Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 . 8 0 0
. 7 6 6 . 4 1 1 1
PROSPECTUS
S&P STARS Portfolio
CLASS A 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 in-
vestment adviser believes that this approach will provide opportuni-
ties to achieve performance that exceeds the S&P 500's total return.
By this Prospectus, the STARS Portfolio is offering two Classes of shares.
Class A shares are subject to a sales charge imposed at the time of purchase
and Class C shares are subject to a 1% contingent deferred sales charge im-
posed on redemptions made within the first year of purchase. Other differences
between the Classes include the services offered to and the expenses borne by
each Class and certain voting rights, as described herein. These alternatives
are offered so an investor may choose the method of purchasing shares that is
most beneficial given the amount of the purchase, the length of time the in-
vestor expects to hold the shares and other circumstances. The STARS Portfolio
issues another Class of shares which has different expenses which would affect
performance. Investors desiring to obtain information about this Class of
shares should call 1-800-766-4111 or ask their sales representative or the
STARS Portfolio's distributor.
BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the 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 REFER-
ENCE.
Part B (also known as the Statement of Additional Information), dated June 30,
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 en-
dorsed by, any bank, and are not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JUNE 30, 1997
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Table of Contents
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PAGE
<S> <C>
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
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2
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Fee Table
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CLASS A CLASS C
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................... 4.75% --
Maximum Deferred Sales Charge Imposed on Redemptions (as a
percentage of the amount subject to charge)................... * 1.00%
ANNUAL STARS PORTFOLIO OPERATING EXPENSES**
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver).............................. 0.05% 0.05%
12b-1 Fees.................................................... 0.50% 1.00%
Other Expenses (after expense reimbursement)***............... 1.00% 1.00%
Total Portfolio Operating Expenses (after fee waiver and
expense reimbursement)***..................................... 1.50% 2.00%
EXAMPLE:
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 YEAR...................................................... $ 62 $ 30
3 YEARS..................................................... $ 93 $ 63
5 YEARS..................................................... $125 $108
10 YEARS..................................................... $218 $233
You would pay the following expenses on the same investment,
assuming no redemption:
1 YEAR...................................................... $ 62 $ 20
3 YEARS..................................................... $ 93 $ 63
5 YEARS..................................................... $125 $108
10 YEARS..................................................... $218 $233
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*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."
**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.
***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 and 2.00% for Class C. Without such waiver, Advisory Fees
stated above would be 0.75%, Other Expenses would be 1.45% for Class A and 1.95%
for Class C and Total STARS Portfolio Operating Expenses would be 2.20% for
Class A and 2.70% for Class C.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE
STARS PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RE-
TURN 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 ex-
pense reimbursement or waiver arrangements in effect, see "Management of the
STARS Portfolio."
3
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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 re-
turn, ratios to average net assets and other supplemental data for a 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 Se-
ries (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.
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FOR THE PERIOD
FOR THE FISCAL YEAR APRIL 5, 1995*
ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
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CLASS A CLASS C CLASS A CLASS C
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<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE**
Net asset value, begin-
ning 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
operations............. 2.54 2.45 3.31 3.22
--------- --------- ------- -------
Dividends and distribu-
tions to shareholders
from Net realized capi-
tal gains.............. (1.33) (1.25) (0.39) (0.36)
--------- --------- ------- -------
(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 pe-
riod (000's omitted)... $ 67,491 $ 37,622 $45,049 $28,081
Ratio of expenses to av-
erage 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)
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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.
(2) The amounts shown for a share outstanding throughout the respective peri-
ods 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.
4
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Contained below are ratios to average net assets and other supplemental data
for the Master Series for the periods indicated. This information has been de-
rived from information provided in the Master Series' financial statements.
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FOR THE PERIOD
FOR THE FISCAL APRIL 5, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
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<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 as-
sets(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>
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* 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."
Alternative Purchase Methods
By this Prospectus, the Portfolio offers investors two methods of purchasing
its shares; inves- tors may choose the Class of shares that best suits their
needs, given the amount of purchase, the length of time the investor expects
to hold the shares and any other relevant circumstances. Each Portfolio share
represents an identical pro rata interest in the Portfolio's investment port-
folio.
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 4.75% of the public offering price imposed at
the time of purchase. The initial sales charge may be reduced or waived for
certain purchases. See "How to Buy Shares--Class A Shares." The Class A shares
of the Portfolio are subject to an annual distribution and shareholder servic-
ing fee at the rate of .50 of 1% of the value of the average daily net assets.
See "Management of the Fund--Distribution and Shareholder Servicing Plan."
Class C shares of the Portfolio are subject to a 1% contingent deferred sales
charge ("CDSC") which is assessed only if Class C shares are redeemed within
one year of purchase. See "How to Redeem Shares--Class C Shares." These shares
of the Portfolio also are subject to an annual distribution and shareholder
servicing fee at the rate of 1% of the value of the average daily net assets
of Class C. See "Management of the Fund--Distribution and Shareholder Servic-
ing 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 in-
vestment. Each investor should consider whether, during the anticipated life of
the investor's investment in the Fund, the accumulated distribution and
shareholder servicing fee and CDSC, if any, on Class C shares would be less than
the initial sales charge on Class A shares purchased at the same time, and to
what extent, if any, such differential would be offset by the return of Class A.
Additionally, investors qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distri- bution and
shareholder servicing fees on Class C shares may exceed the initial sales charge
on Class A shares during the life of the investment. Finally, each investor
should consider the effect of the CDSC period in the context of the investor's
own investment time frame. Generally, for example, Class A shares would be more
appropriate for investors who invest $1,000,000 or more in the Portfolio's
shares, but may not be appropriate for investors who invest less than $50,000 in
Portfolio's shares depending on the investors time horizon.
5
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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 of-
fered. From time to time, other portfolios may be established and sold pursu-
ant to other offering documents. See "General Information."
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide investment results that ex-
ceed 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 in-
vestment 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 se-
curities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
*****Buy--Expected to be among the best performers over the next 12
months and to rise in price.
****Accumulate--Expected to be an above-average performer.
***Hold--Expected to be an average performer.
**Avoid--Expected to be a below-average performer.
*Sell--Expected to be a well-below-average performer and to fall in
price.
STARS was introduced by S&P in January 1987. Since 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 con-
sisted of approximately 525 stocks, the two star category has consisted of ap-
proximately 100 stocks, and the one star category has consisted of between ap-
proximately 14 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P ana-
lysts.
For purposes of evaluating the performance of stocks in the various catego-
ries--and thus of the performance of its analysts--S&P has created a model
which initially gives equal weight by dollar amount to the stocks in the vari-
ous categories, does not rebalance the portfolio based on changes in values or
rankings and does not take into account dividends or transaction costs. STARS
is only a model; it does not reflect actual investment performance. While its
performance cannot be used to predict actual results, S&P believes it is use-
ful in evaluating the capability of its analysts. Investors should recognize
that the pool of S&P analysts changes and their past performance is not neces-
sarily predictive of future results either of the model or of the STARS Port-
folio.
From January 1, 1987 through March 31, 1997
a The S&P 500 (measured on a total return basis, with-
out 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--+262.03%
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.
6
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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. Investors also should con-
sider that the Portfolio is managed actively--and, thus, its performance will
depend materially on BSFM's investment determinations-- and will incur trans-
action and other costs, including management and 12b-1 fees, which are not re-
flected 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 sub-
scriber 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 securi-
ties in the five star category to evaluate for purchase and in the one star
category to evaluate for short selling. BSFM anticipates that at least 85% of
the value of the 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 invest-
ment 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 dividends or distributions to
shareholders will not by themselves cause a violation of this investment poli-
cy. 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 addi-
tional 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 cor-
porate bonds and other short-term debt instruments, and repurchase agreements,
as set forth in the Appendix. The Portfolio will not count money market in-
struments 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 tech-
niques 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
7
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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 substan-
tially 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. How-
ever, 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 ex-
change to the extent of more than 5% of the value of its net assets. The Port-
folio may not sell short the securities of any class of an issuer to the ex-
tent, at the time of the transaction, of more than 2% of the outstanding secu-
rities 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 re-
ceives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the Port-
folio's net assets.
CERTAIN FUNDAMENTAL POLICIES
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--Invest-
ment 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 com-
panies to exceed 5% of the value of its total assets; (ii) pledge, hypothe-
cate, 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 re-
purchase agreements providing for settlement in more than seven days after no-
tice and in other illiquid securities. See "Investment Objective and Manage-
ment Policies--Investment Restrictions" in the Statement of Additional Infor-
mation.
RISK FACTORS
No investment is free from risk. Investing in the STARS Portfolio will subject
investors to certain risks which should be considered.
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NET ASSET VALUE FLUCTUATIONS
The Portfolio's net asset value is not fixed and should be expected to fluctu-
ate. 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 man-
aged 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 trade-
marks in connection with the management of mutual funds and access to STARS
through S&P's publicly available subscription service.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques, such as short selling, lending portfolio se-
curities and engaging in options transactions, involves greater risk than that
incurred by many other funds with a similar objective. See "Appendix--Invest-
ment Techniques."
The Portfolio's ability to engage in certain short-term transactions may be
limited by the requirement that, to qualify as a regulated investment company,
it must earn less than 30% of its gross income from the disposition of securi-
ties held for less than three months. This 30% test limits the extent to which
the Portfolio may sell securities held for less than three months, effect short
sales of securities held for less than three months, 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 share- holders 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 com-
pany 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 sin-
gle 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 In-
ternal 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 se-
curities, the securities of other regulated investment companies and other se-
curities, with such other securities of any one issuer limited for the pur-
poses 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 in-
vested in the securities of any one issuer (other than U.S. Government securi-
ties or the securities of other regulated investment companies). Since a rela-
tively high percentage of the Portfolio's assets may be invested in the secu-
rities 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 suscepti-
ble to any single economic, political or regulatory occurrence than the port-
folio 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
9
<PAGE>
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 ob-
tained 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 supervi-
sion of the Fund's Board of Trustees. The STARS Portfolio's Statement of Addi-
tional Information contains the name and general business experience of each
Trustee.
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 institu-
tional and individual investors. BSFM is a registered investment adviser and
offers, either directly or through affiliates, investment advisory and admin-
istrative services to open-end and closed-end investment funds and other man-
aged pooled investment vehicles with net assets at March 31, 1997 of over $2.8
billion.
BSFM serves as investment adviser of the Portfolio under an Investment Advi-
sory Agreement between BSFM and the Portfolio, subject to the overall author-
ity 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 re-
garding 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 vol- untary undertaking by BSFM. For the fiscal year ended March
31, 1997, the in- vestment 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 over-
all authority of the Fund's Board of Trustees in accordance with Massachusetts
law. For providing administrative services to the STARS Port- folio, 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 Administra-
tive Services Agreement with the Fund, PFPC Inc. provides certain administra-
tive 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 as- sets
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.
10
<PAGE>
Prior to June 25, 1997, the Master Series paid PFPC International Ltd. an
annual fee, as set forth below:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MASTERS SERIES' ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
First $200 million................................ .12 of 1%
Next $200 million up to $400 million.............. .09 of 1%
Next $200 million up to $600 million.............. .075 of 1%
Assets in excess of $600 million.................. .05 of 1%
</TABLE>
The above-referenced fee was 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. 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 as-
sume 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 Addi-
tional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment Ad-
visory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the STARS Portfolio's principal underwriter within the meaning of the 1940 Act
and as distributor of the STARS Portfolio's shares pursuant to an agreement
which is renewable annually. Bear Stearns is entitled to receive the sales
load described under "How to Buy Shares" and payments under the STARS Portfo-
lio's Distribution and Shareholder Servicing Plan described below.
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
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 distrib-
uting Portfolio shares and for providing personal services to, and/or main-
taining accounts of, Portfolio shareholders a fee at the annual rate of .50%
and 1% of the average daily net assets of Class A and Class C, respectively.
Under the Plan, Bear Stearns may pay third parties in respect of these serv-
ices such amount as it may determine. The fees paid to Bear Stearns under the
Plan are payable without regard to actual expenses incurred. The Portfolio un-
derstands that these third parties also may charge fees to their clients who
are beneficial owners of Portfolio shares in connection with their client ac-
counts. These fees would be in addition to any amounts which may be received
by them from Bear Stearns under the Plan.
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, includ-
ing the investment advisory fee and fees under the Plan, exceed 1.5% of Class
A's average daily net assets and 2% of Class C's average daily net assets for
the fiscal year, BSFM may waive a portion of its investment advisory fee or
bear other expenses to the extent of the excess expense.
11
<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 certifi-
cates 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. Invest-
ments by employees of Bear Stearns and its affiliates are not subject to mini-
mum 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 Port-
folio's shares also may be made directly through the Transfer Agent. When pur-
chasing Portfolio's shares, investors must specify which Class is being pur-
chased.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the Trans-
fer Agent (the "trade date"). Payment for Portfolio shares generally is due to
Bear Stearns or the Authorized Dealer on the third business day (the "settle-
ment date") after the trade date. Investors who make payment before the set-
tlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment for payment until the settlement date. If
a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made be-
fore the settlement date.
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 accept-
ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro-
kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "STARS Portfolio" if purchased di-
rectly from the 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 re-
cently 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 Prospectus,
and mailing it, together with a check to cover the purchase, to PFPC Inc., At-
tention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Port-
folio 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 (cur-
rently 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 deter-
mined.
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
12
<PAGE>
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 as-
sets represented by such Class (i.e., the value of its assets less liabili-
ties) by the total number of shares of such Class outstanding. The STARS Port-
folio's investments are valued based on market value or, where market quota-
tions are not readily available, based on fair value as determined in good
faith by, or in accordance with procedures established by, the Board of Trust-
ees. For further information regarding the methods employed in valuing the
Portfolio's investments, see "Determination of Net Asset Value" in the Portfo-
lio's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to backup withholding and a $50 penalty im-
posed 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 accor-
dance with the following schedule:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.75% 4.99% 4.25%
$50,000 to less than
$100,000..................... 4.25 4.44 3.75
$100,000 to less than
$250,000..................... 3.75 3.90 3.25
$250,000 to less than
$500,000..................... 3.25 3.36 3.00
$500,000 to less than
$750,000..................... 2.75 2.83 2.50
$750,000 to less than
$1,000,000................... 2.25 2.30 2.00
$1,000,000 and above......... 0.00* 0.00 1.00
</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 ini-
tial sales charge as part of an investment of at least $1,000,000 and re-
deems 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 appli-
cable to the Class A shares subject to a CDSC. Letter of Intent and Right of
Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow addi-
tional payments or promotional incentives to dealers that sell Class A shares.
In some instances, these incentives may be offered only to certain dealers who
have sold or may sell significant amounts of Class A shares. Dealers may re-
ceive a larger percentage of the sales load from Bear Stearns than they re-
ceive for selling most other funds.
Class A shares may be sold at net asset value to (a) Bear Stearns, its affili-
ates or their respective officers, directors or employees (including retired
employees), any partnership of which Bear Stearns is a general partner, any
Trustee or officer of the Fund and designated family members of any of the
above individuals; (b) qualified retirement plans of Bear Stearns; (c) any em-
ployee of McGraw-Hill, Inc. and its affiliates, or their respective spouses
and minor children; (d) any employee or registered representative of any Au-
thorized Dealer or their respective spouses and minor children; (e) trustees
or directors of investment companies for which Bear Stearns or an affiliate
acts as sponsor; (f) any state, county or city, or any instrumentality, de-
partment, authority or agency thereof, which is prohibited by applicable in-
vestment laws from paying a sales load or commission in connection with the
purchase of Portfolio shares; (g) any institutional investment clients includ-
ing corporate sponsored pension and profit-sharing plans, other benefit plans
and insurance companies; (h) any pension funds, state and municipal govern-
ments or funds, Taft-Hartley plans and qualified non-profit organizations,
foundations and endowments; (i) trust institutions (including bank trust de-
partments) investing on their own behalf or on behalf of their clients; and
(j) accounts as to which an Authorized Dealer charges an asset management fee.
To take advantage of these exemptions, a purchaser must indicate its eligibil-
ity 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 addi -
13
<PAGE>
tional information from a purchaser in order to verify that such purchaser is
eligible for an exemption. Bear Stearns reserves the right to limit the par-
ticipation of its employees in Class A shares of the STARS Portfolio. Divi-
dends 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 mu-
tual fund which were subject to a contingent deferred sales charge upon re-
demption. 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 in-
vestment professional, at the time the purchase is made. Bear Stearns will of-
fer 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 finan-
cial planners if such clients place trades through accounts linked to master
accounts of such investment advisers or financial planners on the books and
records of such broker and (iii) retirement and deferred compensation plans,
and trusts used to fund such plans, including, but not limited to, plans or
trusts defined in Section 401(a), 403(b) or 457 of the Code, and "rabbi
trusts", provided, in each case, the purchase transaction is effected through
such broker. The broker may charge a fee for transactions in STARS Portfolio
shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that Class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to pur-
chase 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 pub-
lic 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 pur-
chase and the corresponding sales load: (a) individual purchases on behalf of
a single purchaser, the purchaser's spouse and their children under the age of
21 years including shares purchased in connection with a retirement account
exclusively for the benefit of such individual(s), such as an IRA, and pur-
chases made by a company controlled by such individual(s); (b) individual pur-
chases by a trustee or other fiduciary account, including an employee benefit
plan (such as employer-sponsored pension, profit-sharing and stock bonus
plans, including plans under Section 401(k) of the Code, and medical, life and
disability insurance trusts); or (c) individual purchases by a trustee or
other fiduciary purchasing shares concurrently for two or more employee bene-
fit plans of a single employer or of employers affiliated with each other.
Subsequent purchases made under the conditions set forth above will be subject
to the minimum subsequent investment of $250 and will be entitled to the Right
of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load appli-
cable to the total number of Class A shares of 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
Informa -
14
<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
---------------------------------------------------------------------------
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 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 $________________
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
[_] $750,000 [_] $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 __________________________ .
(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.
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
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
-------------------------------- -------------------------------
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
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.
NOT PART OF THE PROSPECTUS
<PAGE>
tion 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 pur-
chases qualify for a further sales load reduction, the sales load will be ad-
justed to reflect the total purchase at the end of 13 months. If total pur-
chases 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 attor-
ney-in-fact, will redeem an appropriate number of shares held in escrow to re-
alize 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 Portfo-
lio 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 invest-
ments 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 des-
ignated will be debited in the specified amount, and STARS Portfolio shares
will be purchased once a month, on the twentieth day. Only an account main-
tained 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 Sys-
tematic 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 peri-
ods of low price levels. The Fund may modify or terminate the Systematic In-
vestment 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 Invest-
ment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the ex-
tent such shares are offered for sale in the investor's state of residence.
These funds have different investment objectives which may be of interest to
investors. To use this Privilege, investors should consult their account exec-
utive at Bear Stearns, their account executive at an Authorized Dealer or the
Transfer Agent to determine if it is available and whether any conditions are
imposed on its use.
To use this Privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to ex-
change shares of the Portfolio by phone because share certificates must accom-
pany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 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 re-
quests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless other-
wise specified in writing by the shareholder with all signatures guaranteed by
an eligible
15
<PAGE>
guarantor institution as described below. To participate in the Systematic In-
vestment 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 be-
lieved to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable, in-
cluding 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 Au-
thorized Dealer or the Transfer Agent. Except in the case of Personal Retire-
ment Plans, the shares being exchanged must have a current value of at least
$250; furthermore, when establishing a new account by exchange, the shares be-
ing exchanged must have a value of at least the minimum initial investment re-
quired for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or ex-
ceed the applicable minimum for subsequent investments. If any amount remains
in the investment portfolio from which the exchange is being made, such amount
must not be below the minimum account value required by the Portfolio or Fund.
Shares will be exchanged at the next determined net asset value; however, ex-
cept in the instances described below, a sales load may be charged with re-
spect to exchanges of Class A shares into portfolios or funds sold with a
sales load. Generally, a sales load will be charged if the shares being ex-
changed were subject to a sales load which is lower than the sales load to
which the shares being purchased are subject or were not subject to any sales
load. No CDSC will be imposed on Class C shares at the time of an exchange.
The CDSC applicable on redemption of the acquired Class C shares will be cal-
culated from the date of the initial purchase of the Class C shares exchanged.
If an investor is exchanging Class A into a portfolio or fund that charges a
sales load, the investor may qualify for share prices which do not include the
sales load or which reflect a reduced sales load, if the shares of the portfo-
lio or fund from which the investor is exchanging were: (a) purchased with a
sales load; (b) acquired by a previous exchange from shares purchased with a
sales load; or (c) acquired through reinvestment of dividends or distributions
paid with respect to the foregoing categories of shares. To qualify, at the
time of the exchange the investor must notify Bear Stearns, the Authorized
Dealer or the Transfer Agent. Any such qualification is subject to confirma-
tion of the investor's holdings through a check of appropriate records. No
fees currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written no-
tice, to charge shareholders a $5.00 fee in accordance with rules promulgated
by the Securities and Exchange Commission. The Fund reserves the right to re-
ject any exchange request in whole or in part. The Exchange Privilege may be
modified or terminated at any time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in ex-
change by the shareholder and, therefore, an exchanging shareholder may real-
ize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automati-
cally dividends and/or capital gain distributions, if any, paid by the Portfo-
lio in shares of the same Class of another portfolio of the Fund or a fund ad-
vised or sponsored by Bear Stearns of which the shareholder is an investor, or
the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio
or fund will be purchased at the then-current net asset value. If an investor
is investing in a Class that charges a CDSC, the shares purchased will be sub-
ject on redemption to the CDSC, if any, applicable to the purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
16
<PAGE>
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 re-
quest for redemption must specify the Class of shares being redeemed. If the
investor fails to specify the Class of shares to be redeemed or if the in-
vestor owns fewer shares of the Class than specified to be redeemed, the re-
demption request may be delayed until the Transfer Agent receives further in-
structions from the investor, the investor's Bear Stearns account executive or
the investor's Authorized Dealer. The Fund imposes no charges (other than any
applicable CDSC) when shares are redeemed directly through Bear Stearns.
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 tel-
ephone 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 no-
tice period. Shareholders who have redeemed Class A shares may reinstate their
Portfolio account without a sales charge up to the dollar amount redeemed by
purchasing Class A shares of the Portfolio within 60 days of the redemption.
To take advantage of this reinstatement privilege, shareholders must notify
their Bear Stearns account executive, Authorized Dealer or the Transfer Agent
at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvest-
ment of dividends or capital gain distributions, plus (ii) increases in the
net asset value of an investor's Class C shares above the dollar amount of all
such investor's payments for the purchase of Class C shares held by the in-
vestor at the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares ac-
quired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of the Portfolio at $10
per share for a cost of $1,000. Subsequently, the shareholder acquired 5 addi-
tional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assum-
ing 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). There-
fore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged
at a rate of 1% for a total CDSC of $2.40.
17
<PAGE>
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 share holder, (b) redemptions by employ-
ees participating in Eligible Benefit Plans, (c) redemptions as a result of a
combination of any investment company with the Portfolio by merger, acquisi-
tion of assets or otherwise, and (d) a distribution following retirement under
a tax-deferred retirement plan or upon attaining age 70 1/2 in the case of an
IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code.
If the Fund's Trustees determine to discontinue the waiver of the CDSC, the
disclosure in the Portfolio's prospectus will be revised appropriately. Any
Portfolio shares subject to a CDSC which were purchased prior to the termina-
tion of such waiver will have the CDSC waived as provided in the Portfolio's
prospectus at the time of the purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account execu-
tive or the investor's Authorized Dealer must notify the Distributor. Any such
qualification is subject to confirmation of the investor's entitlement.
REDEMPTION PROCEDURES
Clients with a brokerage account may submit redemption requests to their ac-
count executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a re-
demption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the sharehold-
er's brokerage account at the election of the shareholder. Bear Stearns ac-
count executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably be-
lieved by the Transfer Agent to be genuine. The Fund will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor
the Transfer Agent will be liable for following telephone instructions reason-
ably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail re-
demption requests should be sent to the Transfer Agent at: PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the share-
holder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Autho-
rized Dealer, or to the Transfer Agent if the shares are not held in a broker-
age account.
If share certificates have been issued, written redemption instructions, indi-
cating 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, partner-
ship, trust or fiduciary, signature(s) must be guaranteed by any eligible
guarantor institution. A signature guarantee is designed to protect the share-
holders and the Portfolio against fraudulent transactions by unauthorized per-
sons. A signature guarantee may be obtained from a domestic bank or trust com-
pany, recognized broker, dealer, clearing agency or savings association who
are participants in a medallion program by the securities transfer associa-
tion. 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 Guaran-
tees 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
18
<PAGE>
and, with regard to a particular redemption transaction, to require a signa-
ture 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 experi-
ence difficulty in contacting Bear Stearns or Authorized Dealers by telephone
to request a redemption of STARS Portfolio shares. In such cases, investors
should consider using the other redemption procedures described herein. Use of
these other redemption procedures may result in the redemption request being
processed at a later time than it would have been if telephone redemption had
been used. During the delay, the STARS Portfolio's net asset value may fluctu-
ate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through Au-
tomatic Withdrawal.
Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject
to any applicable CDSC. Purchases of additional Class A shares where the sales
load is imposed concurrently with withdrawals of Class A shares generally are
undesirable.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional STARS Portfolio
shares at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution
Option.
The Portfolio ordinarily pays dividends from net investment income and dis-
tributes net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution re-
quirements of the Code, in all events in a manner consistent with the provi-
sions of the 1940 Act. The Portfolio will not make distributions from net re-
alized securities gains unless capital loss carryovers, if any, have been uti-
lized or have expired. Dividends are automatically reinvested in additional
Portfolio shares at net asset value, unless payment in cash is requested or
dividends are redirected into another fund pursuant to the Redirected Distri-
bution Option. All expenses are accrued daily and deducted before declaration
of dividends to investors. Dividends paid by each Class of 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 C shares will receive lower per
share dividends than Class A shares because of the higher expenses borne by
Class C. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains re-
alized from the sale or disposition of certain market discount bonds, paid by
the Portfolio will be taxable to U.S. shareholders as ordinary income whether
received in cash or reinvested in additional shares of the Portfolio or redi-
rected into another portfolio or fund. Distributions from net realized long-
term securities gains of 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 distri-
butions are received in cash or reinvested in, or redirected into other,
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28%. Divi-
dends and distributions may be subject to state and local taxes.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of certain market discount bonds, paid by 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 securi-
ties 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.
19
<PAGE>
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and distribu-
tions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on 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 affil-
iates within 91 days of purchase and such other fund reduces or eliminates its
otherwise applicable sales load for the purpose of the exchange. In this case,
the amount of the sales load charged the investor for such shares, up to the
amount of the reduction of the sales load charge on the exchange, is not in-
cluded in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
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 cer-
tify 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 be-
ing subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a federal income tax return. Further-
more, 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 re-
spect of their investment in STARS Portfolio shares.
Management of the Fund believes that the Portfolio has qualified for the fis-
cal 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 re-
spect to certain undistributed amounts of taxable investment income and capi-
tal 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 re-
turn figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the Portfolio dur-
ing the measuring period were reinvested in shares of the same Class. These
figures also take into account any applicable distribution and shareholder
servicing fees. As a result, at any given time, the performance of Class C
should be expected to be lower than that of Class A. Performance for each
Class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an ini-
tial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable value of the investment at the end of the period. Advertisements of
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 an-
nualization of the Portfolio's actual total return for the applicable period.
20
<PAGE>
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percent-
age rate which is calculated by combining the income and principal changes for
a specified period and dividing by the net asset value (or maximum public of-
fering price in the case of Class A shares) per share at the beginning of the
period. Class C total return will reflect the deduction of the CDSC. Adver-
tisements may include the percentage rate of total return or may include the
value of a hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return. Total return for the Port-
folio also may be calculated by using the net asset value per share at the be-
ginning of the period instead of the maximum offering price per share at the
beginning of the period for Class A shares or without giving effect to any ap-
plicable CDSC at the end of the period for Class C shares. Calculations based
on the net asset value per share do not reflect the deduction of the sales
load on the Portfolio's Class A shares, which, if reflected, would reduce the
performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance infor-
mation, such as that described above, may not provide a basis for comparison
with other investments or other investment companies using a different method
of calculating performance.
Comparative performance information may be used from time to time in advertis-
ing or marketing 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 three Classes--Class A, Class C and Class Y. Each share has
one vote and shareholders will vote in the aggregate and not by Class, except
as otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Portfolio and requires that notice of such disclaimer be given in each agree-
ment, 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 incur-
ring financial loss on account of a shareholder liability is limited to cir-
cumstances in which the Portfolio itself would be unable to meet its obliga-
tions, 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 ordinar-
ily will not hold shareholder meetings; however, shareholders under certain
circumstances may have the right to call a meeting of shareholders for the
purpose of voting to remove Trustees.
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 port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Fund
has the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submit-
ted under the provisions of the 1940 Act or applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company,
such as the Fund, will not be deemed to have been effectively acted upon un-
less approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfo-
lio shall be deemed to be affected
21
<PAGE>
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 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 cer-
tain 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 Portfo-
lio's Statement of Additional Information under "Information About the Portfo-
lio." BSFM will have no greater access to STARS than any other subscriber to
MarketScope. S&P has no obligation to take the needs of Bear Stearns and its
affiliates or shareholders of the 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 ad-
vised that its Equity Services Group which publishes STARS, operates indepen-
dently 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 confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by
calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
22
<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 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 op-
tion 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 se-
curities (or groups or "baskets" of specific securities) in which it may in-
vest. 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 share-
holder'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 33 1/3% 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 irrevoca-
ble 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 in-
terest, 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 33 1/3% 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.
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 con-
verted. ADRs are receipts typically issued by a United States
A-1
<PAGE>
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 fa-
cility frequently is under no obligation to distribute shareholder communica-
tions 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 se-
curities.
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. Govern-
ment or its agencies or instrumentalities, which include U.S. Treasury securi-
ties 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 guar-
anteed by U.S. Government agencies and instrumentalities, for example, Govern-
ment 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 Asso-
ciation, 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 pro-
vides financial support to such U.S. Government-sponsored agencies or instru-
mentalities, 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 sub-
sidiaries 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 for-
eign 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 is-
suers. Such risks include possible future political and economic developments,
the possible imposition of foreign withholding taxes on interest income pay-
able on the securities, the possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely af-
fect the payment of principal and interest on these securities and the possi-
ble 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 In-
surance 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 unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
A-2
<PAGE>
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an under-
lying 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 Portfo-
lio in connection with the sale of the securities if the seller does not re-
purchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the securi-
ties, realization on the securities by the Portfolio may be delayed or limit-
ed.
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 Portfo-
lio will consist only of direct obligations which, at the time of their pur-
chase, are (a) rated not lower than Prime-1 by Moody's 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 Rat-
ing 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 ob-
ligations 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 Port-
folio'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 securi-
ties 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 securi-
ties as to which a liquid trading market does not exist, provided such invest-
ments are consistent with its investment objective. Such securities may in-
clude 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 represen-
tative of their value, the value of its net assets could be adversely affect-
ed.
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
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
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE STARS PORTFOLIO'S PROSPECTUS
AND IN THE STARS PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFER OF THE STARS PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THE STARS PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN
ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
BSF-P-001-04
<PAGE>
Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 . 8 0 0
. 7 6 6 . 4 1 1 1
PROSPECTUS
S&P STARS Portfolio
CLASS Y 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").
o 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 cat-
egory (which is one star) to evaluate for short selling. The invest-
ment adviser believes that this approach will provide opportunities
to achieve performance that exceeds the S&P 500's total return.
By this Prospectus, Class Y shares of the STARS Portfolio are being offered.
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. The STARS Portfolio issues other
Classes of shares which have sales charges and different expenses which would
affect performance. Investors desiring to obtain information about these other
Classes of shares should call 1-800-766-4111 or ask their sales representative
or the STARS Portfolio's distributor.
BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the 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 REFER-
ENCE.
Part B (also known as the Statement of Additional Information), dated June 30,
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 en-
dorsed by, any bank, and are not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JUNE 30, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 4
Description of the STARS Portfolio......................................... 5
Risk Factors............................................................. 7
Management of the STARS Portfolio.......................................... 9
How to Buy Shares.......................................................... 10
Shareholder Services....................................................... 12
How to Redeem Shares....................................................... 13
Dividends, Distributions and Taxes......................................... 14
Performance Information.................................................... 15
General Information........................................................ 16
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
CLASS Y
- -------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)............................................................... None
Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage
of the amount subject to charge)...................................... None
ANNUAL STARS PORTFOLIO OPERATING EXPENSES*
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)...................................... 0.05%
12b-1 Fees............................................................ None
Other Expenses (after expense reimbursement)**........................ 1.00%
Total STARS Portfolio Operating Expenses (after fee waiver and expense
reimbursement)**...................................................... 1.00%
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
1 YEAR.............................................................. $ 10
3 YEARS............................................................. $ 32
5 YEARS............................................................. $ 55
10 YEARS............................................................. $122
</TABLE>
- ------
*Prior to June 25, 1997, the Portfolio invested all of its assets in the S&P
STARS Master (the "Master Series"), a series of S&P STARS Fund. The Master Se-
ries had substantially the same investment objective, policies and restric-
tions as the Portfolio.
**BSFM has undertaken to waive its advisory fee and assume certain expenses of
the STARS Portfolio other than brokerage commissions, extraordinary items, in-
terest and taxes to the extent Total STARS Portfolio Operating Expenses exceed
1.00% for Class Y. Without such waiver, Advisory Fees stated above would be
0.75%, Other Expenses would be 0.95% and Total STARS Portfolio Operating
Expenses would be 1.70% for Class Y.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE
STARS PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RE-
TURN GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the STARS Portfolio and investors, the payment of which
will reduce investors' annual return. In addition to the expenses noted above,
the Fund will charge $7.50 for each wire redemption. See "How to Redeem
Shares." For a description of the expense reimbursement or waiver arrangements
in effect, see "Management of the STARS Portfolio."
3
<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 LLC. 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 re-
turn, ratios to average net assets and other supplemental data for a Class Y
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, a series
of S&P STARS Fund. The Master Series had substantially the same investment ob-
jective, policies and restrictions as the Portfolio. This information has been
derived from information in the STARS Portfolio's financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL AUGUST 7, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
-------------- ---------------
CLASS Y CLASS Y
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period........... $ 14.97 $14.13
------- ------
Net investment income/(loss) (1)............... (0.02) 0.07
Net realized and unrealized gain from Master
Series (2).................................... 2.66 1.20
------- ------
Net increase in net assets resulting from oper-
ations........................................ 2.64 1.27
------- ------
Dividends and distributions to shareholders
from:
Net investment income.......................... -- (0.03)
Net realized capital gains..................... (1.38) (0.40)
------- ------
(1.38) (0.43)
------- ------
Net asset value, end of period................. $ 16.23 $14.97
======= ======
Total investment return for the period (3)..... 17.48 % 9.09 %
======= ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)...... $14,763 $8,779
Ratio of expenses to average net assets
(1)........................................... 1.00 % 1.00 %(4)
Ratio of net investment loss to average net as-
sets (1)...................................... (0.10)% 0.82 %(4)
Decrease reflected in above expense ratios and
net investment loss due to waivers and
reimbursements (5)............................ 0.70 % 0.99 %(4)
</TABLE>
- ------
* 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.
(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 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) 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 April 5, 1995 (commencement of investment
operations) to March 31, 1996. This information has been derived from informa-
tion 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>
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 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 initial public offering.
(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."
4
<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 of-
fered. From time to time, other portfolios may be established and sold pursu-
ant to other offering documents. See "General Information."
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide investment results that ex-
ceed 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 STARS Portfolio
will be achieved.
STARS
STARS is S&P's proprietary stock ranking system. It is used by BSFM to iden-
tify a universe of securities in the highest category to evaluate for purchase
and in the lowest category to evaluate for short selling.
STARS ranks on a scale from five stars (highest) to one star (lowest) the
stocks of approximately 1,100 issuers analyzed by S&P's research staff of se-
curities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
***** Buy--Expected to be among the best performers over the next 12
months and to rise in price.
**** Accumulate--Expected to be an above-average performer.
*** Hold--Expected to be an average performer.
** Avoid--Expected to be a below-average performer.
* Sell--Expected to be a well-below-average performer and to fall in
price.
STARS was introduced by S&P in January 1987. Since 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 con-
sisted of approximately 525 stocks, the two star category has consisted of ap-
proximately 100 stocks, and the one star category has consisted of between ap-
proximately 14 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P ana-
lysts.
For purposes of evaluating the performance of stocks in the various catego-
ries--and thus of the performance of its analysts--S&P has created a model
which initially gives equal weight by dollar amount to the stocks in the vari-
ous categories, does not rebalance the portfolio based on changes in values or
rankings and does not take into account dividends or transaction costs. STARS
is only a model; it does not reflect actual investment performance. While its
performance cannot be used to predict actual results, S&P believes it is use-
ful in evaluating the capability of its analysts. Investors should recognize
that the pool of S&P analysts changes and their past performance is not neces-
sarily predictive of future results either of the model or of the STARS Port-
folio.
From January 1, 1987 through March 31, 1997:
o The S&P 500 (measured on a total return basis, without divi-
dend reinvestment)* increased by 212.64%.
o The ranked stocks, measured as described above, changed in
value as follows*:
o Five stars --+ 443.52%
o Four stars --+ 262.03%
o Three stars --+ 161.04%
o Two stars --+ 140.11%
o 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.
5
<PAGE>
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 out-performed higher ranked STARS
categories and higher ranked STARS categories have under-performed the S&P
500. Specifically, the performance of five star and one star stocks has not
consistently exceeded or fallen below the performance of the S&P 500. In some
years, one star stocks have outperformed the S&P 500 as well as five star
stocks; in other years, both one and five star stocks have outperformed the
S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn
outperformed five star stocks. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one star stocks. Investors also should con-
sider that the Portfolio is managed actively--and, thus, its performance will
depend materially on BSFM's investment determinations--and will incur transac-
tion and other costs, including management fees, which are not reflected in
the foregoing information.
STARS is available to the public through various S&P publications. BSFM has
access to STARS through S&P's MarketScope, a computer-accessed subscription
service available for an annual fee, currently with more than 74,000 sub-
scriber 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 securi-
ties in the five star category to evaluate for purchase and in the one star
category to evaluate for short selling. BSFM anticipates that at least 85% of
the value of the STARS 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 STARS 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 apprecia-
tion BSFM will not seek to replicate STARS performance and will not necessar-
ily 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 eligi-
ble for purchase by the STARS Portfolio. Subsequent market appreciation of a
security or changes in total assets due to subscriptions and redemptions or
dividends or distributions to shareholders will not by themselves cause a vio-
lation 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% calcu-
lation, but will not by itself cause the Portfolio to violate this limitation.
If at any time, however, the Portfolio exceeds the 15% limitation, the Portfo-
lio will not purchase additional non-five star ranked securities or sell short
additional non-one star ranked securities. The STARS Portfolio may invest, in
anticipation of investing cash positions and, without limitation, for tempo-
rary defensive purposes, in money market instruments consisting of U.S. Gov-
ernment securities, certificates of deposit, time deposits, bankers' accept-
ances, 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 sell-
ing, lending portfolio securities, and options transactions, each of which in-
volves risk. Options transactions involve "derivative securities." Short sell-
ing is discussed below. For a discussion of these other investment techniques
and their related risks, see "Appendix--Investment Techniques" and "Risk Fac-
tors" 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 Master Series must borrow the security to
make delivery to the buyer. The Portfolio then is obligated to replace the se-
curity borrowed by purchasing it at the market price at the time of replace-
ment. The price at such time may be more or less than the price at which the
security was sold by the Portfolio. Until the
6
<PAGE>
security is replaced, the Portfolio is required to pay to the lender amounts
equal to any dividend which accrues during the period of the loan. To borrow
the security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
cash, cash equivalents or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral always equals the current value of the security sold short; or (b)
otherwise cover its short position in accordance with positions taken by the
Staff of the Securities and Exchange Commission.
The Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize
a gain if the security declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a long position
in a security. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium or amounts in lieu of interest
the Portfolio may be required to pay in connection with a short sale. The
Portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short by the Master Series. See "Appendix--In-
vestment Techniques--Options Transactions."
The Portfolio anticipates that the frequency of short sales will vary substan-
tially 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. How-
ever, 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 ex-
change to the extent of more than 5% of the value of its net assets. The Port-
folio may not sell short the securities of any class of an issuer to the ex-
tent, at the time of the transaction, of more than 2% of the outstanding secu-
rities 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 re-
ceives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the Port-
folio's net assets.
CERTAIN FUNDAMENTAL POLICIES
The STARS 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. Gov-
ernment, its agencies or instrumentalities. This paragraph describes fundamen-
tal policies that cannot be changed as to the STARS Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the STARS Portfolio. See "Investment Objective and Man-
agement Policies--Investment Restrictions" in the Statement of Additional In-
formation.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The STARS Portfolio may (i) purchase securities of any company having less
than three years' continuous operation (including operations of any predeces-
sors) 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, hypothe-
cate, 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 re-
purchase agreements providing for settlement in more than seven days after no-
tice and in other illiquid securities. See "Investment Objective and Manage-
ment Policies--Investment Restrictions" in the Statement of Additional Infor-
mation.
RISK FACTORS
No investment is free from risk. Investing in the STARS Portfolio will subject
investors to certain risks which should be considered.
7
<PAGE>
NET ASSET VALUE FLUCTUATIONS
The Portfolio's net asset value is not fixed and should be expected to fluctu-
ate. 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 man-
aged 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 trade-
marks in connection with the management of mutual funds and access to STARS
through S&P's publicly available subscription service.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques, such as short selling, lending portfolio se-
curities and engaging in options transactions, involves greater risk than that
incurred by many other funds with a similar objective. See "Appendix--Invest-
ment Techniques."
The Portfolio's ability to engage in certain short-term transactions may be
limited by the requirement that, to qualify as a regulated investment company,
it must earn less than 30% of its gross income from the disposition of securi-
ties held for less than three months. This 30% test limits the extent to which
the Portfolio may sell securities held for less than three months, effect
short sales of securities held for less than three months, 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 the BSFM believes the anticipated ben-
efits 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 share-
holders as ordinary income. See "Portfolio Transactions" in the STARS Portfo-
lio's Statement of Additional Information.
NON-DIVERSIFIED STATUS
The STARS Portfolio's classification as a "non-diversified" investment company
means that the proportion of its assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. A "diversified" investment
company is required by the 1940 Act generally, with respect to 75% of its to-
tal 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 securi-
ties of a single issuer. However, the Portfolio intends to conduct its opera-
tions 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 se-
curities, the securities of other regulated investment companies and other se-
curities, with such other securities of any one issuer limited for the pur-
poses 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 in-
vested in the securities of any one issuer (other than U.S. Government securi-
ties or the securities of other regulated investment companies). Since a rela-
tively high percentage of the Portfolio's assets may be invested in the secu-
rities 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 suscepti-
ble to any single economic, political or regulatory occurrence than the port-
folio 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
8
<PAGE>
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 in-
vestments or opportunities for sales will be allocated equitably to each. In
some cases, this procedure may adversely affect the size of the position ob-
tained for or disposed of by the STARS 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 supervi-
sion of the Fund's Board of Trustees. The STARS Portfolio's Statement of Addi-
tional Information contains the name and general business experience of each
Trustee.
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 institu-
tional and individual investors. BSFM is a registered investment adviser and
offers, either directly or through affiliates, investment advisory and admin-
istrative services to open-end and closed-end investment funds and other man-
aged pooled investment vehicles with net assets at March 31, 1997 of over $2.8
billion.
BSFM serves as investment adviser of the Portfolio under an Investment Advi-
sory Agreement between BSFM and the Portfolio, subject to the overall author-
ity 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 re-
garding 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 vol- untary undertaking by BSFM. For the fiscal year ended March
31, 1997, the in- vestment 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 Portfolio, BSFM gener-
ally supervises all aspects of the operation of the STARS Portfolio, subject to
the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law. For providing administrative services to the STARS Portfo-
lio, the Portfolio 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 Portfolio, 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 mil- lion,
.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.
9
<PAGE>
Prior to June 25, 1997, the Master Series paid PFPC International Ltd. an
annual fee, as set forth below:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
MASTER SERIES ANNUAL FEE AS A PERCENTAGE OF
AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
First $200 million................................ .12 of 1%
Next $200 million up to $400 million.............. .09 of 1%
Next $200 million up to $600 million.............. .075 of 1%
Assets in excess of $600 million. ................ .05 of 1%
</TABLE>
The above-referenced fee is 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, 1996, the Master Series paid PFPC In-
ternational 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 as-
sume certain STARS 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 STARS 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
STARS Portfolio's shares. See "Portfolio Transactions" in the Statement of Ad-
ditional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment Ad-
visory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the STARS Portfolio's principal underwriter within the meaning of the 1940 Act
and as distributor of the STARS Portfolio's shares pursuant to an agreement
which is renewable annually.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
EXPENSE LIMITATION
BSFM has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that, if in any fiscal year, certain expenses, includ-
ing the investment advisory fee, exceed 1% of Class Y's average daily net as-
sets for the fiscal year, BSFM may waive a portion of its investment advisory
fee or bear other expenses to the extent of the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request.
The Portfolio reserves the right to reject any purchase order. The Portfolio
reserves the right to vary the initial and subsequent investment minimum re-
quirements at any time. Investments by employees of Bear Stearns and its af-
filiates are not subject to the minimum investment requirement. In addition,
accounts under management of Bear Stearns, its affiliates or authorized deal-
ers are not subject to the minimum investment requirement.
Purchases of the Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the National Association of Secu -
10
<PAGE>
rities Dealers, Inc. who have sales agreements with Bear Stearns (an "Autho-
rized Dealer"). Purchases of the Portfolio's shares also may be made directly
through the Transfer Agent. Investors must specify that Class Y is being pur-
chased.
Purchases are effected at Class Y's net asset value per share next determined
after a purchase order is received by Bear Stearns, an Authorized Dealer or
the Transfer Agent (the "trade date"). Payment for Portfolio shares generally
is due to Bear Stearns or the Authorized Dealer on the third business day (the
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment for payment until the settlement date.
If a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made be-
fore the settlement date.
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 accept-
ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro-
kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "STARS Portfolio--Class Y" if pur-
chased directly from the Portfolio, and should be directed to the Transfer
Agent: PFPC Inc., Attention: STARS Portfolio--Class Y, P.O. Box 8960, Wilming-
ton, 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 Autho-
rized 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 re-
demption of shares recently purchased by check may be delayed as described un-
der "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., Atten-
tion: STARS Portfolio--Class Y, P.O. Box 8960, Wilmington, Delaware 19899-
8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange (cur-
rently 4:00 p.m., New York time) on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next deter-
mined.
Shares of the Portfolio are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of Class Y of the Portfolio is computed by di-
viding the value of the Portfolio's net assets represented by Class Y (i.e.,
the value of its assets less liabilities) by the total number of shares of
Class Y outstanding. The Portfolio's investments are valued based on market
value or, where market quotations are not readily available, based on fair
value as determined in good faith by, or in accordance with procedures estab-
lished by, the Board of Trustees. For further information regarding the meth-
ods 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 Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to backup withholding and a $50 penalty im-
posed by the Internal Revenue Service (the "IRS").
11
<PAGE>
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for Class
Y shares of the Portfolio, Class Y shares of the Fund's other portfolios or
shares of certain other funds sponsored or advised by Bear Stearns, including
the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the
Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are
offered for sale in the investor's state of residence. These funds have dif-
ferent 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 ex-
change shares of the Portfolio by phone because share certificates must accom-
pany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 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 re-
quests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own Class Y shares of the
portfolio or fund whose shares are being acquired, a new account will be es-
tablished 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. The Ex-
change Privilege may be modified or terminated at any time, or from time to
time, by the Fund on 60 days' notice to the affected portfolio or fund share-
holders. The Fund, BSFM and Bear Stearns will not be liable for any loss, lia-
bility, cost or expense for acting upon telephone instructions that are rea-
sonably believed to be genuine. In attempting to confirm that telephone in-
structions are genuine, the Fund will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which an account is regis-
tered, the account number, recent transactions in the account, and the account
holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any Au-
thorized Dealer or the Transfer Agent. When establishing a new account by ex-
change, the Class Y shares being exchanged must have a value of at least the
minimum initial investment required for the portfolio or fund into which the
exchange is being made; if making an exchange to an existing account, the dol-
lar value must equal or exceed the applicable minimum for subsequent invest-
ments. If any amount remains in the investment portfolio from which the ex-
change is being made, such amount must not be below the minimum account value
required by the Portfolio or Fund.
Class Y shares will be exchanged at the next determined net asset value. No
fees currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written no-
tice, to charge shareholders a $5.00 fee in accordance with rules promulgated
by the Securities and Exchange Commission. The Fund reserves the right to re-
ject any exchange request in whole or in part. The Exchange Privilege may be
modified or terminated at any time upon notice to shareholders.
The exchange of Class Y shares of one portfolio or fund for Class Y shares of
another is treated for federal income tax purposes as a sale of the Class Y
shares given in exchange by the shareholder and, therefore, an exchanging
shareholder may realize a taxable gain or loss.
12
<PAGE>
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automati-
cally dividends and/or capital gain distributions, if any, paid by the Portfo-
lio in Class Y shares of another portfolio of the Fund or a fund advised or
sponsored by Bear Stearns of which the shareholder is an investor, or the
Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or
fund will be purchased at the then-current net asset value.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one Class, any re-
quest for redemption must specify the Class of shares being redeemed. If the
investor fails to specify the Class of shares to be redeemed or if the in-
vestor owns fewer shares of the Class than specified to be redeemed, the re-
demption request may be delayed until the Transfer Agent receives further in-
structions from the investor, the investor's Bear Stearns account executive or
the investor's Authorized Dealer. The Fund imposes no charges when shares are
redeemed directly through Bear Stearns.
The STARS Portfolio ordinarily will make payment for all shares redeemed
within three days after receipt by the Transfer Agent of a redemption request
in proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased STARS Portfolio shares by
check and subsequently submits a redemption request by mail, the redemption
proceeds will not be transmitted until the check used for investment has
cleared, which may take up to 15 days. The Fund will reject requests to redeem
shares by telephone or wire for a period of 15 days after receipt by the
Transfer Agent of the purchase check against which such redemption is request-
ed. This procedure does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days' written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the no-
tice period.
REDEMPTION PROCEDURES
Clients with a brokerage account may submit redemption requests to their ac-
count executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a re-
demption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the sharehold-
er's brokerage account at the election of the shareholder. Bear Stearns ac-
count executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably be-
lieved by the Transfer Agent to be genuine. The Fund will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor
the Transfer Agent will be liable for following telephone instructions reason-
ably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares
13
<PAGE>
through the Transfer Agent. Mail redemption requests should be sent to the
Transfer Agent at: PFPC Inc., Attention: STARS Portfolio--Class Y, P.O. Box
8960, Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the share-
holder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Autho-
rized Dealer, or to the Transfer Agent if the shares are not held in a broker-
age account.
If share certificates have been issued, written redemption instructions, indi-
cating 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, partner-
ship, trust or fiduciary, signature(s) must be guaranteed by any eligible
guarantor institution. A signature guarantee is designed to protect the share-
holders and the Portfolio against fraudulent transactions by unauthorized per-
sons. A signature guarantee may be obtained from a domestic bank or trust com-
pany, broker, dealer, clearing agency or savings association who are partici-
pants 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 dis-
continue its signature guarantee policy at any time and, with regard to a par-
ticular redemption transaction, to require a signature guarantee at its dis-
cretion. 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 experi-
ence difficulty in contacting Bear Stearns or Authorized Dealers by telephone
to request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being proc-
essed at a later time than it would have been if telephone redemption had been
used. During the delay, the Portfolio's net asset value may fluctuate.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional STARS Portfolio
shares at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Op-
tion.
The Portfolio ordinarily pays dividends from net investment income and dis-
tributes net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution re-
quirements of the Code, in all events in a manner consistent with the provi-
sions of the 1940 Act. The Portfolio will not make distributions from net re-
alized securities gains unless capital loss carryovers, if any, have been uti-
lized or have expired. Dividends are automatically reinvested in additional
Class Y shares of the Portfolio at net asset value, unless payment in cash is
requested or dividends are redirected into another fund pursuant to the Redi-
rected Distribution Option. All expenses are accrued daily and deducted before
declaration of dividends to investors.
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains re-
alized 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 redi-
rected 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 distri-
butions are received in cash or reinvested in, or redirected into other,
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28%. Divi-
dends and distributions may be subject to state and local taxes.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of certain market discount bonds, paid
14
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION FORM
(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
----------------------------------------------------------------------------
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 $2,500,000
per Fund.
[_] I will wire the minimum initial investment of $2,500,000 per Fund.
[_] I have enclosed a check for an additional investment of $ ____________
per Fund.
[_] I will wire an additional investment of $ ___________________________
per Fund.
[_] I purchased _____________________ shares of _________________________
through my broker on ____/____/____. Confirm # _______________.
NOT PART OF THE PROSPECTUS
<PAGE>
(3) INVESTMENT INFORMATION continued
WIRING INSTRUCTIONS
A. Telephone the Fund's transfer agent, PFPC Inc., toll-free (800) 447-1139,
and provide them with your name, address, telephone number, Social Security
or Taxpayer Identification Number, the Fund or Funds selected, the amount
being wired, and by which bank. PFPC Inc. will then provide a Fund account
number. (Investors with existing accounts should also notify the Fund's
transfer agent prior to wiring funds.)
B. Instruct your bank or broker to wire the specified amount, together with
your assigned account number, to the Transfer Agent:
PFPC Inc.
ABA-0310-0005-3
Credit account number: 86-1030-3398
From: (name of investor)
Account number: (investor's account number with the Fund)
For purchase of:(name of the Fund)
Amount:(amount to be invested)
PLEASE MAKE MY INVESTMENT IN THE FUNDS DESIGNATED BELOW:
----------------------------------------------------------------------------
Class Y 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 $
------------ ----------------------
Money Market Portfolio $
------------ ----------------------
Emerging Markets Debt 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.
(4) 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
(5) 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.
(6) 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 7 is completed for
redemption by wire of $500 or more.
NOT PART OF THE PROSPECTUS
<PAGE>
(7) BANK OF RECORD (FOR TELEPHONE REDEMPTIONS)
PLEASE ATTACH A VOIDED CHECK (FOR ELECTRONIC CREDIT TO YOUR CHECKING
ACCOUNT) IN THE SPACE PROVIDED IN SECTION 11.
----------------------------------------------------------------------------
BANK NAME
----------------------------------------------------------------------------
STREET OR P.O. BOX APARTMENT NUMBER
----------------------------------------------------------------------------
CITY STATE ZIP CODE
----------------------------------------------------------------------------
BANK ABA NUMBER BANK ACCOUNT NUMBER
----------------------------------------------------------------------------
ACCOUNT NAME
(8) 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
(9) 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. If this
Account Information Form includes a Telephone Exchange Privilege
authorization or a Telephone Redemption Privilege, 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
(10)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
<PAGE>
(11) IF YOU ARE APPLYING FOR THE TELEPHONE REDEMPTION PRIVILEGE, 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.
<PAGE>
by the Portfolio to a foreign investor generally are subject to U.S. nonresi-
dent 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 in-
vestor 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, gen-
erally 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 distribu-
tions from securities gains, if any, paid during the year.
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 cer-
tify 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 sub-
ject 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 prop-
erly report taxable dividend and interest income on a federal income tax re-
turn.
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 Portfolio shares.
Management of the Fund believes that the Portfolio has qualified for the fis-
cal year ended March 31, 1997 as a "regulated investment company" under the
Code. The STARS Portfolio intends to continue to so qualify if such qualifica-
tion is in the best interests of its shareholders. Such qualification relieves
the STARS Portfolio of any liability for federal income tax to the extent its
earnings are distributed in accordance with applicable provisions of the Code.
The Portfolio may be subject to a non-deductible 4% excise tax, measured with
respect to certain undistributed amounts of taxable investment income and cap-
ital 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 Class Y may be calculated on the
basis of average annual total return and/or total return. These total return
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Portfolio during the
measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an ini-
tial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable value of the investment at the end of the period. Advertisements of
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 Portfolio has operated. Computations of aver-
age annual total return for periods of less than one year represent an annual-
ization 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 percent-
age rate which is calculated by combining the income and principal changes for
a specified period and dividing by the net asset value per
15
<PAGE>
share at the beginning of the period. Advertisements may include the percent-
age rate of total return or may include the value of a hypothetical investment
at the end of the period which assumes the application of the percentage rate
of total return.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance infor-
mation, such as that described above, may not provide a basis for comparison
with other investments or other investment companies using a different method
of calculating performance.
Comparative performance information may be used from time to time in advertis-
ing or marketing the 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 three Classes--Class A, Class C and Class Y. Each share has
one vote and shareholders will vote in the aggregate and not by Class, except
as otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Portfolio and requires that notice of such disclaimer be given in each agree-
ment, 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 incur-
ring financial loss on account of a shareholder liability is limited to cir-
cumstances in which the Portfolio itself would be unable to meet its obliga-
tions, 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 ordinar-
ily will not hold shareholder meetings; however, shareholders under certain
circumstances may have the right to call a meeting of shareholders for the
purpose of voting to remove Trustees.
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 port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Fund
has the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submit-
ted under the provisions of the 1940 Act or applicable state law or otherwise to
the holders of the outstanding voting securities of an investment company, such
as the Fund, will not be deemed to have been effectively acted upon un- less
approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfo-
lio shall be deemed to be affected by a matter unless it is clear that the in-
terests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, Rule 18f-2 exempts the se-
lection of independent accountants and the election of Trustees from the sepa-
rate 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 cer-
tain 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 Portfo-
lio's Statement of Additional Information under "Information About the Portfo-
lio."
16
<PAGE>
BSFM will have no greater access to STARS than any other subscriber to Market-
Scope. S&P has no obligation to take the needs of Bear Stearns and its affili-
ates 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 ad-
vised that its Equity Services Group, which publishes STARS, operates indepen-
dently 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 confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by
calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
17
<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 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 op-
tion 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 se-
curities (or groups or "baskets" of specific securities) in which it may in-
vest. 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 share-
holder'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 33 1/3% 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 irrevoca-
ble 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 in-
terest, 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 33 1/3% 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.
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 con-
verted. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corpo -
A-1
<PAGE>
ration. 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 se-
curity. Holders of unsponsored depositary receipts generally bear all the
costs of such facilities and the depositary of an unsponsored facility fre-
quently is under no obligation to distribute shareholder communications re-
ceived 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. Govern-
ment or its agencies or instrumentalities, which include U.S. Treasury securi-
ties 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 guar-
anteed by U.S. Government agencies and instrumentalities, for example, Govern-
ment 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 Asso-
ciation, 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 pro-
vides financial support to such U.S. Government-sponsored agencies or instru-
mentalities, 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 sub-
sidiaries 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 for-
eign 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 is-
suers. Such risks include possible future political and economic developments,
the possible imposition of foreign withholding taxes on interest income pay-
able on the securities, the possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely af-
fect the payment of principal and interest on these securities and the possi-
ble 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 In-
surance 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 unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an under-
lying debt instrument, subject to an obligation of the seller to repurchase,
and the Portfolio to resell, the instrument at a fixed
A-2
<PAGE>
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 Portfo-
lio will consist only of direct obligations which, at the time of their pur-
chase, are (a) rated not lower than Prime-1 by Moody's 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 Rat-
ings 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 ob-
ligations 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 Port-
folio'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 securi-
ties 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 securi-
ties as to which a liquid trading market does not exist, provided such invest-
ments are consistent with its investment objective. Such securities may in-
clude 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 represen-
tative of their value, the value of its net assets could be adversely affect-
ed.
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
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 STARS PORTFOLIOOS PROSPECTUS
AND IN THE STARS PORTFOLIOOS OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFER OF THE STARS PORTFOLIOOS 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 PORTFOLIOOS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN
ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
BSF-P-008-03
<PAGE>
Rule 497(c)
Registration No. 33-84842
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JUNE 30, 1997
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated June 30, 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: 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 Portfolio......................................... B- 7
Management Arrangements.............................................. B- 10
Purchase and Redemption of Shares.................................... B- 13
Determination of Net Asset Value..................................... B- 14
Dividends, Distributions and Taxes................................... B- 14
Portfolio Transactions............................................... B- 21
Performance Information.............................................. B- 22
Code of Ethics....................................................... B- 23
Information About the Portfolio..................................... B- 24
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors................................... B- 25
Financial Statements................................................. B- 26
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 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 Portolio, depending on the principal amount of
the CDs of each bank held by the Porfolio) 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 Star 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
B-4
<PAGE>
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 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
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<PAGE>
limited to 5% of its net assets, except that this limitation does not apply to
warrants acquired in units or attached to securities. Included in such amount,
but not to exceed 2% of the value of its net assets, may be warrants which are
not listed on the New York or American Stock Exchange.
Investment Restrictions. The 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.
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<PAGE>
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.
MANAGEMENT OF THE PORTFOLIO
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
Peter M. Bren (63) Trustee President of The Bren
162 East 56th Street Co.; 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
Apt. #2 since January 1993;
Belleville, IL 62223 United States Senator of
Illinois from 1981 to
1993.
John R. McKernan, Jr. Trustee Chairman and Chief
(49) Executive Officer of
P.O. Box 15213 McKernan Enterprises
Portland, ME 04112 since January 1995;
Governorof 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
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<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
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
245 Park Avenue Board 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 Managing
Three First National Plaza President Director, Emeritus -
Chicago, IL 60602 February 1997,
Bear Stearns, Senior
Managing Director, Public
Finance since 1987.
William J. Montgoris (50) Executive Vice Chief Financial Officer
245 Park Avenue President and Chief Operating
New York, NY 10167 Officer, Bear Stearns.
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue Department, Bear
New York, NY 10167 Stearns since September
1990.
Frank J. Maresca (39) Vice President and Managing Director of
245 Park Avenue Treasurer Bear Stearns since
New York, NY 10167 September 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
245 Park Avenue Director, Bear Stearns
New York, NY 10167 Asset 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;
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<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- ---------------- --------- ----------------------
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
from October 1992 to May
1993.
Eileen M. Coyle (32) 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
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.
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<PAGE>
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution and Shareholder Servicing Plan" remains in effect,
the Fund's Trustees who are not "interested persons" of the Fund, as defined in
the 1940 Act, will be selected and nominated by the Trustees who are not
"interested persons" of the Fund.
No meetings of shareholders of the Fund will be held for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds
of the outstanding shares of the Fund may remove a Trustee through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Trustee when requested in writing to do so by
the shareholders of record of not less than 10% of the Fund's outstanding
shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Management of 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 in
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 Michael
Minikes, Warren J. Spector and Robert M. Steinberg,
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<PAGE>
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.
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 serves to the
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<PAGE>
Portfolio. As compensation for PFPC's administrative services, the Fund has
agreed to pay PFPC $5,500 per month. For the period from April 3, 1995
(commencement of operations) through March 31, 1996, the administrative fee
payable by the 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.
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 Plan. Rule 12b-1 (the "Rule")
adopted by the Securities and Exchange Commission under the 1940 Act provides,
among other things, that an investment company may bear expenses of distributing
its shares only pursuant to a plan adopted in accordance with the Rule. The
Fund's Trustees have adopted such a plan with respect to Class A and Class C
Shares (the "Plan"). The Fund's Trustees believe that there is a reasonable
likelihood that the Plan will benefit the Portfolio and the holders of its Class
A and Class C shares.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the Trustees
for their review. In addition, the Plan provides that it may not be amended to
increase materially the costs which holders of a Class of shares may bear
pursuant to the Plan without approval of such 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. The Plan and
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan was so approved
on January 28, 1997. The Plan is terminable at any time, as to the Portfolio,
without penalty, by vote of a majority of the Trustees who are not "interested
persons" and who have no direct or indirect financial interest in the operation
of the Plan or in the Plan agreements or by vote of holders of a majority of the
Portfolio's relevant Class of shares. A Plan agreement is terminable without
penalty, at any time, by such vote of the Trustees, upon not more than 60 days'
written notice to the parties to such agreement or by vote of the holders of a
majority of the Portfolio's shares. A Plan agreement will terminate
automatically 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 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,
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<PAGE>
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.
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 - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.80
Per Share Offering Price to
the Public $16.93
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.
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<PAGE>
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 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
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
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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 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
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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. 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
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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 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
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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, Class C, and Class Y shares are calculated at the
same time and in the same manner. In general, dividends on Class C shares are
expected to be lower than those on Class A shares due to the higher distribution
expenses borne by the Class 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
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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 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
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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 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
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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.
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
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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
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
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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 C 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 one-year period
ended March 31, 1997 and the period April 5, 1995 (commencement of operations)
to March 31, 1997 was 11.34% and 19.29%, respectively, 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 16.87%, and 22.25%, respectively,
for the same periods. The average annual total return for Class C for the same
periods was 15.33% and 21.19%, respectively. Without giving effect to the
applicable CDSC, the total return for Class C was 16.33% and 21.60%,
respectively, for these periods. Average annual total return for Class Y for the
year ended March 31, 1997 and the period August 7, 1995 (commencement of
operations) to March 31, 1997 was 17.48% and 16.20%, respectively.
Total return is calculated by subtracting the amount of the Portfolio's
net asset value (maximum offering price in the case of Class A) per share at the
beginning of a stated period from the net asset value per share at the end of
the period (after giving effect to the reinvestment of dividends and
distributions during the period and any applicable CDSC), and dividing the
result by the net asset value (maximum offering price in the case of Class A)
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class C shares, which, if reflected would reduce the
performance quoted.
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 operations) to March 31, 1997 was 11.34% and 42.09%,
respectively. Based on net asset value per share, the total return for Class A
was 16.87% and 49.19%, respectively, for the same periods. The total return for
Class C for the same periods was 15.33% and 46.64%, respectively. Without giving
effect to the applicable CDSC, the total return for Class C was 16.33% and
47.64%, respectively, for the periods. The total return for Class Y for the same
year ended March 31, 1997 and the period August 7, 1995 (commencement of
operations) 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
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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.
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.
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<PAGE>
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 Street
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.
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.
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<PAGE>
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.
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