245, $7,666 and $116 from 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.
B-16
<PAGE>
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, 1997.
EQUITY PORTFOLIOS: Large Cap Value Small Cap Value
Portfolio Portfolio
--------- ---------
Net Asset Value per Share $ 17.17 $ 17.48
======= =======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 1.00 1.02
------- -------
Per Share Offering Price to
the Public $ 18.17 $18.50
======= =======
BOND PORTFOLIO:
Net Asset Value per Share 12.03
=======
Per Share Sales Charge - 4.50%
of offering price (4.71% of
net asset value per share) 0.57
-------
Per Share Offering Price to
the Public $ 12.60
=======
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.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
B-17
<PAGE>
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. The Distributor will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Portfolio instead. A fourth class of shares may be
purchased only by certain institutional investors at net asset value per share
(the "Class Y shares").
The four classes of shares each represent an interest in the same
Portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution and
Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
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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
investment advisory, administration and distribution 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 which
are not valued by the Service 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,
including the investment advisory, administration and distribution 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
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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 Board of 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 Board of 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, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. Each Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, a Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will, therefore, satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock,
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<PAGE>
securities or foreign currencies (or options, futures or forward contracts
thereon) held for less than three months (the "Short-Short Gain Test"). However,
foreign currency gains, including those derived from options, futures and
forwards, will not in any event be characterized as Short-Short Gain if they are
directly related to the regulated investment company's investments in stock or
securities (or options or futures thereon). Because of the Short-Short Gain
Test, a Portfolio may have to limit the sale of appreciated securities that it
has held for less than three months. However, the Short-Short Gain Test will not
prevent a Portfolio from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period is
disregarded for this purpose. Interest (including original issue discount)
received by a Portfolio at maturity or upon the disposition of a security held
for less than three months will not be treated as gross income derived from the
sale or other disposition of such security within the meaning of the Short-Short
Gain Test. However, income that is attributable to realized market appreciation
will be treated as gross income from such sale or other disposition of
securities for this purpose.
In general, gain or loss recognized by a Portfolio on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by a Portfolio at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Portfolio held the debt obligation. In
addition, under the rules of the Code, Section 988, gain or loss recognized on
the disposition of a debt obligation denominated in a foreign currency or an
option with respect thereto (but only to the extent attributable to changes in
foreign currency exchange rates), and gain or loss recognized on the disposition
of a foreign currency forward contract, futures contract, option or similar
financial instrument, or of foreign currency itself, except for regulated
futures contracts or non-equity options subject to the Code, Section 1256
(unless a Portfolio elects otherwise), will generally be treated as ordinary
income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Portfolio's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
Section 1092 of the Code; (2) the transaction is one that was marketed or sold
to the Portfolio on the basis that it would have the economic characteristics of
a loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury
Regulations. The amount of the gain recharacterized generally will not exceed
the amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the federal long-term, mid-term, or
short-term rate, depending upon the type of instrument at issue, reduced by an
amount equal to: (1) prior inclusions of ordinary income items from the
conversion transaction and (2) the capital interest on acquisition indebtedness
under the Code, Section 263(g). Built-in losses will be preserved where a
Portfolio has a built-in loss with respect to property that becomes a part of a
conversion transaction. No authority exists that indicates that the converted
character of the income will not be passed to a Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of the Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified
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<PAGE>
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto, or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, a Portfolio
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by the Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an option
written by a Portfolio will commence on the date it is written and end on the
date it lapses or the date of a closing transaction is entered into.
Accordingly, a Portfolio may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Certain transactions that may be engaged in by a Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Portfolio,
however, may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Portfolio that are not Section 1256 contracts. Under Treasury Regulations, gains
arising from Section 1256 contracts will be treated for purposes of the
Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under the
Code, Section 1256.
A Portfolio may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect to
treat the PFIC as a qualified electing fund (a "QEF"), in which event the
Portfolio will each year have ordinary income equal to its pro rata share of the
PFIC's ordinary earnings for the year and long-term capital gain equal to its
pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. If a Portfolio does not elect to treat the PFIC as
a QEF, then, in general, (1) any gain recognized by the Portfolio upon sale or
other disposition of its interest in the PFIC or any excess distribution
received by the Portfolio from the PFIC will be allocated ratably over the
Portfolio's holding period of its interest in the PFIC, (2) the portion of such
gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Portfolio's gross income for such year as ordinary income (and the distribution
of such portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate
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<PAGE>
(individual or corporate) in effect for such prior year plus (ii) interest on
the amount determined under clause (i) for the period from the due date for
filing a return for such prior year until the date for filing a return for the
year in which the gain is recognized or the excess distribution is received at
the rates and methods applicable to underpayments of tax for such period, and
(4) the distribution by the Portfolio to shareholders of the portions of such
gain or excess distribution so allocated to prior years (net of the tax payable
by the Portfolio thereon) will again be taxable to the shareholders as an
ordinary income dividend.
Under proposed Treasury Regulations, a Portfolio can elect to recognize
as gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over the Portfolio's adjusted tax basis in
that share ("mark to market gain"). Such mark to market gain will be included by
the Portfolio as ordinary income and will not be subject to the Short-Short Gain
Test, and the Portfolio's holding period with respect to such PFIC stock will
commence on the first day of the next taxable year. If the Portfolio makes such
election in the first taxable year it holds PFIC stock, it will not incur the
tax described in the preceding paragraphs.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year a Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible
excise tax is imposed on a regulated investment company that fails to distribute
in each calendar year an amount equal to 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election")). The balance of
such income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
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For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Portfolio may in certain circumstances be required
to liquidate portfolio investments to make sufficient distribution to avoid
excise tax liability.
Portfolio Distributions. Each Portfolio anticipates distributing
substantially all of its investment company taxable income for each taxable
year. Such distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes, but will qualify for the
70% dividends-received deduction for corporate shareholders only to the extent
discussed below. Dividends paid on Class A, B, C, and Y shares are calculated at
the same time and in the same manner. In general, dividends on Class B and C
shares are expected to be lower than those on Class A shares due to the higher
distribution expenses borne by the Class B and C shares. Dividends may also
differ between classes as a result of differences in other class specific
expenses.
A Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by a Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Portfolio's
disposition of domestic "small business" stock will be subject to tax.
Conversely, if a Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain
its net capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result that
each shareholder will be required to report his pro rata share of such gain on
his tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Equity Portfolios with respect to
a taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Equity Portfolios from
domestic corporations for the taxable year. A dividend received by an Equity
Portfolio will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Portfolio has held for less
than 46 days (91 days in the case of certain preferred stock), excluding for
this purpose under the rules of the Code, Section 246(c)(3)and (4) (i) any day
more than 45 days (or 90 days in the case of certain preferred stock)
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<PAGE>
after the date on which the stock becomes ex-dividend and (ii) any period during
which the Portfolio has an option to sell, is under a contractual obligation to
sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Portfolio is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent that the stock on which the dividend is paid is treated as debt-financed
under the rules of Code section 246A. Moreover, the dividends-received deduction
for a corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Portfolio or (2) by application of the Code, Section 246(b) which
in general limits the dividends-received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends-received deduction
and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from an Equity Portfolio into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolios that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolios will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional shares of another Portfolio (or another fund). Shareholders receiving
a distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Portfolio reflects undistributed
net investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Portfolio, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although they economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio)
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on December 31 of such calendar year if such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to the
U.S. federal income tax consequences of distributions made (or deemed made)
during the year.
A Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares. A shareholder will recognize gain or loss
on the sale or redemption of shares of a Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the Portfolio within
30 days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of a
Portfolio will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than one year. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be treated as a long-term capital loss to the extent of the amount
of capital gain dividends received on such shares. For this purpose, the special
holding period rules of the Code, Section 246(c)(3) and (4) (discussed above in
connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Long-term capital gains
of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder") depends on whether
the income from a Portfolio is "effectively connected" with a U.S. trade or
business carried on by such shareholder.
If the income from a Portfolio is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Such foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Portfolio, capital gain
dividends, and amounts retained by the Portfolio that are designated as
undistributed capital gains.
If the income from a Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
B-26
<PAGE>
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Portfolios, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Considerations. The
foregoing general discussion of U.S. federal income tax consequences is based on
the Code and the Treasury Regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolios.
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 Bond Portfolio 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 its 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
B-27
<PAGE>
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 portfolio 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. The
portfolio turnover rate for the fiscal year ended March 31, 1997 was 137%, 57%
and 263%, 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 portfolio 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, 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, respectively. 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.
For the fiscal year ended March 31, 1997, Large Cap Value Portfolio and
Small Cap Value Portfolio paid total brokerage commissions of $59,523 and
$102,411, respectively, of which approximately $1,300 and $9,000, respectively,
was paid to Bear Stearns. The Large Cap Value Portfolio and Small Cap Value
Portfolio paid 2.18% and 8.79%, respectively, of its commissions to Bear
Stearns, and, with respect to all the securities transactions for each Equity
Portfolio, 2.93% and 8.89% of the transactions, respectively, involved
commissions being paid to Bear Stearns. No brokerage commissions were paid by
the Bond Portfolio.
B-28
<PAGE>
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Performance
Information."
Current yield for the 30-day period ended March 31, 1997 for Class A,
Class C and Class Y of the Bond Portfolio was 6.38%, 6.28% and 6.99%,
respectively. The current yield for each Class reflects the waiver and
reimbursement of certain fees and expenses by the investment adviser, without
which the Portfolio's current yield for such period would have been 3.87% for
Class A, 3.67% for Class C and 4.42% 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 B the maximum applicable CDSC has been paid upon redemption at the end of
the period.
Total return of each Portfolio is calculated by subtracting the amount
of the Portfolio's net asset value (maximum offering price in the case of Class
A) per share at the beginning of a stated period from the net asset value per
share at the end of the period (after giving effect to the reinvestment of
dividends and distributions during the period and any applicable CDSC), and
dividing the result by the net asset value (maximum offering price in the case
of Class A) per share at the beginning of the period. Total return also may be
calculated based on the net asset value per share at the beginning of the period
instead of the maximum offering price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class B or C shares. In such cases, the calculation would not
reflect the deduction of the sales load with respect to Class A shares or any
applicable CDSC with respect to Class B or C shares, which, if reflected, would
reduce the performance quoted.
B-29
<PAGE>
The chart below sets forth average annual total return from inception*
through March 31, 1997 and total return for one-year and inception* through
March 31, 1997 for Class A, Class C and Class Y:
TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1997
<TABLE>
<CAPTION>
Class A Class C Class Y
Based on Maximum Based on Net Based on Based on Net Based on
Name of Portfolio Offering Price Asset Value Maximum Asset Value Net
CDSC Asset Value
<S> <C> <C> <C> <C> <C>
Large Cap Value Portfolio 38.92% 45.85% N/A 44.40% 26.19%
Small Cap Value Portfolio 42.96% 50.09% N/A 48.45% 38.57%
Total Return Bond Portfolio 9.08% 13.33% N/A 12.45% 7.82%
TOTAL RETURN - ONE-YEAR ENDED MARCH 31, 1997
Class A Class C Class Y
Name of Portfolio Based on Maximum Based on Net Based on Based on Net Based on
Offering Price Asset Value Maximum Asset Value Net
CDSC Asset Value
Large Cap Value Portfolio 9.96% 15.44% N/A 14.87% 16.04%
Small Cap Value Portfolio 6.41% 11.71% N/A 11.12% 12.19%
Total Return Bond Portfolio 0.49% 4.40% N/A 3.99% 4.77%
AVERAGE ANNUAL TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1997
Class A Class C Class Y
Name of Portfolio Based on Maximum Based on Net Based on Based on Net Based on
Offering Price Asset Value Maximum Asset Value Net
CDSC Asset Value
Large Cap Value Portfolio 17.94% 20.86% N/A 20.23% 16.12%
Small Cap Value Portfolio 19.63% 22.58% N/A 21.90% 20.17%
Total Return Bond Portfolio 4.45% 6.47% N/A 6.06% 4.93%
</TABLE>
* Class A and Class C shares of Large Cap Value Portfolio commenced
investment operations on April 4, 1995. Class A and Class C shares of
Small Cap Value Portfolio commenced investment operations on April 3,
1995. Class A and Class C shares of the Bond Portfolio commenced
investment operations on April 5, 1995. The initial public offering of
the Class Y shares of Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio commenced on September 11, June 22, and
September 8, 1995, respectively.
CODE OF ETHICS
The Fund, on behalf of each Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Fund and employees of the
Fund and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the
B-30
<PAGE>
Portfolios, without prior approval by the Fund or without the applicability of
certain exemptions; (2) the recommendation of a securities transaction without
disclosing his or her interest in the security or issuer of the security; (3)
the commission of fraud in connection with the purchase or sale of a security
held by or to be acquired by each Portfolio; (4) the purchase of any securities
in an initial public offering or private placement transaction eligible for
purchase or sale by each Portfolio without prior approval by the Fund; and (5)
the acceptance of gifts of more than a de minimus value from those doing
business with or on behalf of the Portfolio. Certain transactions are exempt
from item (1) of the previous sentence, including: (1) purchases or sales on the
account of an access person that are not under the control of or that are
non-volitional with respect to that person; (2) purchases or sales of securities
not eligible for purchase or sale by the Portfolio; (3) purchases or sales
relating to rights issued by an issuer pro rata to all holders of a class of its
securities; and (4) any securities transaction, or series of related
transactions, involving 500 or fewer shares of an issuer having a market
capitalization greater than $1 billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of each Portfolio first, shall avoid potential or
actual conflicts of interest with each Portfolio, and shall not take unfair
advantage of their relationship with each Portfolio. Under certain
circumstances, the Adviser to each Portfolio may aggregate or bunch trades with
other clients provided that no client is materially disadvantaged. Access
persons are required by the Code of Ethics to file quarterly reports of personal
securities investment transactions. However, an access person is not required to
report a transaction over which he or she had no control. Furthermore, a trustee
of the Fund who is not an "interested person" (as defined in the Investment
Company Act) of the Fund is not required to report a transaction if such person
did not know or, in the ordinary course of his duties as a Trustee of the Fund,
should have known, at the time of the transaction, that, within a 15 day period
before or after such transaction, the security that such person purchased or
sold was either purchased or sold, or was being considered for purchase or sale,
by each Portfolio. The Code of Ethics specifies that certain designated
supervisory persons and/or designated compliance officers shall supervise
implementation and enforcement of the Code of Ethics and shall, at their sole
discretion, grant or deny approval of transactions required by the Code of
Ethics.
INFORMATION ABOUT THE 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, 1997, 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. 21.9%
FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.6%
FBO 086-15297-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-31
<PAGE>
Piedmont Trust Bank 5.4%
Custodian for API Trust Growth Fund
1 Ellsworth Street
Martinsville, VA 24112
<PAGE>
Percent of Large Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 7.8%
FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.6%
FBO 026-47353-17
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. 20.0%
FBO 038-04569-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 10.2%
FBO 049-40734-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
EAMCO 8.6%
FBO 02130004
Attn: Mutual Funds Desk
c/o Riggs Bank N.A.
P.O. Box 96211
Washington, DC 20090-6211
Bear, Stearns Securities Corp. 5.9%
FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 12201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Piedmont Trust Bank 6.9%
Custodian for API Trust Growth Fund
1 Ellsworth Street
Martinsville, VA 24112
Bear, Stearns Securities Corp. 6.3%
FBO 042-13302-18
1 Metrotech Center North
Brooklyn, NY 12201-3859
B-32
<PAGE>
Percent of Small Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 7.0%
FBO 984-00106-16
1 Metrotech Center North
Brooklyn, NY 01201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Custodial Trust Company 17.5%
101 Carnegie Center
Princeton, NJ 08540
Bear, Stearns Securities Corp. 7.4%
FBO 049-41065-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.8%
FBO 047-23948-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 24.2%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 6.3%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 6.0%
FBO 044-34756-29
1 Metrotech Center North
Brooklyn, NY 12201-3859
Bear, Stearns Securities Corp. 5.7%
FBO 042-16744-25
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. 27.2%
FBO 498-00001-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 13.0%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-33
<PAGE>
Bear, Stearns Securities Corp. 13.0%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 9.6%
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. 78.8%
FBO 049-41095-15
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.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, 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, 1997 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.
B-34
<PAGE>
APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch and
Duff:
S&P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
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.
B-35
<PAGE>
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.
B-36
<PAGE>
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.
B-37
<PAGE>
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.
B-38
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
THE INSIDERS SELECT FUND
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
_________, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated ________, 1997 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 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 is referred to herein as the "Adviser."
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-9
Management Arrangements................................................. B-11
Purchase and Redemption of Shares....................................... B-14
Determination of Net Asset Value........................................ B- 16
Dividends, Distributions and Taxes...................................... B- 17
Portfolio Transactions.................................................. B- 24
Performance Information................................................. B- 25
Code of Ethics.......................................................... B- 26
Information About the Fund.............................................. B- 27
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors...................................... B- 27
Financial Statements.................................................... B- 28
B-1
<PAGE>
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
B-2
<PAGE>
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 Adviser 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 the borrower, it is not contemplated that
such instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, 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 ("Rule 144A"), 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
B-3
<PAGE>
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 covered 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 by the Portfolio 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 the Adviser 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 the Adviser 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 the Adviser 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.
B-4
<PAGE>
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser 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: (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
B-5
<PAGE>
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
B-6
<PAGE>
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 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.
B-7
<PAGE>
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 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 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.
B-8
<PAGE>
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.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co.
126 East 56th Street since 1969; President of
New York, NY 10021 Koll, Bren Realty Advisors
and Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from
1981 to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
P.O. Box 15213 Officer of McKernan
Portland, ME 04112 Enterprises since January
1995; Governor of Maine
prior thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief
700 13th St., N.W., Executive Officer,
Suite 400 Washington, D.C. 20005 Association of American
Railroads since June 23,
1997; Vice Chairman of
Cassidy & Associates since
February 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* (53) Chairman of the Director of Mutual Funds-
245 Park Avenue 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.
Peter B. Fox (45 Executive Vice Managing Director -Emeritus,
Three First National Plaza President Bear Stearns Since February
Chicago, IL 60602 1997, Bear Stearns Senior
Managing Director,
Public Finance since
September 1987.
William J. Montgoris (50) Executive Vice Chief Operating Officer,
245 Park Avenue President Bear Stearns.
New York, NY 10167
B-9
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue Department; General Counsel,
New York, NY 10167 Bear Stearns Asset
Management, a division of
Bear Stearns.
Frank J. Maresca (39) 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.
Donalda L. Fordyce (38) Vice President Bear Stearns Asset
245 Park Avenue Management since March,
New York, NY 10167 1996; previously, Vice
Senior Managing Director, President, Asset Management
Group, Goldman Sachs from
1986 to 1996.
Ellen T. Arthur (44) 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 (32) 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.
Eileen M. Coyle (31 Assistant Vice President of Bear
245 Park Avenue Secretary Stearns since September
New York, NY 10167 1995; Manager of BSFM since
1995; Senior Fund
Administrator and Supervisor
for BSFM from January 1994
to 1995; Accounting
Supervisor and Senior
Accountant for Bear Stearns
since 1990.
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
Funds for which such person is a Board member (the number of
B-10
<PAGE>
which is set forth in parenthesis next to each Board member's total
compensation) for the fiscal year ended March 31, 1997 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 $11,500
Alan J. Dixon $7,000 None None $6,500
John R. McKernan, Jr. $7,000 None None $12,000
M.B. Oglesby, Jr. $7,000 None None $12,000
Robert S. Reitzes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to approximately $7,000 for Board members of
the Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1%
of the Portfolio's shares outstanding on May 31, 1997.
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 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, as revised May 4, 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 January 28, 1997. The Agreement is terminable, as
to the Portfolio, without penalty, on 60 days
B-11
<PAGE>
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;Frank J. Maresca, Executive
Vice President; Donalda L. Fordyce, Executive Vice President; Vincent L.
Pereira, Vice President and Treasurer; Ellen T. Arthur, Secretary; and James G.
McCluskey, 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 0.50% per year of the
value of the Portfolio's average daily net assets. For the period from June 16,
1995 (commencement of investment operations) through March 31, 1996, the
investment advisory fees payable amounted to $116,606. For the fiscal year ended
March 31, 1997, the investment advisory fees payable amounted to $182,313. These
amounts were waived pursuant to a voluntary undertaking by BSFM, resulting in no
fees being paid by the Portfolio. In addition, the Adviser reimbursed $243,945,
in order to maintain the voluntary expense limitation.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995, as
revised April 11, 1995 and June 2, 1997, 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 and the fiscal year ended March 31, 1997, the
administration fees accrued amounted to $21,806 and $35,873 and the amount paid
was $18,824 and $32,547, 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.
B-12
<PAGE>
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 investment operations)
through March 31, 1996 and the fiscal year ended March 31, 1997, the
administrative fees payable by the Portfolio amounted to $104,500 and $141,467,
respectively. These amounts were reduced to $44,282 and $107,174, respectively,
as a result of a waiver of fees by PFPC.
Distribution and Shareholder Servicing . 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
Board of Trustees has adopted a distribution and shareholder servicing plan with
respect to Class A and Class C shares (the "Plan"). The Fund's Board of Trustees
has also adopted a distribution plan (the "Distribution Plan") and a shareholder
servicing plan (the "Shareholder Servicing Plan", and together with the Plan
and/or the Distribution Plan, the "Plans") with respect to the Class B shares.
The Fund's Board of Trustees believe that there is a reasonable likelihood that
the Plans will benefit the Portfolio and the holders of its Class A, Class B and
Class C shares.
A quarterly report of the amounts expended under the Plan and the
Distribution Plan, and the purposes for which such expenditures were incurred,
must be made to the Trustees for their review. In addition, each Plan provides
that it may not be amended to increase materially the costs which holders of a
class of shares may bear pursuant to such Plan without approval of such effected
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. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is required by a
Securities and Exchange Commission rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Plan that would
materially increase the amount to be paid by Class A shareholders under such
Plans. Such approval must be by a "majority" of the Class A and Class B shares
(as defined in the 1940 Act), voting separately by class. Each Plan and related
agreements is subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on such Plan. The Plan with respect to
Class A and Class C shares was so approved on January 28, 1997. The Distribution
Plan and the Shareholder Servicing Plan with respect to the Class B shares was
approved on September 8, 1997. Each Plan is terminable at any time, as to each
class of the 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 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 relevant class' shares.
A Plan agreement will terminate automatically, as to the relevant class of the
Portfolio, in the event of its assignment (as defined in the 1940 Act).
For the fiscal year ended March 31, 1997, the Portfolio paid Bear
Stearns $65,276 with respect to Class A shares and $94,265 with respect to Class
C shares under the Plan. With respect to Class A, of the $56,284 paid under the
Plan, $4,029 was paid to brokers or dealers and $4,963 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
B-13
<PAGE>
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 has 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. No such expense
limitations currently apply to the Portfolio.
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 and the fiscal year ended March 31, 1997,
Bear Stearns retained $502,600 and $163,000, respectively, from the sales loads
on Class A shares and $9,000 and $14,300, respectively, 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, 1997.
Net Asset Value per Share $14.58
======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.85
------
B-14
<PAGE>
Per Share Offering Price to
the Public $15.43
======
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.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of the Portfolio instead. A fourth class of shares may
be purchased only by certain institutional investors at net asset value per
share (the "Class Y shares").
The four classes of shares each represent an interest in the same
Portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of the Portfolio's Class A, B, C and Y shares recognizes two types
of expenses. General expenses that do not pertain specifically to a class are
allocated pro rata to the shares of each class, based on the percentage of the
net assets of such class to the Portfolio's total assets, and then equally to
each outstanding share within a given class. Such general expenses include (i)
management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest,
B-15
<PAGE>
taxes and brokerage commissions, and (ix) non-recurring expenses, such as
litigation costs. Other expenses that are directly attributable to a class are
allocated equally to each outstanding share within that class. Such expenses
include (a) Distribution and Shareholder Servicing Plan fees, (b) incremental
transfer and shareholder servicing agent fees and expenses, (c) registration
fees and (d) shareholder meeting expenses, to the extent that such expenses
pertain to a specific class rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of the Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
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,
Martin Luther King Jr. Day, Thanksgiving and Christmas Day.
B-16
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussions here and in
the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, a Portfolio is not subject to
federal income tax on the portion of its net investment income (i.e., taxable
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by the
Portfolio made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will, therefore,
satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short- Short Gain Test, the Portfolio may have
to limit the sale of appreciated securities that it has held for less than three
months. However, the Short- Short Gain Test will not prevent the Portfolio from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Portfolio at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income that is attributable to realized market appreciation will be treated as
gross income from such sale or other disposition of securities for this purpose.
In general, a gain or loss recognized by the Portfolio on the
disposition of an asset will be a capital gain or a capital loss. However, a
B-17
<PAGE>
gain recognized on the disposition of a debt obligation purchased by the
Portfolio at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Portfolio held the
debt obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code section 1256
(unless a Portfolio elects otherwise), will generally be treated as ordinary
income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Portfolio's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (2) the transaction is one that was marketed or sold
to the Portfolio on the basis that it would have the economic characteristics of
a loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury
Regulations. The amount of the gain recharacterized generally will not exceed
the amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the federal long-term, mid-term, or
short-term rate, depending upon the type of instrument at issue, reduced by an
amount equal to: (1) prior inclusions of ordinary income items from the
conversion transaction and (2) the capital interest on acquisition indebtedness
under Code section 263(g). Built-in losses will be preserved where the Portfolio
has a built-in loss with respect to property that becomes a part of a conversion
transaction. No authority exists that indicates that the converted character of
the income will not be passed to the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of the Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto, or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, the
Portfolio may be required to defer the recognition of a loss on the disposition
of an asset held as part of a straddle to the extent of any unrecognized gain on
the offsetting position.
Any gain recognized by the Portfolio on the lapse of, or any gain or
loss recognized by the Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an option
written by the Portfolio will commence on the date it is written and end on the
date it lapses or the date of a closing transaction is entered into.
Accordingly, the Portfolio may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
B-18
<PAGE>
Certain transactions that may be engaged in by the Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gains or losses for the taxable year with respect to Section
1256 contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
Portfolio, however, may elect not to have this special tax treatment apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts. Under Treasury
Regulations, gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the Portfolio invests in a PFIC, it may
elect to treat the PFIC as a qualified electing fund (a "QEF"), in which event
the Portfolio will each year have ordinary income equal to its pro rata share of
the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. If the Portfolio does not elect to treat the PFIC
as a QEF, then, in general, (1) any gain recognized by the Portfolio upon sale
or other disposition of its interest in the PFIC or any excess distribution
received by the Portfolio from the PFIC will be allocated ratably over the
Portfolio's holding period of its interest in the PFIC, (2) the portion of such
gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Portfolio's gross income for such year as ordinary income (and the distribution
of such portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under proposed Treasury Regulations, the Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted tax
basis in that share ("mark to market gain"). Such mark to market gain will be
included by the Portfolio as ordinary income and will not be subject to the
Short-Short Gain Test, and the Portfolio's holding period with respect to such
PFIC stock will commence on the first day of the next taxable year. If the
Portfolio makes such election in the first taxable year it holds PFIC stock, it
will not incur the tax described in the preceding paragraphs.
B-19
<PAGE>
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Portfolio's taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to each of which the Portfolio has not invested more than 5% of the
value of the Portfolio's total assets in securities of such issuer and does not
hold more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible excise tax is
imposed on a regulated investment company that fails to distribute in each
calendar year an amount equal to 98% of capital gain net income for the one-year
period ended on October 31 of such calendar year (or, at the election of a
regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election")). The balance of
such income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distribution to
avoid excise tax liability.
B-20
<PAGE>
Portfolio Distributions
The Portfolio anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but will qualify for the 70% dividends-received
deduction for corporate shareholders only to the extent discussed below.
Dividends paid on Class A, B, C, and Y shares are calculated at the same time
and in the same manner. In general, dividends on Class B and C shares are
expected to be lower than those on Class A shares due to the higher distribution
expenses borne by the Class B and C shares. Dividends may also differ between
classes as a result of differences in other class specific expenses.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by the Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon the Portfolio's
disposition of domestic "small business" stock will be subject to tax.
Conversely, if the Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Portfolio elects to
retain its net capital gain, it is expected that the Portfolio also will elect
to have shareholders of record on the last day of its taxable year treated as if
each received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such gain
on his tax return as long-term capital gain, will receive a refundable tax
credit for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Portfolio with respect to a
taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Portfolio from domestic
corporations for the taxable year. A dividend received by the Portfolio will not
be treated as a qualifying dividend (1) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock), excluding for this purpose under the rules
of Code section 246(c)(3)and (4) (i) any day more than 45 days (or 90 days in
the case of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Portfolio has an option to
sell, is under a contractual obligation to sell, has made and not closed a short
sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option
to buy, or has otherwise diminished its risk of loss by holding other positions
with respect to, such (or substantially identical) stock; (2) to the extent that
the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent that the stock on which the dividend is
paid is treated as debt-financed under the rules of Code section 246A. Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
or reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Portfolio or (2) by application
of Code section 246(b) which in general limits the dividends-received deduction
to 70%
B-21
<PAGE>
of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from the Portfolio into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolio that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional shares of another portfolio (or another fund). Shareholders receiving
a distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Portfolio reflects undistributed
net investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Portfolio, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although they economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
B-22
<PAGE>
Sale or Redemption of Shares
A shareholder will recognize a gain or loss on the sale or redemption of
shares of the Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Portfolio within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of the Portfolio will
be considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the U.S., is a non-resident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("Foreign Shareholder") depends on whether the income from a Portfolio is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) upon the gross amount of
the dividend. Such Foreign Shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of a Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
B-23
<PAGE>
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Portfolio, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolios.
PORTFOLIO TRANSACTIONS
The Adviser 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 the Adviser's best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders at the most favorable net price.
Subject to this consideration, the brokers selected will include those that
supplement the Adviser's research facilities with statistical data, investment
information, economic facts and opinions. Information so received is in addition
to and not in lieu of services required to be performed by the Adviser and the
Adviser's fees are not reduced as a consequence of the receipt of such
supplemental information.
Such information may be useful to the Adviser 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 the Adviser 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 the Adviser being engaged
simultaneously in the purchase or sale of the same security. Certain of the
Adviser's transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to 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 investment operations) through March 31, 1996 and the fiscal year ended March
31, 1997 was 93.45% and 128.42%, respectively. In periods in which extraordinary
market conditions prevail, the Adviser will not be deterred from changing
investment strategy as rapidly as needed, in which case higher turnover rates
can be anticipated which would result in greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by the Adviser based
upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
B-24
<PAGE>
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) 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. For the fiscal year ended March 31, 1997, the Portfolio paid total
brokerage commissions of $39,790, of which $8,925 was paid to Bear Stearns. The
Portfolio paid 22.43% of its commissions to Bear Stearns, and, with respect to
all the securities transactions for the Portfolio, 22.18% 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 B the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The average annual total return for Class A (at maximum offering price)
for the period June 16, 1995 (commencement of investment operations) through
March 31, 1997 was 16.52%. Based on net asset value per share, the average
annual total return for Class A was 19.72% for this period. The average annual
total return for Class C was 19.13% for this period. The average annual total
return for Class Y for the period June 20, 1995 (commencement of initial public
offering) through March 31, 1997 was 19.69%.
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)
B-25
<PAGE>
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class B and C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class B and C shares, which, if reflected, would reduce the
performance quoted.
The total return for Class A (at maximum offering price) for the period
June 16, 1995 (commencement of investment operations) through March 31, 1997 was
31.57%. Based on net asset value per share, the total return for Class A was
38.13% for this period. The total return for Class C was 36.91% for this period.
The total return for Class Y for the period June 20, 1995 (commencement of
initial public offering) through March 31, 1997 was 37.79%.
The total return for Class A (at maximum offering price) for the fiscal
year ended March 31, 1997 was 12.69%. Based on net asset value per share, the
total return for Class A was 18.31% for this period. The total return for Class
C was 17.69% for this period. The total return for Class Y for this period was
18.81%.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Fund and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the Portfolio, without prior approval by the
Fund or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her interest in the
security or issuer of the security; (3) the commission of fraud in connection
with the purchase or sale of a security held by or to be acquired by the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund; and (5) the acceptance of gifts of more than
a de minimus value from those doing business with or on behalf of the Portfolio.
Certain transactions are exempt from item (1) of the previous sentence,
including: (1) purchases or sales on the account of an access person that are
not under the control of or that are non-volitional with respect to that person;
(2) purchases or sales of securities not eligible for purchase or sale by the
Portfolio; (3) purchases or sales relating to rights issued by an issuer pro
rata to all holders of a class of its securities; and (4) any securities
transaction, or series of related transactions, involving 500 or fewer shares of
an issuer having a market capitalization greater than $1 billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the Investment Company
Act) of the Fund is not required to report a transaction if such person did not
know or, in the ordinary course of his duties as a trustee of the Fund, should
have known, at the time of the
B-26
<PAGE>
transaction, that, within a 15 day period before or after such transaction, the
security that such person purchased or sold was either purchased or sold, or was
being considered for purchase or sale, by the Portfolio. The Code of Ethics
specifies that certain designated supervisory persons and/or designated
compliance officers shall supervise implementation and enforcement of the Code
of Ethics and shall, at their sole discretion, grant or deny approval of
transactions required by the Code of Ethics.
INFORMATION ABOUT THE 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, 1997, 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
FBO Barra 401k Plan
c/o Wells Fargo Bank
420 Montgomery St., 8th Flr
San Francisco, CA 94104
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 0.015% of the value of the domestic assets held in
custody or $5,000, such fee to be payable monthly based upon the total market
value of such assets, as determined on the last business day of the month. In
addition, CTC receives certain securities transactions charges 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.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, 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.
B-27
<PAGE>
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, 1997 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.
B-28
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
___________, 1997
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated ___________, 1997 of S&P STARS Portfolio (the "STARS Portfolio"
or the "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: S&P STARS Portfolio,
P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1- 800-447-1139 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 investment adviser to the
Portfolio.
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-7
Management Arrangements........................................... B-10
Purchase and Redemption of Shares................................. B-13
Determination of Net Asset Value.................................. B- 15
Dividends, Distributions and Taxes................................ B- 15
Portfolio Transactions............................................ B- 23
Performance Information........................................... B- 24
Code of Ethics.................................................... B- 25
Information About the Fund....................................... B- 26
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors................................ B- 27
Financial Statements.............................................. B- 27
B-1
<PAGE>
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
STARS Portfolio."
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.
B-2
<PAGE>
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. BSFM 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 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 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 the borrower, it is not contemplated that
such instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, 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, 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 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, it 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 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
B-3
<PAGE>
the effect of increasing the level of illiquidity in the Portfolio during such
period.
Management Policies
Options Transactions. The Portfolio may engage in options transactions
of the type described in the Portfolio's Prospectus.
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. 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 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 by the Portfolio 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 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 Portfolio's 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 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 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
B-4
<PAGE>
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 engage in stock index option
transactions of the type described in the 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 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.
Investments in Warrants. The Portfolio 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
B-5
<PAGE>
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 Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to the 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 outstanding voting securities of the Portfolio, 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 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 it 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 it 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, it 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.
6. Act as an underwriter of securities of other issuers, except to the
extent it 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 it 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 it 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
B-6
<PAGE>
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.
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.
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 (63) Trustee President of The Bren
126 East 56th Street Co. since 1969;
New York, NY 10021 President of Koll, Bren
Realty Advisors and
Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a
7535 Claymont Court law firm in St. Louis
Apt. #2 since January 1993;
Belleville, IL 62223 United States Senator of
Illinois from 1981 to
1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief
P.O. Box 15213 Executive Officer of
Portland, ME 04112 McKernan Enterprises
Inc. since January 1995;
Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief
700 13th St., N.W., Suite 400 Executive Officer,
Washington, D.C. 20005 Association of American
Railroads since June 23,
1997; Vice Chairman of
Cassidy & Associates
since February 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.
B-7
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Robert S. Reitzes* (53) Chairman of the Board Director of Mutual
245 Park Avenue Funds-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.
Peter B. Fox (45) Executive Vice President Managing Director -
Three First National Plaza Emeritus, Bear Stearns
Chicago, IL 60602 since February 1997; Bear
Stearns, Senior Managing
Director, Public Finance,
since September 1987.
William J. Montgoris (50) Executive Vice Chief Operating Officer,
245 Park Avenue President Bear Stearns.
New York, NY 10167
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue Department; General
New York, NY 10167 Counsel, Bear Stearns
Asset Management, a
division of Bear Stearns.
Frank J. Maresca (39) Vice President and Managing Director of Bear
245 Park Avenue 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.
Donalda L. Fordyce (38) Vice President Senior Managing Director,
245 Park Avenue Bear Stearns Asset
New York, NY 10167 Management since March,
1996; previously, Vice
President, Asset
Management Group, Goldman
Sachs from 1986 to 1996.
Ellen T. Arthur (44) Secretary Associate Director of
245 Park Avenue Bear Stearns since
New York, NY 10167 January 1996; Senior
Counsel and Corporate
Vice President of
PaineWebber
B-8
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Incorporated from April
1989 to September 1995.
Vincent L. Pereira (32) Assistant Treasurer Associate Director of
245 Park Avenue Bear Stearns since
New York, NY 10167 September 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.
Eileen M. Coyle (31) Assistant Secretary Vice President of Bear
245 Park Avenue Stearns since September
New York, NY 10167 1995; Manager of BSFM
since 1995; Senior Fund
Administrator and
Supervisor for BSFM from
January 1994 to 1995;
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, 1997 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 $11,500
Alan J. Dixon $7,000 None None $ 6,500
John R. McKernan, Jr. $7,000 None None $12,000
M.B. Oglesby, Jr. $7,000 None None $12,000
Robert S. Reitzes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $7,000 for Board members of the Fund, as a
group.
Board members and officers of the Fund, as a group, owned less than 1% of
the Portfolio's shares outstanding on May 31, 1997.
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.
B-9
<PAGE>
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 STARS
Portfolio."
General.
Prior to June 25, 1997, the Portfolio invested all of its assets into the S&P
STARS Master Series of S&P STARS Fund (the "Master Series"), rather than
directly in a portfolio of securities in an arrangement typically referred to as
a "master-feeder" structure. Active portfolio management was performed at the
Master Series level and BSFM was retained by the Master Series rather than the
Portfolio. At a meeting held June 18, 1997, a majority of the shareholders of
the Portfolio approved an investment advisory contract between BSFM and the
Portfolio and active management of the Portfolio investments commenced.
Historical information provided below for periods prior to June 25, 1997
pertaining to items such as advisory fees, portfolio turnover, and brokerage
expenses reflects those items as incurred by the Master Series.
Investment Advisory Agreement. BSFM provides investment advisory services
to the Portfolio pursuant to the Investment Advisory Agreement (the "Agreement")
dated June 1, 1997, 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
Fund's 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 Fund's Board of Trustees, including
a majority of the Trustees who are not "interested persons", approved the
Agreement on April 29, 1997, subject to approval by the shareholders of the
Portfolio. Such shareholder approval was obtained on June 18, 1997 at a meeting
of the shareholders of the Portfolio. The Agreement is terminable, 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. 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; Frank J. Maresca, Executive
Vice President; Donalda L. Fordyce, Executive Vice President; Vincent L.
Pereira, Vice President and Treasurer; Ellen T. Arthur, Secretary; and James G.
McCluskey, Michael Minikes, Warren J. Spector and Robert M. Steinberg,
Directors.
BSFM provides investment advisory services to the Portfolio in accordance
with its stated policies, subject to the approval of the Fund's Board of
Trustees. BSFM provides the Portfolio with portfolio managers who are authorized
by the Fund's Board of Trustees to execute purchases and sales of securities.
The portfolio managers are Robert S. Reitzes and Gayle M. Sprute.
B-10
<PAGE>
All purchases and sales are reported for the Board's review at the meeting
subsequent to such transactions.
As noted above, prior to June 25, 1997, the Portfolio did not retain an
investment adviser. Instead, The Master Series retained BSFM to serve as its
investment adviser. For the period from April 3, 1995 (commencement of
operations) through March 31, 1996, the investment advisory fees payable
amounted to $384,779. BSFM waived its advisory fee entirely and reimbursed
$4,424 and $79,750 of the Portfolio's and the Master Series' expenses,
respectively, pursuant to a voluntary undertaking by BSFM. For the fiscal year
ended March 31, 1997, the investment advisory fees payable amounted to $747,970.
BSFM waived $699,997 of its advisory fee pursuant to a voluntary undertaking,
resulting in net advisory fees of $47,973 paid by the Master Series.
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 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. For the fiscal year ended March 31,
1997, the administration fee accrued amounted to $149,100 and the amount paid
was $131,668.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement 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.
Under the terms of the Administrative Services Agreement, PFPC is entitled
to receive a monthly fee equal to an annual rate of .10 of 1% of the Portfolio's
average daily net assets up to $200 million, .075% of 1% of the next $200
million, .05% of 1% of the next $200 million and .03 of 1% of net assets above
$600 million, subject to a minimum annual fee of approximately $100,000 for the
Portfolio.
Prior to June 25, 1997, PFPC Inc. provided administrative services to the
Portfolio. As compensation for PFPC's administrative services, the Fund 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
Portfolio amounted to $60,000. This amount was reduced to $58,660 as a result of
a waiver of fees by PFPC. For the fiscal year ended March 31, 1997, the
administrative fee payable by the Portfolio amounted to $65,999.
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<PAGE>
Prior to June 25, 1997, PFPC International Ltd. provided certain
administrative services to the Master Series pursuant to the Administrative
Services Agreement dated February 23, 1995, with the Fund. Under the
Administrative Services Agreement, the Master Series paid PFPC International
Ltd. an annual fee, as a percentage of average daily net assets, equal to .12 of
1% of the first $200 million of average net assets, .09 of 1% of the next $200
million, .075 of 1% of the next $200 million and .05 of 1% of average net assets
in excess of $600 million, subject to a monthly minimum fee of $8,500. For the
period April 3, 1995 (commencement of operations) through March 31, 1996 and the
fiscal year ended March 31, 1997, the Master Series paid PFPC International Ltd.
$61,620 and $123,741, respectively.
Distribution and Shareholder Servicing . 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 Board of
Trustees has adopted a distribution and shareholder servicing plan with respect
to Class A and Class C shares (the "Plan"). The Fund's Board of Trustees has
also adopted a distribution plan (the "Distribution Plan") and a shareholder
servicing plan (the "Shareholder Servicing Plan", and together with the Plan
and/or the Distribution Plan, the "Plans") with respect to the Class B shares.
The Fund's Board of Trustees believe that there is a reasonable likelihood that
the Plans will benefit the Portfolio and the holders of its Class A, Class B and
Class C shares.
A quarterly report of the amounts expended under the Plan and the
Distribution Plan, and the purposes for which such expenditures were incurred,
must be made to the Trustees for their review. In addition, each Plan provides
that it may not be amended to increase materially the costs which holders of a
class of shares may bear pursuant to such Plan without approval of such effected
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. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is required by a
Securities and Exchange Commission rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Plan that would
materially increase the amount to be paid by Class A shareholders under such
Plans. Such approval must be by a "majority" of the Class A and Class B shares
(as defined in the 1940 Act), voting separately by class. Each Plan and related
agreements is subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on such Plan. The Plan with respect to
Class A and Class C shares was so approved on January 28, 1997. The Distribution
Plan and the Shareholder Servicing Plan with respect to the Class B shares was
approved on September 8, 1997. Each Plan is terminable at any time, as to each
class of the 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 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 relevant class' shares.
A Plan agreement will terminate automatically, as to the relevant class of the
Portfolio, in the event of its assignment (as defined in the 1940 Act).
For the fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns
$276,327 with respect to Class A shares and $324,164 with respect to Class C
shares under the Plan. All such amounts were paid to brokers or dealers.
Expenses. The Fund bears its own operating expenses. Operating expenses
include: organizational costs, taxes, interest, loan commitment fees, interest
and distributions paid on securities sold short, brokerage fees and
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<PAGE>
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 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, 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.
Expense Limitation. BSFM agreed that if, in any fiscal year, the aggregate
expenses of a Portfolio, exclusive of taxes, brokerage commissions, interest on
borrowings and (with 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. No such expense
limitations currently apply to the Portfolio.
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 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. For the fiscal year ended March 31, 1997, Bear
Stearns retained approximately $904,000 from the sales loads on Class A shares
and approximately $30,000 from 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, 1997.
Net Asset Value per Share $16.13
======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.94
------
Per Share Offering Price to
the Public $17.07
======
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<PAGE>
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 the
Portfolio's shareholders.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Portfolio instead. A fourth class of shares may be
purchased only by certain institutional investors at net asset value per share
(the "Class Y shares").
The four classes of shares each represent an interest in the same
Portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution and
Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
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<PAGE>
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 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.
The 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 Board of 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 Board of 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, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussions here and in
the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Portfolio is not subject to
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<PAGE>
federal income tax on the portion of its net investment income (i.e., taxable
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by the
Portfolio made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will, therefore,
satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short- Short Gain Test, the Portfolio may have
to limit the sale of appreciated securities that it has held for less than three
months. However, the Short- Short Gain Test will not prevent the Portfolio from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Portfolio at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income that is attributable to realized market appreciation will be treated as
gross income from such sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Portfolio at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Portfolio held the debt obligation. In
addition, under the rules of Code section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code section 1256 (unless the
Portfolio elects otherwise), will generally be treated as ordinary income or
loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Portfolio's net investment in
the transaction and: (1) the transaction consists of the
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<PAGE>
acquisition of property by the Portfolio and a contemporaneous contract to sell
substantially identical property in the future; (2) the transaction is a
straddle within the meaning of section 1092 of the Code; (2) the transaction is
one that was marketed or sold to the Portfolio on the basis that it would have
the economic characteristics of a loan but the interest-like return would be
taxed as capital gain; or (4) the transaction is described as a conversion
transaction in the Treasury Regulations. The amount of the gain recharacterized
generally will not exceed the amount of the interest that would have accrued on
the net investment for the relevant period at a yield equal to 120% of the
federal long-term, mid-term, or short-term rate, depending upon the type of
instrument at issue, reduced by an amount equal to: (1) prior inclusions of
ordinary income items from the conversion transaction and (2) the capital
interest on acquisition indebtedness under Code section 263(g). Built-in losses
will be preserved where the Portfolio has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of Portfolio) (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the
Portfolio as part of a "straddle" (which term generally excludes a situation
where the asset is stock and the Portfolio grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto, or (3) the asset is stock and the Portfolio grants an in-the-money
qualified covered call option with respect thereto. However, for purposes of the
Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above. In addition, the Portfolio may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Portfolio on the lapse of, or any gain or
loss recognized by the Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an option
written by the Portfolio will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into. Accordingly,
the Portfolio may be limited in its ability to write options which expire within
three months and to enter into closing transactions at a gain within three
months of the writing of options.
Certain transactions that may be engaged in by the Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The Portfolio,
however, may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Portfolio that are not Section 1256 contracts.
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<PAGE>
Under Treasury Regulations, gains arising from Section 1256 contracts will be
treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256.
The Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the Portfolio invests in a PFIC, it may
elect to treat the PFIC as a qualified electing fund (a "QEF"), in which event
the Portfolio will each year have ordinary income equal to its pro rata share of
the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. If the Portfolio does not elect to treat the PFIC
as a QEF, then, in general, (1) any gain recognized by the Portfolio upon sale
or other disposition of its interest in the PFIC or any excess distribution
received by the Portfolio from the PFIC will be allocated ratably over the
Portfolio's holding period of its interest in the PFIC, (2) the portion of such
gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Portfolio's gross income for such year as ordinary income (and the distribution
of such portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under proposed Treasury Regulations, the Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted tax
basis in that share ("mark to market gain"). Such mark to market gain will be
included by the Portfolio as ordinary income and will not be subject to the
Short-Short Gain Test, and the Portfolio's holding period with respect to such
PFIC stock will commence on the first day of the next taxable year. If the
Portfolio makes such election in the first taxable year it holds PFIC stock, it
will not incur the tax described in the preceding paragraphs.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Portfolio's taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to each of which the Portfolio has not invested more than 5% of the
value of the Portfolio's total assets in securities of such issuer and
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<PAGE>
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Portfolio controls and which are engaged in the same or similar trades
or businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having a
taxable year ending November 30 or December 31, for its taxable year (a "taxable
year election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distribution to
avoid excise tax liability.
Portfolio Distributions
The Portfolio anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but will qualify for the 70% dividends-received
deduction for corporate shareholders only to the extent discussed below.
Dividends paid on Class A, B, C, and Y shares are calculated at the same time
and in the same manner. In general, dividends on Class B and C shares are
expected to be lower than those on Class A shares due to the higher distribution
expenses borne by the Class B and C shares. Dividends may also differ between
classes as a result of differences in other class specific expenses.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and
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<PAGE>
designated as a capital gain dividend will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder has
held his shares or whether such gain was recognized by the Portfolio prior to
the date on which the shareholder acquired his shares. The Code provides,
however, that under certain conditions only 50% of the capital gain recognized
upon the Portfolio's disposition of domestic "small business" stock will be
subject to tax.
Conversely, if the Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Portfolio elects to
retain its net capital gain, it is expected that the Portfolio also will elect
to have shareholders of record on the last day of its taxable year treated as if
each received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such gain
on his tax return as long-term capital gain, will receive a refundable tax
credit for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Portfolio with respect to a
taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Portfolio from domestic
corporations for the taxable year. A dividend received by the Portfolio will not
be treated as a qualifying dividend (1) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock), excluding for this purpose under the rules
of Code section 246(c)(3)and (4) (i) any day more than 45 days (or 90 days in
the case of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Portfolio has an option to
sell, is under a contractual obligation to sell, has made and not closed a short
sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option
to buy, or has otherwise diminished its risk of loss by holding other positions
with respect to, such (or substantially identical) stock; (2) to the extent that
the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent that the stock on which the dividend is
paid is treated as debt-financed under the rules of Code section 246A. Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
or reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Portfolio or (2) by application
of Code section 246(b) which in general limits the dividends-received deduction
to 70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from an Equity Portfolio into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's
B-20
<PAGE>
adjusted current earnings over its AMTI (determined without regard to this item
and the AMT net operating loss deduction)) includable in AMTI.
Investment income that may be received by the Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolio that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional shares of another Portfolio (or another fund). Shareholders receiving
a distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Portfolio reflects undistributed
net investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Portfolio, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although they economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Portfolio within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of the Portfolio will
be considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special
B-21
<PAGE>
holding period rules of Code section 246(c)(3) and (4) (discussed above in
connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Long-term capital gains
of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) upon the gross amount of
the dividend. Such foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Portfolios, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
B-22
<PAGE>
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolio.
PORTFOLIO TRANSACTIONS
BSFM 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 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 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 their 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 BSFM being engaged simultaneously in the purchase or sale of the
same security. 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 Master Series for the period April 3, 1995
(commencement of operations) through March 31, 1996 and the fiscal year ended
March 31, 1997 was 296% and 220%, respectively. The portfolio turnover rate for
the period ending March 31, 1997 differed from the anticipated portfolio
turnover rate because of market volatility. 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
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) 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
B-23
<PAGE>
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 and for the fiscal year ended March 31, 1997, the Master Series paid
total brokerage commissions of $415,246 and $474,679, respectively of which
$378,353 and $368,764, respectively was paid to Bear Stearns. With respect to
such periods, the Master Series paid 91.10% and 77.68%, respectively of its
commissions to Bear Stearns, and, with respect to all the securities
transactions for the Master Series, 90.60% and 76.59%, respectively 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's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or in the case of Class B the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The average annual total return for Class A for the period April 5, 1995
(commencement of investment operations) to March 31, 1997 was 19.30% after
reflecting the maximum initial sales charge of 4.75%. Based on net asset value
per share, the average annual total return for Class A was 22.26% for the same
period. The average annual total return for Class C was 21.60% for this period.
Average annual total return for Class Y for the period August 7, 1995
(commencement of initial public offering) to March 31, 1997 was 16.20%.
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 B and C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class B and C shares, which, if reflected, would reduce the
performance quoted.
The total return for Class A, after reflecting the maximum initial sales
charge of 4.75%, for the year ended March 31, 1997 and the period April 5, 1995
(commencement of investment operations) to March 31, 1997 was 11.34% and 42.11%,
respectively. Based on net asset value per share, the total return for Class A
was 16.87% and 49.22%, respectively, for the same periods. The total return for
Class C was 16.33% and 47.64%, respectively, for the periods. The total return
for Class Y for the year ended March 31, 1997 and the period
B-24
<PAGE>
August 7, 1995 (commencement of initial public offering) to March 31, 1997 was
17.48% and 28.16%, respectively.
CODE OF ETHICS
The Trust, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Trust must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Trust and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the Portfolio, without prior approval by the
Trust or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her interest in the
security or issuer of the security; (3) the commission of fraud in connection
with the purchase or sale of a security held by or to be acquired by the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Trust; and (5) the acceptance of gifts of more
than a de minimus value from those doing business with or on behalf of the
Portfolio. Certain transactions are exempt from item (1) of the previous
sentence, including: (1) purchases or sales on the account of an access person
that are not under the control of or that are non-volitional with respect to
that person; (2) purchases or sales of securities not eligible for purchase or
sale by the Portfolio; (3) purchases or sales relating to rights issued by an
issuer pro rata to all holders of a class of its securities; and (4) any
securities transaction, or series of related transactions, involving 500 or
fewer shares of an issuer having a market capitalization greater than $1
billion.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Trust who is not an "interested person" (as defined in the Investment Company
Act) of the Trust is not required to report a transaction if such person did not
know or, in the ordinary course of his duties as a trustee of the Trust, should
have known, at the time of the transaction, that, within a 15 day period before
or after such transaction, the security that such person purchased or sold was
either purchased or sold, or was being considered for purchase or sale, by the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
B-25
<PAGE>
INFORMATION ABOUT THE PORTFOLIO
The following information supplements and should be read in conjunction
with the section in the 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 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
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 Portfolio.
STARS is the centerpiece of OUTLOOK, S&P's flagship investment
newsletter that has a high net worth readership of 25,000 weekly subscribers.
STARS reaches more than 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 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 June 23, 1997 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
- ---------------- ------------------
Custodial Trust Company 63.6%
101 Carnegie Center
Princeton, NJ 08540
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
B-26
<PAGE>
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 .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 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.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, 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, 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, 1997 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.
B-27
<PAGE>
THE BEAR STEARNS FUNDS
FOCUS LIST PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
_______, 1997
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated ______, 1997 of the Focus List Portfolio (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 Focus List Portfolio, P.O. Box 8960, Wilmington,
Delaware 19899-8960, call 1-800-447-1139 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.
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-19
Determination of Net Asset Value.......................................... B-21
Dividends, Distributions and Taxes........................................ B-22
Portfolio Transactions.................................................... B-31
Performance Information................................................... B-32
Code of Ethics............................................................ B-33
Information About the Fund................................................ B-34
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors......................................... B-35
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<PAGE>
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Fund."
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
THE BEAR STEARNS RESEARCH FOCUS LIST
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of U.S. issuers that, at the time of purchase,
are on the Bear Stearns Research Focus List (the "Focus List"). The Portfolio is
designed for investors seeking to maximize returns on a fully-invested,
all-equity portfolio. The Portfolio is not a market-timing vehicle. Except for
short-term liquidity purposes, cash reserves should rarely, if ever, exceed 5%
of Portfolio assets.
The Focus List typically consists of 20 selected stocks chosen from those stocks
currently rated as Attractive or as a Buy by a Bear Stearns research analyst.
The stocks are selected for inclusion on the Focus List by a Focus List
Committee (comprised of senior Bear Stearns investment strategists) based upon
the expectation that the selected stocks will outperform the total return
realized on the S&P 500 Index over the next three to six months.
The Bear Stearns Global Research Department has fifty domestic equity analysts
who cover 800 issues. Using a rating system of 1-5, stocks are rated by analysts
with "1" being the highest rating of "buy" and "2" attractive, etc.
Approximately two hundred stocks are rated as Attractive or as a Buy. All rating
changes (other than to 3 - no opinion) are approved by the Stock Selection
Committee at Bear Stearns.
The criteria for an Attractive (2) rating by an analyst is that the stock must
be a good, long-term growth prospect either because of or in comparison to its
industry and that it is undervalued in comparison to the industry. A Buy (1)
rating means that the analyst along with the Stock Section Committee feel that
the stock, already rated Attractive, will outperform the market over the next
six to twelve months because of a catalyst or near-term event which will trigger
the upside. These catalysts can include change in management, the introduction
of a new product, or a change in the industry outlook.
Stocks are picked by the Focus List Committee whose members are Kathryn Booth,
Director of Global Research of Bear Stearns, and Elizabeth Mackay, Chief
Investment Strategist of Bear Stearns. The Committee maintains twenty stocks on
the list and any new additions are generally accompanied by a comparable number
of deletions. The Committee monitors the list daily and candidates are
considered based on any one or more of the following criteria: market and/or
sector perception, analyst view and relative value.
-2-
<PAGE>
Stocks that are downgraded below Attractive (2) by an analyst, are automatically
deleted from the Focus List. However, the Focus List Committee may delete stocks
for several other reasons including, but not limited to, achievement of its
target price range, the lack of a catalyst to materialize or have its expected
effect, and/or the appearance of new, more attractive opportunities.
It is possible that the Focus List will include stocks of issuers for which Bear
Stearns or one of its affiliates performs banking services for which it receives
fees, as well as stocks of issuers in which Bear Stearns or one of its
affiliates makes a market and may have a long or short position in the stock.
When Bear Stearns or one of its affiliates is engaged in an underwriting or
other distribution of stock of an issuer, the Adviser may be prohibited from
purchasing the stock of the issuer for the Portfolio. The activities of Bear
Stearns or one of its affiliates may, from time to time, limit the Focus List
Committee's ability to include stocks on the Focus List or the Portfolio's
flexibility in purchasing and selling such stocks. In addition, the Focus List
is available to other clients of Bear Stearns and its affiliates, including the
Adviser, as well as the Portfolio.
INVESTMENT STRATEGY
Generally, as soon as practicable after public announcement, the Portfolio
Manager will purchase a security that has been added to the Focus List, and will
sell a security when the security has been removed from the Focus List. The
Portfolio Manager determines what percentage of the Portfolio's total assets are
to be allocated into each Focus List stock and makes changes in allocation
percentages as investment and economic conditions change. Depending upon market
conditions and to the extent the Portfolio needs to hold cash balances to
satisfy shareholder redemption requests, the Portfolio Manager may not
immediately purchase a new Focus List stock and/or may continue to hold one or
more Focus List stocks that have been deleted from the Focus List. The Portfolio
Manager will not have access to the Focus List prior to its becoming publicly
disseminated.
The Portfolio may invest up to 35% of its total assets in securities that are
not in the Focus List, although it currently intends to limit its investment to
non-Focus List Securities to 20% of the Portfolio's total assets, under normal
market conditions.
The Investment Strategy described above will be implemented to the extent it is
consistent with maintaining the Portfolio's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Dividends, Distributions and Taxes." The Portfolio's strategy may
be limited, in particular, by the requirements for such qualification that less
than 30% of the Portfolio's annual gross income be derived from the sale or
other disposition of stocks held for less than three months.
-3-
<PAGE>
Portfolio Securities
Equity Securities. Equity securities consist of common stocks,
convertible securities and preferred stocks. 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. Domestic and foreign stocks, and American Depositary Receipts (ADRs)
are eligible for inclusion of the Focus List.
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
-4-
<PAGE>
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
-5-
<PAGE>
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 put or call options or writing covered call 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
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<PAGE>
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 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 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.
So long as the Portfolio's obligation as the writer of a call 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 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 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
-7-
<PAGE>
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.
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.
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<PAGE>
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 indices, 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;
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<PAGE>
(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 7 as fundamental policies. These restrictions
cannot be changed, as to the 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 lettered a through f are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. The Portfolio may
not:
1. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in transactions that
may result in the issuance of senior securities to the extent permitted under
applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) the Portfolio may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Portfolio may borrow money as authorized by
the 1940 Act.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
investments in U.S. Government securities or in bank instruments issued by
domestic banks.
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.
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<PAGE>
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. 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 indices.
The following restrictions are non-fundamental, and may be changed by
the Board of Trustees without the approval of shareholders 6. The Portfolio may
not:
a. Knowingly invest more than 15% of the value of the Portfolio's
assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
b. 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.
c. 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
indices, and options on futures contracts or indexes.
d. Make short sales of securities, other than short sales "against the
box."
e. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
f. Make additional investments when borrowing exceeds 5% of Portfolio
assets.
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<PAGE>
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.
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.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co.,
126 East 56th Street since 1969; President of Koll,
New York, NY 10021 Bren Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a
7535 Claymont Court law 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. (49) Trustee Chairman and Chief
P.O. Box 15213 Executive Officer of
Portland, ME 02110 McKernan Enterprises
since January 1995;
Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief Executive
700 13th Street, N.W. Officer, Association of American
Suite 400 Railroads since June 23, 1997;
Washington, D.C. 20005 Vice Chairman of Cassidy &
Associates since February 1996;
Senior Vice President of RJR
Nabisco, Inc. from April 1989
to February 1996; Former Deputy
Chief of Staff-White
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<PAGE>
House from 1988 to
January 1989.
Robert S. Reitzes* (53) Chairman of the Director of Mutual Funds-
245 Park Avenue 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.
Peter B. Fox (45) Executive Vice Managing Director-
Three First National Plaza President Emeritus,
Chicago, IL 60602 Bear Stearns, since
February 1997; Bear
Stearns, Senior Managing
Director, Public Finance,
since September 1987.
William J. Montgoris (50) Executive Vice Chief Operating Officer,
245 Park Avenue President Bear Stearns.
New York, NY 10167
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue Department; General
New York, NY 10167 Counsel, Bear Stearns
Asset Management, a
division of Bear Stearns.
Frank J. Maresca (38) 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.
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<PAGE>
Donalda L. Fordyce (38) Vice President Senior Managing Director,
245 Park Avenue Bear Stearns Asset
New York, NY 10167 Management since March,
1996; previously Vice
President, Asset
Management Group,
Goldman, Sachs from
1986 to 1996.
Ellen T. Arthur (44) 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 (32) Assistant Associate Director of Bear
245 Park Avenue Treasurer 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
Asset Management Inc.
from October 1992 to
May 1993.
Eileen M. Coyle (31) Assistant Vice President of Bear
245 Park Avenue Secretary Stearns since September
New York, NY 10167 1995; Manager of BSFM
since 1995; Senior
Administrator and
Supervisor for BSFM from
January 1994 to 1995;
Accounting Supervisor
and Senior Accountant for
Bear Stearns since 1990.
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<PAGE>
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, 1997 is as follows:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Board Aggregate Pension or Estimated Annual Total
Member Compensation Retirement Benefits Benefits Upon Compensation from
from Fund* Accrued as Part of Retirement Fund and Fund
Fund's Expenses Complex Paid to
Board Members
<S> <C> <C> <C> <C>
Peter M. Bren $7,000 None None $11,000
Alan J. Dixon $7,000 None None $6,500
John R. McKernan, Jr. $7,000 None None $12,000
M.B. Oglesby, Jr. $7,000 None None $12,000
Robert S. Reitzes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $7,000 for Board members of the Fund, as a
group.
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.
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<PAGE>
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 as of June 2, 1997, with the Fund. The Agreement will
remain in effect for two years from the date of execution and shall continue
from year to year thereafter if it is approved 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 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; Donalda L. Fordyce, Executive Vice President; Vincent L. Pereira,
Treasurer; Ellen T. Arthur, Secretary; and James G. McCluskey, 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 0.65% of value of the
Portfolio's average daily net assets.
Administration Agreement. BSFM provides certain administrative
services to the Fund pursuant to the Administration Agreement dated as of June
2, 1997, with the Fund. The Administration Agreement will continue until May 31,
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
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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.
Administrative Services Agreement. PFPC provides certain
administrative services to the Fund pursuant to the Administrative Services
Agreement dated as of June 2, 1997, 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.
Distribution and Shareholder Servicing . 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 Board of Trustees has adopted a distribution and shareholder
servicing plan with respect to Class A and C shares (the "Plan"). The Fund's
Board of Trustees has also adopted a distribution plan (the "Distribution Plan")
and a shareholder servicing plan (the "Shareholder Servicing Plan", and together
with the Plan and/or the Distribution Plan, the "Plans") with respect to the
Class B shares. The Fund's Board of Trustees believe that there is a reasonable
likelihood that the Plans will benefit the Portfolio and the holders of its
Class A, Class B, and C shares.
A quarterly report of the amounts expended under the Plan and
the Distribution Plan, and the purposes for which such expenditures were
incurred, must be made to the Trustees for their review. In addition, each Plan
provides that it may not be amended to increase materially the costs which
holders of a class of shares may bear pursuant to such Plan without approval of
such effected 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
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agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is required by a
Securities and Exchange Commission rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Plan that would
materially increase the amount to be paid by Class A shareholders under such
Plans. Such approval must be by a "majority" of the Class A and Class B shares
(as defined in the 1940 Act), voting separately by class. Each Plan and related
agreements is subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on such Plan. The Plan with respect to
Class A shares was approved on January 28, 1997. The Plan with respect to Class
C shares was approved on September, 8, 1997. The Distribution Plan and the
Shareholder Servicing Plan with respect to the Class B shares was approved on
September 8, 1997. Each Plan is terminable at any time, as to each class of the
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 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 relevant class' shares. A Plan agreement will
terminate automatically, as to the relevant class of the Portfolio, in the event
of its assignment (as defined in the 1940 Act).
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 Bear Stearns, BSFM 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 a Portfolio, exclusive of taxes, brokerage
commissions, interest on borrowings and (with prior written consent of the
necessary state
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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. No such expense
limitations currently apply to the Portfolio.
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 as of June 2,
1997 which is renewable annually. 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.
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
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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.
Alternative Sales Arrangements - Class A, B, C and Y Shares.
The availability of three classes of shares to individual investors permits an
investor to choose the method of purchasing shares that is more beneficial to
the investor depending on the amount of the purchase, the length of time the
investor expects to hold shares and other relevant circumstances. Investors
should understand that the purpose and function of the deferred sales charge and
asset-based sales charge with respect to Class B and C shares are the same as
those of the initial sales charge with respect to Class A shares. Any
salesperson or other person entitled to receive compensation for selling
Portfolio shares may receive different compensation with respect to one class of
shares than the other. Bear Stearns will not accept any order of $500,000 or
more of Class B or $1 million or more of Class C shares on behalf of a single
investor (not including dealer "street name" or omnibus accounts) because
generally it will be more advantageous for that investor to purchase Class A
shares of a Portfolio instead. A fourth class of shares may be purchased only by
certain institutional investors at net asset value per share (the "Class Y
shares").
The four classes of shares each represent an interest in the
same Portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
C shares and the dividends payable on Class B and C shares will be reduced by
incremental expenses borne solely by that class, including the asset-based sales
charge to which Class B and C shares are subject.
The methodology for calculating the net asset value, dividends
and distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution and
Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
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None of the instructions described elsewhere in the Prospectus
or Statement of Additional Information for the purchase, redemption,
reinvestment, exchange, or transfer of shares of a Portfolio, the selection of
classes of shares, or the reinvestment of dividends apply to Class Y shares.
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,
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Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
[TO BE UPDATED]
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. The Portfolio
has elected to be taxed as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, the Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the Portfolio made during
the taxable year or, under specified circumstances, within twelve months after
the close of the taxable year, will be considered distributions of income and
gains of the taxable year and will, therefore, satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must: (1) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement"); and (2)
derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or
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<PAGE>
forward contracts thereon) held for less than three months (the "Short-Short
Gain Test"). However, foreign currency gains, including those derived from
options, futures and forwards, will not in any event be characterized as
Short-Short Gain if they are directly related to the regulated investment
company's investments in stock or securities (or options or futures thereon).
Because of the Short-Short Gain Test, a Portfolio may have to limit the sale of
appreciated securities that it has held for less than three months. However, the
Short-Short Gain Test will not prevent a Portfolio from disposing of investments
at a loss, since the recognition of a loss before the expiration of the
three-month holding period is disregarded for this purpose. Interest (including
original issue discount) received by a Portfolio at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from such sale
or other disposition of securities for this purpose.
In general, gain or loss recognized by a Portfolio on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation purchased by a Portfolio at a market
discount (generally, at a price less than its principal amount) will be treated
as ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Portfolio held the debt obligation. In
addition, under the rules of the Code, Section 988, gain or loss recognized on
the disposition of a debt obligation denominated in a foreign currency or an
option with respect thereto (but only to the extent attributable to changes in
foreign currency exchange rates), and gain or loss recognized on the disposition
of a foreign currency forward contract, futures contract, option or similar
financial instrument, or of foreign currency itself, except for regulated
futures contracts or non-equity options subject to the Code, Section 1256
(unless a Portfolio elects otherwise), will generally be treated as ordinary
income or loss.
Further, the Code also treats as ordinary income a portion of
the capital gain attributable to a transaction where substantially all of the
return realized is attributable to the time value of a Portfolio's net
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the Portfolio and a contemporaneous contract to sell
substantially identical property in the future; (2) the transaction is a
straddle within the meaning of Section 1092 of the Code; (2) the transaction is
one that was marketed or sold to the Portfolio on the basis that it would have
the economic characteristics of a loan but the interest-like return would be
taxed as capital gain; or (4) the transaction is described as a conversion
transaction in the Treasury Regulations. The amount of the gain recharacterized
generally will not exceed the amount of the interest that would have accrued on
the net investment for the relevant period at a yield equal to 120% of the
federal long-term, mid-term, or short-term rate, depending upon the type of
instrument at issue, reduced by an amount equal to: (1) prior inclusions of
ordinary income items from the conversion transaction and (2) the
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capital interest on acquisition indebtedness under the Code, Section 263(g).
Built-in losses will be preserved where a Portfolio has a built-in loss with
respect to property that becomes a part of a conversion transaction. No
authority exists that indicates that the converted character of the income will
not be passed to a Portfolio's shareholders.
In general, for purposes of determining whether capital gain
or loss recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of the Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto, or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, a Portfolio
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any
gain or loss recognized by the Portfolio from a closing transaction with respect
to, an option written by the Portfolio will be treated as a short-term capital
gain or loss. For purposes of the Short-Short Gain Test, the holding period of
an option written by a Portfolio will commence on the date it is written and end
on the date it lapses or the date of a closing transaction is entered into.
Accordingly, a Portfolio may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Certain transactions that may be engaged in by a Portfolio
(such as regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain
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or loss and 40% short-term capital gain or loss. A Portfolio, however, may elect
not to have this special tax treatment apply to Section 1256 contracts that are
part of a "mixed straddle" with other investments of the Portfolio that are not
Section 1256 contracts. Under Treasury Regulations, gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under the Code, Section 1256.
A Portfolio may purchase securities of certain foreign
investment funds or trusts which constitute passive foreign investment companies
("PFICs") for federal income tax purposes. If a Portfolio invests in a PFIC, it
may elect to treat the PFIC as a qualified electing fund (a "QEF"), in which
event the Portfolio will each year have ordinary income equal to its pro rata
share of the PFIC's ordinary earnings for the year and long-term capital gain
equal to its pro rata share of the PFIC's net capital gain for the year,
regardless of whether the Portfolio receives distributions of any such ordinary
earnings or capital gains from the PFIC. If a Portfolio does not elect to treat
the PFIC as a QEF, then, in general, (1) any gain recognized by the Portfolio
upon sale or other disposition of its interest in the PFIC or any excess
distribution received by the Portfolio from the PFIC will be allocated ratably
over the Portfolio's holding period of its interest in the PFIC, (2) the portion
of such gain or excess distribution so allocated to the year in which the gain
is recognized or the excess distribution is received shall be included in the
Portfolio's gross income for such year as ordinary income (and the distribution
of such portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under proposed Treasury Regulations, a Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted tax
basis in that share ("mark to market gain"). Such mark to market gain will be
included by the Portfolio as ordinary income and will not be subject to the
Short-Short Gain Test, and the Portfolio's holding period with respect to such
PFIC stock will commence on the first day of the next taxable year. If the
Portfolio makes such
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election in the first taxable year it holds PFIC stock, it will not incur the
tax described in the preceding paragraphs.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above,
each Portfolio must satisfy an asset diversification test in order to qualify as
a regulated investment company. Under this test, at the close of each quarter of
a Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year a Portfolio does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to a tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case of
corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4%
non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of capital gain
net income for the one-year period ended on October 31 of such calendar year
(or, at the election of a regulated investment company having a taxable year
ending November 30 or December 31, for its taxable year (a "taxable year
election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
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For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that a Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distribution to
avoid excise tax liability.
Portfolio Distributions. The Portfolio anticipates
distributing substantially all of its investment company taxable income for each
taxable year. Such distributions will be taxable to shareholders as ordinary
income and treated as dividends for federal income tax purposes, but will
qualify for the 70% dividends-received deduction for corporate shareholders only
to the extent discussed below. Dividends paid on Class A, B and Y shares are
calculated at the same time and in the same manner. In general, dividends on
Class B shares are expected to be lower than those on Class A shares due to the
higher distribution expenses borne by the Class B shares. Dividends may also
differ between classes as a result of differences in other class specific
expenses.
A Portfolio may either retain or distribute to shareholders
its net capital gain for each taxable year. The Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by a Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Portfolio's
disposition of domestic "small business" stock will be subject to tax.
Conversely, if a Portfolio elects to retain its net capital
gain, the Portfolio will be taxed thereon (except to the extent of any available
capital loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to
retain its net capital gain, it is expected that the Portfolio also will elect
to have shareholders of record on the last day of its taxable year treated as if
each received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such gain
on his tax return as long-term capital gain, will receive a refundable tax
credit for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
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Ordinary income dividends paid by the Portfolio with respect
to a taxable year will qualify for the 70% dividends-received deduction
generally available to corporations (other than corporations, such as S
corporations, which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Portfolio from domestic
corporations for the taxable year. A dividend received by the Portfolio will not
be treated as a qualifying dividend (1) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock), excluding for this purpose under the rules
of the Code, Section 246(c)(3)and (4) (i) any day more than 45 days (or 90 days
in the case of certain preferred stock) after the date on which the stock
becomes ex-dividend and (ii) any period during which the Portfolio has an option
to sell, is under a contractual obligation to sell, has made and not closed a
short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified
option to buy, or has otherwise diminished its risk of loss by holding other
positions with respect to, such (or substantially identical) stock; (2) to the
extent that the Portfolio is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property; or (3) to the extent that the stock on which the
dividend is paid is treated as debt-financed under the rules of Code section
246A. Moreover, the dividends-received deduction for a corporate shareholder may
be disallowed or reduced (1) if the corporate shareholder fails to satisfy the
foregoing requirements with respect to its shares of the Portfolio or (2) by
application of the Code, Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items).
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from an Equity Portfolio into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which
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entitle the Portfolio to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolio that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Portfolio will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of another Portfolio (or another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of a Portfolio
reflects undistributed net investment income or recognized capital gain net
income, or unrealized appreciation in the value of the assets of the Portfolio,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although they economically constitute a return of capital to
the shareholder.
Ordinarily, shareholders are required to take distributions by
a Portfolio into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year and
payable to shareholders of record on a specified date in such month will be
deemed to have been received by the shareholders (and made by the Portfolio) on
December 31 of such calendar year if such dividends are actually paid in January
of the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made) during
the year.
A Portfolio will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any shareholder (1)
who has provided either an incorrect tax identification number or no number at
all, (2) who is subject to backup withholding for failure to report the receipt
of interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares. A shareholder will recognize
gain or loss on the sale or redemption of shares of a Portfolio in an amount
equal to the difference between the proceeds of the sale or redemption and the
shareholder's adjusted tax basis in the shares. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
Portfolio within 30 days before or after the sale or redemption. In general, any
gain or loss arising
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from (or treated as arising from) the sale or redemption of shares of a
Portfolio will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than one year. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be treated as a long-term capital loss to the extent of the amount
of capital gain dividends received on such shares. For this purpose, the special
holding period rules of the Code, Section 246(c)(3) and (4) (discussed above in
connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Long-term capital gains
of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares
of a Portfolio,(2) disposes of such shares less than 91 days after they are
acquired, and (3) subsequently acquires shares of the Portfolio or another fund
at a reduced sales load pursuant to a right to reinvest at such reduced sales
load acquired in connection with the acquisition of the shares disposed of, then
the sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders. Taxation of a shareholder who, as to the
United States, is a nonresident alien individual, foreign trust or estate,
foreign corporation, or foreign partnership ("foreign shareholder") depends on
whether the income from a Portfolio is "effectively connected" with a U.S. trade
or business carried on by such shareholder.
If the income from a Portfolio is not effectively connected
with a U.S. trade or business carried on by a foreign shareholder, ordinary
income dividends paid to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) upon the
gross amount of the dividend. Such foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale of shares of a
Portfolio, capital gain dividends, and amounts retained by the Portfolio that
are designated as undistributed capital gains.
If the income from a Portfolio is effectively connected with a
U.S. trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
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In the case of foreign noncorporate shareholders, a Portfolio
may be required to withhold U.S. federal income tax at the rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such shareholders furnish the Portfolio with proper
notification of their foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Portfolio, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax
Considerations. The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies often differ from
the rules for U.S. federal income taxation described above. Shareholders are
urged to consult their tax advisers as to the consequences of these and other
state and local tax rules affecting investment in the Portfolio.
PORTFOLIO TRANSACTIONS
BSFM 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 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
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 BSFM 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
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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 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. BSFM expects that the turnover on the securities held in the
Portfolio will be 250% or greater. This portfolio turnover rate is significantly
higher than the portfolio turnover rates of other mutual funds that invest in
equity securities. A higher portfolio turnover rate means that the Portfolio
will incur substantially higher brokerage costs and may realize a greater amount
of short-term capital gains or losses.
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.
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
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<PAGE>
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 B the maximum
applicable CDSC has been paid upon redemption at the end of the period.
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 B and C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class B and C shares, which, if reflected would reduce the
performance quoted.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended
and restated Code of Ethics (the "Code of Ethics"), which established standards
by which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Fund and employees of the
Fund and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the Portfolio, without prior approval by the
Fund or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her interest in the
security or issuer of the security; (3) the commission of fraud in connection
with the purchase or sale of a security held by or to be acquired by the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund; and (5) the acceptance of gifts of more than
a de minimus value from those doing business with or on behalf of the Portfolio.
Certain transactions are exempt from item (1) of the previous sentence,
including: (1) purchases or sales on the account of an access person that are
not under the control of or that are non-volitional with respect to that person;
(2) purchases or sales of securities not eligible for purchase or sale by the
Portfolio; (3) purchases or sales relating to rights issued by an issuer pro
rata to all holders of a class of its securities; and (4)
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any securities transaction, or series of related transactions, involving 500 or
fewer shares of an issuer having a market capitalization greater than $1
billion.
The Code of Ethics specifies that access persons shall place
the interests of the shareholders of the Portfolio first, shall avoid potential
or actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Adviser to the Portfolio may aggregate or bunch trades with other clients
provided that no client is materially disadvantaged. Access persons are required
by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the Investment Company
Act) of the Fund is not required to report a transaction if such person did not
know or, in the ordinary course of his duties as a Trustee of the Fund, should
have known, at the time of the transaction, that, within a 15 day period before
or after such transaction, the security that such person purchased or sold was
either purchased or sold, or was being considered for purchase or sale, by the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE 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.
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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.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York,
New York 10022, 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.
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<PAGE>
THE BEAR STEARNS FUNDS
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A:
(i) Financial Highlights are included in Part A
(ii) Annual Report to Shareholders is incorporated by
reference in Part A.
Part B:
None.
(b) Exhibits:
EX-99.B1(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 electronically on November 9,
1995, accession number 0000950130-95-
002359.
EX-99.B1(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
electronically on November 9, 1995,
accession number 0000950130-95-002359.
EX-99.B2 By-Laws are incorporated by reference to
Exhibit (2) of Post-Effective Amendment
No. 7 to the Registration Statement on
Form N-1A filed electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B3 None.
EX-99.B4 None.
EX-99.B5(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 electronically on November 9,
1995, accession number 0000950130-95-
002359.
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<PAGE>
EX-99.B5(b) Investment Advisory Agreement between
the Registrant and BSFM, with respect
to the Prime Money Market Portfolio,
is incorporated by reference to Exhibit
5(b) of Post-Effective Amendment No. 13
to the Registration Statement on
Form N-1A filed electronically on
July 29, 1997, accession number
0000922423-97-000633.
EX-99.B5(c) 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 electronically on November 9,
1995, accession number 0000950130-95
- 002359.
EX-99.B5(d) 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
electronically on November 9, 1995,
accession number 0000950130-95-002359.
EX-99.B6(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 electronically on November 9,
1995, accession number 0000950130-95-
002359.
EX-99.B6(b) Form of Dealer Agreement is incorporated
by reference to Exhibit (6)(b) of Post-
Effective Amendment No. 9 to the
Registration Statement on Form N-1A
filed electronically on June 20, 1996,
accession number 0000899681-96-000180.
EX-99.B7 None.
EX-99.B8 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 electronically on November 9,
1995, accession number 0000950130-95-
002359.
EX-99.B9 None.
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<PAGE>
EX-99.B10 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 electronically on November 9,
1995, accession number 0000950130-95-
002359.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis &
Frankel is filed herewith.
EX-99.B11(b) Consent of Independent Auditors is filed
herewith.
EX-99.B12 None.
EX-99.B13 None.
EX-99.B14 None.
EX-99.B15 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 electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B16 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 electronically on
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B17 None.
EX-99.B18 Rule 18f-3 Plan, as revised is
incorporated by reference to Exhibit
(18) of Post-Effective Amendment No. 9
to the Registration Statement on Form
N-1A filed electronically on June 20,
1996, accession number 0000950130-95-
002359.
Other Exhibits:
EX-99.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 electronically on
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<PAGE>
November 9, 1995, accession number
0000950130-95-002359.
EX-99.B Powers of attorney are incorporated by
reference to Other Exhibit (b) of Post-
Effective Amendment No. 7 to the
Registration Statement on Form N-1A
filed electronically on November 9,
1995, accession number
0000950130-95-002359 and to Other
Exhibit (b) of Post-Effective Amendment
No. 8 to the Registration Statement on
Form N-1A filed electronically on April
12, 1996, accession number
0000950130-96-001230.
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
Holders as of
Title of Class June 23, 1997
-------------- ----------------
Shares of beneficial interest, $.001 par value per share, of the
following portfolios:
S&P STARS Portfolio--Class A 4467
S&P STARS Portfolio--Class C 2707
S&P STARS Portfolio--Class Y 436
Large Cap Value Portfolio--Class A 187
Large Cap Value Portfolio--Class C 195
Large Cap Value Portfolio--Class Y 110
Small Cap Value Portfolio--Class A 833
Small Cap Value Portfolio--Class C 749
Small Cap Value Portfolio--Class Y 310
Total Return Bond Portfolio--Class A 111
Total Return Bond Portfolio--Class C 43
Total Return Bond Portfolio--Class Y 35
The Insiders Select Fund--Class A 1361
The Insiders Select Fund--Class C 672
The Insiders Select Fund--Class Y 105
Focus List Fund--Class A N/A
Focus List Fund--Class Y N/A
Prime Money Market Portfolio--Class Y N/A
Item 27. Indemnification
Reference is made to Article VIII of the Registrant's
Declaration of Trust (filed as Exhibit 1(a) to Registrant's Post- Effective
Amendment No. 7 filed electronically on November 9, 1995, accession number
0000950130-95-002359 and incorporated herein by reference). The application of
these provisions is limited by Article
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<PAGE>
10 of the Registrant's By-Laws (filed as Exhibit 2 to Registrant's
Post-Effective Amendment No. 7 filed electronically on November 9, 1995,
accession number 0000950130-95-002359 and incorporated herein by reference) and
by the following undertaking set forth in the rules promulgated by the
Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the
securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
Reference also is made to the Distribution Agreement
previously filed as Exhibit 6(a) to Registrant's Post-Effective Amendment No. 7
filed electronically on November 9, 1995, accession number 0000950130-95-002359
and incorporated herein by reference.
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 29. Principal Underwriters
(a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as
principal underwriter or depositor for the following investment
companies:
o Bear Stearns Investment Trust -- Emerging Markets Debt
Portfolio
o Managed Income Securities Plus Fund, Inc.
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(b) Set forth below is a list of each executive officer and
director of Bear Stearns. All Directors and Executive Officers are also Senior
Managing Directors. The principal business address of each such person is 245
Park Avenue, New York, New York 10167, except as set forth below.
Positions and Positions and
Offices with Offices with
Name Bear Stearns Registrant
- ---- ------------ ----------
Directors
James E. Cayne
Alan C. Greenberg Chairman of the Board
John L. Knight
Mark E. Lehman
Alan D. Schwartz
Warren J. Spector
John H. Slade Director Emeritus
Executive Officers
Alan C. Greenberg Chairman of the Board
James E. Cayne Chief Executive
Officer/President
William J. Montgoris Chief Operating Officer Executive Vice
President
Mark E. Lehman Executive Vice President/
General Counsel/Chief
Legal Officer
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
Samuel L. Molinaro, Jr Chief Financial Officer
Senior Vice President - Finance
Frederick B. Casey Assistant Treasurer
- ---------------
1 Michael J. Abatemarco's principal business address is 1 Metrotech
Center North, Brooklyn, New York 11201-3859.
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
C-6
<PAGE>
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.
(3) to file, on behalf of the Class B shares of the Large
Cap Value Portfolio, Small Cap Value Portfolio, Total
Return Bond Portfolio, Insiders Select Fund, S&P
STARS Portfolio and Focus List Portfolio, a
post-effective amendment, using financial statements
which need not be certified, within four to six
months from the effective date of this Registration
Statement or the commencement of the public offering
under the Securities Act of 1933.
C-7
<PAGE>
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 its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York on the 29th day of August, 1997.
THE BEAR STEARNS FUNDS
(Registrant)
By: /s/ Robert S. Reitzes
-----------------------
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/ Robert S. Reitzes President (Principal August 28, 1997
- --------------------
Robert S. Reitzes Executive Officer)
/s/ Frank J. Maresca Vice President and August 28, 1997
- --------------------
Frank J. Maresca Treasurer (Principal
Financial and
Accounting Officer)
*
- ------------------- Trustee
Peter M. Bren
*
- ------------------ Trustee
Alan J. Dixon
*
- ------------------ Trustee
John R. McKernan, Jr.
*
- ------------------ Trustee
M.B. Oglesby, Jr.
/s/ Robert S. Reitzes Trustee August 28, 1997
- ---------------------
Robert S. Reitzes
*By: /s/ Frank J. Maresca
---------------------
Frank J. Maresca,
Attorney-in-Fact
C-8
<PAGE>
INDEX TO EXHIBITS
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Independent Auditors
C-9
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
Thomas E. Constance Michael J. Nassau
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S. Oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph de Winter
Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maria T. Jones
Mark J. Headley Scott S. Rosenblum Maxwell M. Rabb
Robert M. Heller Michele D. Ross James Schreiber
Philip S. Kaufman Howard J. Rothman Counsel
Peter S. Kolevzon Max J. Schwartz _____
Kenneth P. Kopelman Mark B. Segall
Michael Paul Korotkin Judith Singer M. Frances Buchinsky
Shari K. Krouner Howard A. Sobel Abbe L. Dienstag
Kevin B. Leblang Jeffrey S. Trachtman Ronald S. Greenberg
David P. Levin Jonathan M. Wagner Debora K. Grobman
Ezra G. Levin Harold P. Weinberger Christian S. Herzeca
Larry M. Loeb E. Lisk Wyckoff, Jr. Jane Lee
Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
August 28, 1997
The Bear Stearns Funds
245 Park Avenue
New York, New York 10167
Re: The Bear Stearns Funds
with respect to the following portfolios only:
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
The Insiders Select Fund
S&P STARS Portfolio
Focus List Portfolio
Registration No. 33-84842
Post-Effective Amendment
to Registration Statement on Form N-1A
----------------------------------------------
Gentlemen:
We consent to the reference to our Firm as Counsel in Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
-------------------------------------
Kramer, Levin, Naftalis & Frankel
CONSENT OF INDEPENDENT AUDITORS
The Bear Stearns Funds:
We consent to the incorporation by reference in Post-Effective Amendment No. 14
to Registration Statement No. 33-84842 of our report dated May 9, 1997 relating
to Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond
Portfolio, The Insiders Select Fund, and S&P STARS Portfolio of The Bear Stearns
Funds included in the Annual Report to Shareholders for the year ended March 31,
1997 in the Statement of Additional Information, which are a part of such
Registration Statement and to the references to us under the caption "Financial
Highlights" in the Prospectuses, which also are a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
New York, New York
August 28, 1997
