Rule 497(e)
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, AS SUPPLEMENTED JULY 22, 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
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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.
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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
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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
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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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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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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 FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- --------------- -------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co., since
126 East 56th Street 1969; President of Koll, Bren
New York, NY 10021 Realty Advisors and Senior
Partner for Lincoln Properties
prior thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from 1981
to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
P.O. Box 15213 Officer of McKernan
Portland, ME 02110 Enterprises Inc. since January
1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief Executive
700 13th Street, N.W. Officer, Association of
Washington, DC 20005 American Railroads since June
23, 1997; Vice Chairman of
Cassidy & Associates since
February 1996; Senior Vice
President of RJR Nabisco, Inc.
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NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- --------------- --------- ---------------------
from April 1989 to February
1996; Former Deputy Chief of
Staff-White House from 1988
to January 1989.
Robert S. Reitzes* (53) Chairman of the Director of Mutual Funds-Bear
245 Park Avenue Board Stearns Asset Management,
New York, NY 10167 Senior Managing Director of
Bear Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities from January
1991 to March 1994.
Peter B. Fox (45) Executive Vice Managing Director-Emeritus
Three First National Plaza President February 1997, Bear Stearns
Chicago, IL 60602 1997; Bear Stearns, Senior
Managing Director, Public
Finance, since September 1987.
William J. Montgoris (50) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer, Bear
New York, NY 10167 Stearns.
Stephen A. Bornstein (54) Vice President Managing Director, Legal
245 Park Avenue Department, Bear Stearns.
New York, NY 10167
Frank J. Maresca (38) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September 1994;
New York, NY 10167 Associate Director of Bear
Stearns from September 1993 to
September 1994; Executive Vice
President of BSFM since March
1992; Vice President of Bear
Stearns from March 1992 to
September 1993.
Donalda L. Fordyce (38) Vice President Senior Managing Director,
245 Park Avenue Bear Stearns Asset Management
New York, NY 10167 since March, 1996; previously
Vice President, Asset
Management Group, Goldman,
Sachs from 1986 to 1996.
Ellen T. Arthur (44) Secretary Associate Director of Bear
245 Park Avenue Stearns since January 1996;
New York, NY 10167 Senior Counsel and Corporate
Vice President of PaineWebber
Incorporated from April 1989
to September 1995.
Vincent L. Pereira (32) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September 1995
New York, NY 10167 and Vice President of BSFM
since May 1993; Vice President
of Bear Stearns from May 1993
to September 1995; Assistant
Vice President of Mitchell
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NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
- --------------- --------- ---------------------
Hutchins Asset Management, Inc.
from October 1992 to May 1993.
Eileen M. Coyle (31) Assistant Vice President of Bear Stearns
245 Park Avenue Secretary since September 1995; Manager of
New York, NY 10167 BSFM since 1995; Senior
Administrator and Supervisor for
BSFM from January 1994 to 1995;
Accounting Supervisor and
Senior Accountant for Bear
Stearns since 1990.
The Fund pays its non-affiliated Board members an annual retainer of
$5,000 and a per meeting fee of $500 and reimburses them for their expenses. The
Fund does not compensate its officers. The aggregate amount of compensation paid
to each Board member by the Fund and by all other funds in the Bear Stearns
Family of Funds for which such person is a Board member (the number of which is
set forth in parenthesis next to each Board member's total compensation) for the
fiscal year ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund* Fund's Expenses Retirement Board Members
------ ---------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
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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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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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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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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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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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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<PAGE>
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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<PAGE>
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 period April 5,
1995 (commencement of investment operations) to March 31, 1997 was 19.30% after
reflecting the maximum initial sales charge of 4.75%. Based on net asset value
per share, the average annual total return for Class A was 22.26% for the same
period. The average annual total return for Class C was 21.60% for this period.
Average annual total return for Class Y for the period August 7, 1995
(commencement of initial public offering) to March 31, 1997 was 16.20%.
Total return is calculated by subtracting the amount of the Portfolio's
net asset value (maximum offering price in the case of Class A) per share at the
beginning of a stated period from the net asset value per share at the end of
the period (after giving effect to the reinvestment of dividends and
distributions during the period and any applicable CDSC), and dividing the
result by the net asset value (maximum offering price in the case of Class A)
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class 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 investment operations) to March 31, 1997 was 11.34% and
42.11%, respectively. Based on net asset value per share, the total return for
Class A was 16.87% and 49.22%, respectively, for the same periods. The total
return for Class C was 16.33% and 47.64%, respectively, for the periods. The
total return for Class Y for the year ended March 31, 1997 and the period August
7, 1995 (commencement of initial public offering) to March 31, 1997 was 17.48%
and 28.16%, respectively.
CODE OF ETHICS
The Trust, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Trust must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Trust and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the Portfolio, without prior approval by the
Trust or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her
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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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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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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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